AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 17, 1997
REGISTRATION NO. 333-______
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FINANCIAL ASSET SECURITIES CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 13-3172275
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
600 STEAMBOAT ROAD
GREENWICH, CONNECTICUT 06830
(203) 625-2700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JOHN C. ANDERSON
FINANCIAL ASSET SECURITIES CORP.
600 STEAMBOAT ROAD
GREENWICH, CONNECTICUT 06830
(203) 625-5673
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
</TABLE>
WITH A COPY TO:
<TABLE>
<CAPTION>
<S> <C>
PAUL D. STEVELMAN, ESQ. STEPHEN B. ESKO, ESQ.
FINANCIAL ASSET SECURITIES CORP. Brown & Wood LLP
600 STEAMBOAT ROAD One World Trade Center
GREENWICH, CONNECTICUT 06830 New York, New York 10048
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time on or after the effective date of the registration statement, as determined by market conditions.
</TABLE>
---------------------------
IF THE ONLY SECURITIES BEING REGISTERED ON THIS FORM ARE BEING OFFERED
PURSUANT TO DIVIDEND OR INTEREST REINVESTMENT PLANS, PLEASE CHECK THE
FOLLOWING BOX. / /
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED
ON A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES
ACT OF 1933, PLEASE CHECK THE FOLLOWING BOX. /X/
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING
PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING
BOX AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER
EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING./ /____________
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING./ /____________
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE
434, PLEASE CHECK THE FOLLOWING BOX./ /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Proposed Proposed
Amount Maximum Maximum Amount of
Title of Each Class of to be Offering Price Aggregate Registration
Securities to Be Registered Registered Per Unit* Offering Price* Fee
Asset Backed Securities . . . . . . . $1,000,000,000 100% $1,000,000,000 $303,030.31
</TABLE>
* Estimated for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
Pursuant to Rule 429 of the Securities and Exchange Commission's Rules
and Regulations under the Securities Act of 1933, as amended, the Prospectus
and Prospectus Supplement contained in this Registration Statement also
relates to Registrant's registration statement No. 333-21071 as previously
filed by the Registrant on Form S-3.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION, DATED JUNE 17, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED __________, 1997)
FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
$___________ (APPROXIMATE) CLASS A, ( %) (VARIABLE PASS-THROUGH RATE)
ASSET BACKED CERTIFICATES, SERIES 199_-___
DISTRIBUTIONS PAYABLE ON THE __TH DAY OF EACH MONTH, COMMENCING ON _______
__, 199_
The Series 199_-___ Certificates will consist of the Class A
Certificates (the "Senior Certificates"), one or more classes of subordinate
certificates (the "Subordinate Certificates"), and the Class R Certificates
(the "Residual Certificates"). The Senior Certificates, the Subordinate
Certificates and the Residual Certificates are collectively referred to
herein as the "Certificates." Only the Senior Certificates are offered
hereby.
The Certificates will represent the entire beneficial ownership interest
in a trust fund (the "Trust Fund") to be created pursuant to a Pooling and
Servicing Agreement, dated as of __________ __, 199_, among Financial Asset
Securities Corp. (the "Depositor"), ( ), as servicer (referred
to herein as "( )", the "Seller" or the "Servicer," as applicable),
and ( ), as trustee (the "Trustee"). The Trust Fund will consist
primarily of a pool of certain (adjustable rate) (fixed rate) home equity
(revolving credit line) loans made or to be made in the future (the "Mortgage
Loans") secured (partially)(primarily) by second deeds of trust or mortgages
on residential properties (or, in certain limited cases, mixed-use
properties) that are primarily one- to four-family properties (each a
"Mortgaged Property"), the collections in respect of such Mortgage Loans, and
certain other property relating to such mortgage loans. (The Mortgage Loans
will be subject to monthly mortgage rate adjustments based upon changes in
the average of the prime rate published in The Wall Street Journal (the
"Index"), as described herein under "The Mortgage Pool.")
The Trust Fund is subject to optional termination under the limited
circumstances described herein. Any such optional termination may result in
an early retirement of the Senior Certificates offered hereby. Distributions
to Certificateholders will be made on the ___th day of each month or, if such
___th day is not a business day, on the first business day thereafter (each,
a "Distribution Date"), commencing in _________ 199_.
The Senior Certificates will have an initial aggregate principal balance
of approximately $___________ and will evidence in the aggregate an initial
beneficial ownership interest of approximately ____% in the Trust Fund. The
remaining beneficial ownership interest in the Trust Fund will be evidenced
by the Subordinate Certificates and the Residual Certificates. The rights of
the Subordinate Certificateholders to receive distributions with respect to
the Mortgage Loans will be subordinated to the rights of the Senior
Certificateholders to the extent described herein.
Except for certain representations and warranties relating to the
Mortgage Loans, ( )'s obligations with respect to the Certificates
are limited to its contractual servicing obligations. The Senior Certificates
evidence interests in the Trust Fund only and are payable solely from amounts
received with respect thereto. The Senior Certificates do not constitute an
obligation of or an interest in the Depositor, the Trustee or
( ), or any of their respective affiliates, and will not be
insured or guaranteed by any governmental agency.
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
SECURITIES, SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE S-8 HEREIN AND
IN THE PROSPECTUS ON PAGE 11.
THE SENIOR CERTIFICATES OF A GIVEN SERIES REPRESENT BENEFICIAL INTERESTS IN
THE RELATED TRUST FUND ONLY AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS
OF THE DEPOSITOR, ANY SELLER OR ANY AFFILIATES THEREOF, EXCEPT TO THE EXTENT
DESCRIBED HEREIN. NEITHER THE SENIOR CERTIFICATES NOR THE LOANS ARE INSURED
OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
GREENWICH CAPITAL
M A R K E T S, I N C.
--------------------
___________ __, 199_
THE YIELD TO INVESTORS ON THE SENIOR CERTIFICATES WILL BE SENSITIVE IN
VARYING DEGREES TO, AMONG OTHER THINGS, THE RATE AND TIMING OF PRINCIPAL
PAYMENTS (INCLUDING PREPAYMENTS) OF THE MORTGAGE LOANS (AND TO THE LEVEL OF
THE INDEX). THE YIELD TO MATURITY OF THE SENIOR CERTIFICATES MAY VARY FROM
THE ANTICIPATED YIELD TO THE EXTENT SUCH CERTIFICATES ARE PURCHASED AT A
DISCOUNT OR PREMIUM AND TO THE EXTENT THE RATE AND TIMING OF PAYMENTS THEREON
IS SENSITIVE TO PREPAYMENTS. CERTIFICATEHOLDERS OF THE SENIOR CERTIFICATES
SHOULD CONSIDER, IN THE CASE OF ANY SUCH CERTIFICATES PURCHASED AT A
DISCOUNT, THE RISK THAT A LOWER THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS
COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN THE ANTICIPATED YIELD AND,
IN THE CASE OF ANY SENIOR CERTIFICATES PURCHASED AT A PREMIUM, THE RISK THAT
A FASTER THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN
ACTUAL YIELD THAT IS LOWER THAN THE ANTICIPATED YIELD.
An election will be made to treat the Trust Fund as a real estate
mortgage investment conduit (the "REMIC") for federal income tax purposes.
Greenwich Capital Markets, Inc. (the "Underwriter") intends to make a
secondary market in the Senior Certificates but has no obligation to do so.
There is currently no secondary market for the Senior Certificates and there
can be no assurance that such a market will develop or, if it does develop,
that it will continue.
______________________
The Senior Certificates are being offered by the Underwriter from time
to time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the Depositor are expected to be
approximately $____________, plus accrued interest, before deducting issuance
expenses payable by the Depositor.
The Senior Certificates are offered by the Underwriter, subject to prior
sale, when, as and if delivered to and accepted by the Underwriter and
subject to approval of certain legal matters by counsel. It is expected that
delivery of the Senior Certificates will be made against payment therefor on
or about _______ __, 199_, at the offices of the Underwriter, 600 Steamboat
Road, Greenwich, Connecticut 06830.
______________________
This Prospectus Supplement does not contain complete information about
the offering of the Senior Certificates. Additional information is contained
in the Prospectus and purchasers are urged to read both this Prospectus
Supplement and the Prospectus in full. Sales of the Senior Certificates may
not be consummated unless the purchaser has received both this Prospectus
Supplement and the Prospectus.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE SENIOR CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
SUMMARY OF TERMS
This Summary of Terms is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms used in this Summary
of Terms are defined elsewhere in this Prospectus Supplement or in the
Prospectus.
Title of Certificates Asset Backed Certificates, Series 199__-___
(the "Certificates"), consisting of the Class A
Certificates (the "Senior Certificates"), one
or more classes of subordinate certificates
(the "Subordinate Certificates") and the Class
R Certificates (the "Residual Certificates").
Only the Senior Certificates are offered
hereby.
The Depositor Financial Asset Securities Corp. (the
"Depositor"), a Delaware corporation, and an
indirect limited purpose finance subsidiary of
National Westminster Plc and an affiliate of
Greenwich Capital Markets, Inc. (the
"Underwriter"). See "The Depositor" in the
Prospectus and "Method of Distribution" herein.
None of the Depositor, National Westminster Plc
or any of their affiliates or any other person
or entity will insure or guarantee or otherwise
be obligated with respect to the Certificates.
Servicer and Seller ( ) ("( )") will serve as the
Servicer (in such capacity, the "Servicer").
See "Servicing of Mortgage Loans--The Servicer"
herein. The Mortgage Loans were originated by
( ) and were acquired by the Depositor
pursuant to a purchase agreement, dated ______
(the "Purchase Agreement"), between ( ), as
seller, and the Depositor, as purchaser.
Cut-off Date _______ __, 199_.
Closing Date On or about ____________ __, 199_.
Trustee ( ), a ( ), not in its individual
capacity but solely as trustee on behalf
of the Certificateholders (the "Trustee").
Description of Certificates
A. General The Certificates will be issued pursuant to a
Pooling and Servicing Agreement, dated as of
________ __, 199_ (the "Pooling and Servicing
Agreement"), among the Depositor, the Servicer
and the Trustee.
The Senior Certificates, together with the
Subordinate Certificates and the Residual
Certificates, will represent the entire
beneficial ownership interest in a trust fund
(the "Trust") whose assets include: a pool of
(adjustable) (fixed) rate home equity (re-
volving credit line) loans made (or to be made
in the future) (the "Mortgage Loans") under
certain home equity (revolving credit line)
loan agreements (the "Loan Agreements") and
secured (partially) (primarily) by second
(deeds of trust) (mortgages) on residential
properties (or, in certain limited cases,
mixed-use properties) that are primarily one-
to four-family properties (the "Mortgaged
Properties"); the collections in respect of the
Mortgage Loans received after the Cut-Off Date;
property that secured a Mortgage Loan which
has been acquired by foreclosure or deed in
lieu of foreclosure; (a surety bond or letter
of credit); an assignment of the Depositor's
rights under the Purchase Agreement (as defined
below); rights under certain hazard insurance
policies covering the Mortgaged Properties; and
certain other property, as described more fully
herein.
B. Distributions Distributions on the Senior Certificates will
be made on the ___th day of each month or, if
such day is not a business day, on the first
business day thereafter, commencing on ______
__, 199_ (each, a "Distribution Date").
Distributions on each Distribution Date will be
made to Certificateholders of record as of the
last business day of the month preceding the
month of such Distribution Date (each, a
"Record Date"), except that the final
distribution on the Senior Certificates will
be made only upon presentment and surrender of
the Senior Certificates at the office or agency
of the Trustee in New York, New York.
Distributions on the Mortgage Loans will be
applied to the payment of principal and
interest on the Certificates in accordance with
the priorities described below. The rights of
the Subordinate Certificateholders and Residual
Certificateholders to receive distributions
with respect to the Mortgage Loans are
subordinated to the rights of the Senior
Certificateholders to the extent described
herein.
1. Interest Interest will, to the extent
funds are available therefor,
be paid on the Senior
Certificates in an amount equal
to one month's interest at the
Pass-Through Rate on the
Certificate Principal Balance
thereof, together with any
Unpaid Interest Shortfall with
respect thereto. See "Descrip-
tion of the Certificates--
Distributions" herein.
2. Principal On each Distribution Date,
Certificateholders of the
Senior Certificates will be
entitled to receive, as
payments of principal, to the
extent funds are available
therefor after distributions of
interest on the Senior Certifi-
cates, the Class A Formula
Amount for such Distribution
Date. Certificateholders of
such Certificates also will be
entitled to receive any Unpaid
Liquidation Loss Amounts. See
"Description of the Certifi-
cates--Distributions" herein.
Pass-Through Rate The Pass-Through Rate for a particular
Distribution Date will be equal to (____%) (the
weighted average of the Net Loan Rates of the
Mortgage Loans). The Net Loan Rate for any
Mortgage Loan will be equal to the Loan Rate of
such Mortgage Loan on the first day of the month
preceding the month of such Distribution Date,
less ____% per annum servicing fee rate (the
"Servicing Fee Rate"). The initial Pass-Through
Rate for the first Distribution Date for the
Certificates in _____ 199_ is expected to be
approximately ____%). See "The Mortgage Pool-
-General" herein.
The Mortgage Loans The Mortgage Loans are (partially)(primarily)
secured by second deeds of trust or mortgages
on Mortgaged Properties. The Mortgage Loans
were originated by ( ) and on or prior to the
Closing Date, ( ) will sell the Mortgage
Loans to the Depositor pursuant to a purchase
agreement (the "Purchase Agreement"). The
aggregate Cut-Off Date Principal Balance of the
Mortgage Loans is $_________ (the "Cut-Off Date
Pool Balance").
The combined loan-to-value ratio of each
Mortgage Loan, computed using (the maximum
amount the borrower was permitted to draw down
under the related Loan Agreement (the "Credit
Limit")) and taking into account the amounts
of any related senior mortgage loans (the
"Combined Loan-to-Value Ratio") did not exceed
__% as of the Cut-Off Date. The weighted
average Combined Loan-to-Value Ratio of the
Mortgage Loans was ___% as of the Cut-Off Date.
See "THE MORTGAGE LENDING PROGRAM--Underwriting
Procedures Relating to the Mortgage Loans"
herein.
Interest on each Mortgage Loan is payable
monthly and computed on the related average
daily outstanding Principal Balance for each
billing cycle at a (fixed)(variable) rate per
annum (the "Loan Rate") equal (to ___%)(at any
time (subject to minimum and maximum rates, as
described herein under "The Mortgage Lending
Program--Mortgage Loan Terms," and further
subject to applicable usury limitations) to
the sum of (i) (the prime rate published in the
"Money Rates" section of The Wall Street
Journal generally on the Monday of the week in
which such Loan Rate adjusts (or, if no rate is
published on such day, then on the next
succeeding calendar day on which a prime rate
is published), rounded to the nearest ( )
percent) and (ii) a margin generally within
the range of ___% to ___%. The Loan Rate is
subject to adjustment ( ).) With respect
to each Mortgage Loan, a "billing cycle" is
the calendar month preceding a Due Date.
Interest accrued at such rate will be due on
the Due Date in the month following the close
of the billing cycle. (As to each Mortgage
Loan, the Due Date is the __th day of the
month.) The Cut-Off Date Principal Balances
ranged from zero to $_______ and averaged
$_______. (Credit Limits under the Mortgage
Loans as of the Cut-Off ranged from approxi-
mately $_____ to $______ and averaged $______.)
Each Mortgage Loan was originated in the period
from _______ to _________, (and, as of the
Cut-Off Date, the weighted average Credit Limit
Utilization Rate (as defined herein) was
approximately ___%). See "THE MORTGAGE LENDING
PROGRAM" and "DESCRIPTION OF THE MORTGAGE
LOANS" herein.
Servicing ( ) will serve as the Servicer under the
Pooling and Servicing Agreement. The Servicer
will be responsible for the servicing of the
Mortgage Loans and will receive from interest
collected on the Mortgage Loans a monthly
servicing fee on each Mortgage Loan equal to
the Principal Balance thereof multiplied by
the Servicing Fee Rate (such product, the
"Servicing Fee"). See "Servicing of Mortgage
Loans--Servicing Compensation and Payment of
Expenses" herein.
(The Servicer is obligated to make cash
advances ("Advances") with respect to delin-
quent payments of principal of and interest
on any Mortgage Loan to the extent described
herein. The Trustee will be obligated to make
any such Advance if the Servicer fails in its
obligation to do so, to the extent provided
in the Pooling and Servicing Agreement. See
"Servicing of Mortgage Loans--Advances" herein.)
Optional Termination On any Distribution Date on which the aggregate
Principal Balance of the Mortgage Loans
included in the Trust Fund (the "Pool Principal
Balance") is less than __% of the Pool
Principal Balance of the Mortgage Loans as of
the Cut-off Date (the "Cut-off Date Principal
Balance"), the Servicer will have the option to
purchase, in whole, the Mortgage Loans and the
REO Property, if any, remaining in the Trust
Fund. See "Description of the Certificates--
Optional Termination" herein.
Federal Income Tax
Considerations An election will be made to treat the Trust
Fund as a "real estate mortgage investment
conduit" (the "REMIC") for federal income tax
purposes. The Senior and Subordinate Certifi-
cates will constitute "regular interests" in
the REMIC and the Residual Certificates will
constitute the sole class of "residual
interests" in the REMIC. The Senior Certifi-
cates may be issued at a premium. See "Certain
Federal Income Tax Consequences" herein and in
the Prospectus.
ERISA Considerations The acquisition of a Senior Certificate by a
pension or other employee benefit plan (a
"Plan") subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), could, in some instances, result in
a prohibited transaction or other violation of
the fiduciary responsibility provisions of
ERISA and Code Section 4975. Certain exemptions
from the prohibited transaction rules granted
under Prohibited Transaction Class Exemption
83-1 and under Prohibited Transaction Exemption
90-59 could be applicable to the acquisition of
Senior Certificates. Any Plan fiduciary
considering whether to purchase any Senior
Certificates on behalf of a Plan should consult
with its counsel regarding the applicability of
the provisions of ERISA and the Code.
Legal Investment The Senior Certificates will not constitute
"mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA") because some of the Mortgages
securing Mortgage Loans are not first
mortgages. Accordingly, many institutions
with legal authority to invest in comparably
rated securities based solely on first
mortgages may not be legally authorized to
invest in the Senior Certificates. See "Legal
Investment" in the Prospectus.
Ratings It is a condition of the issuance of the Senior
Certificates that they be rated "( )" by
( ) ("( )") and ( ) by
( ) ("( )" and, together with
( ), the "Rating Agencies"). The
security ratings of the Senior Certificates
should be evaluated independently from similar
ratings on other types of securities. A
security rating is not a recommendation to buy,
sell or hold securities and may be subject to
revision or withdrawal at any time by the
Rating Agencies. See "Ratings" herein.
RISK FACTORS
(Cash Flow Considerations. During the first ( )-year draw down period
under the related Loan Agreements fort the Mortgage Loans, collections on
such Mortgage Loans may vary because, among other things, borrowers are not
required to make monthly payments of principal. With respect to some of the
Mortgage Loans, during the second ( )-year draw down period, no monthly
payments of principal are required. Collections on the Mortgage Loans may
also vary due to seasonal purchasing and payment habits of borrowers.)
(General credit risk may also be greater to Certificateholders than to
holders of instruments representing interests in level payment first mortgage
loans since no payment of principal generally is required until after either
a five- or ten-year interest only period under the related Loan Agreements.
Minimum monthly payments will at least equal and may exceed accrued interest.
Even assuming that the Mortgaged Properties provide adequate security for the
Mortgage Loans, substantial delay could be encountered in connection with the
liquidation of Mortgage Loans that are delinquent and corresponding delays in
the receipt of related proceeds by Certificateholders could occur. Further,
liquidation expenses (such as legal fees, real estate taxes, and maintenance
and preservation expenses) will reduce the proceeds payable to
Certificateholders and thereby reduce the security for the Mortgage Loans.
In the event any of the Mortgaged Properties fail to provide adequate
security for the related Mortgage Loans, Certificateholders could experience
a loss.)
Prepayment Considerations. All of the Mortgage Loans may be prepaid in
whole or in part at any time without penalty. Home equity loans, such as the
Mortgage Loans, have been originated in significant volume only during the
past few years and neither the Depositor nor the Servicer is aware of any
publicly available studies or statistics on the rate of prepayment of such
loans. Generally, home equity loans are not viewed by borrowers as permanent
financing. Accordingly, the Mortgage Loans may experience a higher rate of
prepayment than traditional loans. The Trust's prepayment experience may be
affected by a wide variety of factors, including general economic condition,
interest rates, the availability of alternative financing and homeowner
mobility. In addition, substantially all of the Mortgage Loans contain due-
on-sale provisions and the Servicer intends to enforce such provisions unless
(i) such enforcement is not permitted by applicable law or (ii) the Servicer,
in a manner consistent with reasonable commercial practice, permits the
purchaser of the related Mortgaged Property to assume the Mortgage Loan. To
the extent permitted by applicable law, such assumption will not release the
original borrower from its obligation under any such Mortgage Loan. See
"CERTAIN LEGAL ASPECTS OF THE LOANS--`Due-on-Sale' Clauses" in the
Prospectus.
Legal Considerations. The Mortgage Loans are secured by deeds of trust
or mortgages (which generally are second mortgages). With respect to
Mortgage Loans that are secured by first mortgages, the Servicer has the
power under certain circumstances to consent to a new mortgage lien on the
Mortgaged Property having priority over such Mortgage Loan. Mortgage Loans
secured by second mortgages are entitled to proceeds that remain from the
sale of the related Mortgaged Property after any related senior mortgage loan
and prior statutory liens have been satisfied. In the event that such
proceeds are insufficient to satisfy such loans and prior liens in the
aggregate, the Trust and, accordingly, the Certificateholders, bear (i) the
risk of delay in distributions while a deficiency judgment against the
borrower is obtained and (ii) the risk of loss if the deficiency judgment
cannot be obtained or is not realized upon. See "CERTAIN LEGAL ASPECTS OF
THE LOANS" in the Prospectus.
The sale of the Mortgage Loans from the Seller to the Depositor pursuant
to the Purchase Agreement will be treated as a sale of the Mortgage Loans.
The Seller will warrant that such transfer is either a sale of its interest
in the Mortgage Loans or a grant of a first priority perfected security
interest therein. In the event of an insolvency of the Seller, the receiver
of the Seller may attempt to recharacterize the sale of the Mortgage Loans as
a borrowing by the Seller secured by a pledge of the Mortgage Loans. If the
receiver decided to challenge such transfer, delays in payments of the
Certificates and possible reductions in the amount thereof could occur. The
Depositor will warrant in the Pooling and Servicing Agreement that the
transfer of its interest in the Mortgage Loans to the Trust is a valid
transfer and assignment of such interest.
In the event of a bankruptcy or insolvency of the Servicer, the
bankruptcy trustee or receiver may have the power to prevent the Trustee or
the Certificateholders from appointing a successor Servicer.
(Servicer's Ability to Change the Terms of the Mortgage Loans. The
Servicer may agree to changes in the terms of a Loan Agreement, provided that
such changes (i) do not adversely affect the interest of the
Certificateholders, and (ii) are consistent with prudent business practice.
There can be no assurance that changes in applicable law or the marketplace
for home equity loans or prudent business practice will not result in changes
in the terms of the Mortgage Loans.)
(Delinquent Mortgage Loans. The Trust will include Mortgage Loans which
are __ or fewer days delinquent. The Cut-Off Date Principal Balance of such
delinquent Mortgage Loans was $______________.)
THE MORTGAGE LENDING PROGRAM
The information set forth below concerning (_______) and its
underwriting policies has been provided by (_______). The Depositor does not
make any representation as to the accuracy or completeness of such
information.
GENERAL
All of the Mortgage Loans were originated by
(_____________________________), (the "Seller" or the "Servicer") under its
mortgage lending program. The Seller first offered (adjustable rate) (fixed
rate) home equity (revolving credit line) loans ("home equity loans") in
19__. As of (_____________), (____________) owned and serviced approximately
$__________ aggregate principal amount of outstanding home equity loans
secured by properties located in __________ (the "Seller Portfolio").
UNDERWRITING PROCEDURES RELATING TO THE MORTGAGE LOANS
Each home equity loan was originated after a review by the Seller in
accordance with its established underwriting procedures, which were intended
to assess the applicant's ability to assume and repay such home equity loans
and the adequacy of the real property which serves as collateral for such
home equity loans. The maximum (Principal Balance)(Credit Limit) for a home
equity loan provided by the Seller was $__________.
Each applicant for a home equity loan was required to complete an
application which listed the applicant's assets, liabilities, income, credit
and employment history and other demographic and personal information. If
information in the loan application demonstrated that there was sufficient
income and equity to justify making a home equity loan and the Seller (a)
received a satisfactory independent credit bureau report on the credit
history of the borrower and (b) obtained, in the case of all home equity
loans originated prior to __________ a drive-by appraisal of the related
Mortgaged Property or for all home equity loans originated as of __________,
a satisfactory appraisal completed on forms approved by FNMA, and if such
information met the Seller's underwriting standards, the Seller issued a
commitment subject to satisfaction of certain other conditions. These
conditions included: (i) obtaining and reviewing pay stubs, income tax
returns or a verification of employment from the applicant's employer; (ii)
obtaining and reviewing a verification of deposit; and (iii) obtaining and
reviewing a verification of the loan in the first lien position when the home
equity loan was to be in a second lien position.
Appraisals of the Mortgaged Properties were performed by a qualified
appraiser or an independent third-party, fee-based appraiser who had been
previously approved for such assignment by the Seller.
It is the Seller's policy to require a title policy insuring title
mortgage in accordance with the intended lien position. (Regardless of
Combined Loan-to-Value Ratios, it is the Seller's policy not to accept a
position junior to any mortgage lien other than a first mortgage.)
Generally, a home equity loan needed a Combined Loan-to-Value Ratio of
__% for loans which the Seller obtained full documentary support and was not
greater than __% for loans for which limited documentary support was
obtained.
After obtaining all applicable employment, credit and property
information, the Seller determined whether sufficient unencumbered equity in
the property existed and whether the prospective borrower had sufficient
monthly income available to support the payments of interest (at the current
Index Rate) in addition to any senior mortgage loan payments (including any
escrows for property taxes and hazard insurance premiums) and other monthly
credit obligations based on the prospective borrower's debt-to-gross income
ratio. The "debt-to-gross income ratio" is the ratio of (a) certain of the
borrower's debt obligations which include: (i) the monthly first mortgage
payment plus taxes; (ii) monthly installment debt payments with a term of
more than ten months; (iii) five percent of the total revolving obligations;
(iv) monthly alimony and child support obligations; and (v) the payment on
the home equity loan (calculated at the Credit Limit and current prime rate
plus margin for such home equity loan) to (b) the borrower's gross verifiable
monthly income. The debt-to-gross income ratio generally did not exceed
(________%).
When the commitment conditions had been satisfied, the home equity loan
was completed by signing a Loan Agreement, rescission statement, and mortgage
which secured the repayment of principal of and interest on the related home
equity loan. The original mortgage was then recorded in the appropriate
county government office.
MORTGAGE LOAN TERMS
(A borrower may access a home equity loan by writing a check.) On all
home equity loans, there is (a ten-year) draw down period as long as the
borrower is not in default under the loan agreement. Home equity loans bear
interest at a variable rate which may change bi-weekly. (Home equity loans
may be subject to a maximum per annum interest rate (the "Maximum Rate") of
___ % per annum and in all cases, are subject to applicable usury
limitations.) See "CERTAIN LEGAL ASPECTS OF THE LOANS--Applicability of
Usury Laws" in the Prospectus. (The daily periodic rate on the home equity
loans (the "Loan Rate") is the sum of the Index Rate plus a spread (the
"Margin") which generally ranges between ____% and ____%, divided by 365 days
or 366 days, as applicable.)
(The "Index Rate" is based on (the "prime rate" published in The Wall
Street Journal every second Monday rounded to the nearest one-eighth of one
percent or if not published on any such date, as next published in the Wall
Street Journal.) The annual percentage rate for any monthly period will be
based on the Prime Rate in effect the Monday on which the rate may change.
(If a prime rate range is published in The Wall Street Journal, then the
midpoint (average) of that range will be used.) There are no limitations on
increases or decreases (except for those home equity loans which have Maximum
Rates). Only the home equity loans that have Maximum Rates of ____% also
have annual adjustment caps of __% as to both increases and decreases in
their Loan Rates.)
(Billing statements are mailed monthly.) The statement details all
debits and credits and specifies the minimum payment due (and the available
credit line). Notice of changes in the applicable Loan Rate are provided by
the Seller to the Borrower with such statements. All payments are due by the
tenth day after the date the billing statement is issued.
(The Loan Agreements and Disclosure Statement further provide that if
publication of the Index Rate is discontinued, the Index Rate will be changed
upon notification in accordance with such Loan Agreements and Disclosure
Statements.)
The right to obtain additional credit may be suspended or terminated or
the borrower may be required to pay the entire balance due plus all other
accrued but unpaid charges immediately, if the borrower fails to make any
required payment by the due date, (if the total outstanding principal balance
including all charges payable exceeds the Credit Limit), if the borrower made
any statement or signature on any document which is fraudulent or contained a
material misrepresentation, if the borrower dies or becomes incompetent, if
the borrower becomes bankrupt or insolvent, if the borrower becomes subject
to any judgment, lien, attachment or an execution is issued against the
Mortgaged Property, the borrower fails to obtain and maintain required
property insurance or if the borrower sells or transfers the Mortgaged
Property or does not maintain the property. (In addition, the right to
obtain additional credit may be suspended or a borrower's Credit Limit may be
reduced, if the value of the Mortgaged Property decreases for any reason to
less than 80% of the original appraised value, if the borrower is in default
under the home equity loan, if government action impairs the Seller's lien
priority or if a regulatory agency has notified the Seller that continued
advances would constitute an unsafe and unsound practice.)
DELINQUENCY AND LOSS EXPERIENCE OF THE SERVICER'S PORTFOLIO
The following tables set forth the delinquency and loss experience for
each of the periods shown for the home equity loans indicated on the table.
The Servicer believes that there have been no material trends or anomalies in
the historical delinquency and loss experience as represented in the
following tables. The data presented in the following tables are for
illustrative purposes only, and there is no assurance that the delinquency
and loss experience of the Mortgage Loans will be similar to that set forth
below.
DELINQUENCY EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C> <C>
As of _________
_____
Number of
Loans Amount
__________ ______
Amount Outstanding at
Period End . . . . . . . . . . . . . . . . .
Delinquency
30-59 Days . . . . . . . . . . . . . . . . . $
60-89 Days . . . . . . . . . . . . . . . . .
90 or More Days . . . . . . . . . . . . . . .
Foreclosures and Bankruptcies . . . . . . . . _________
Total Delinquencies . . . . . . . . . . . . . . $_________
30-59 Days Percentage . . . . . . . . . . . . . %
60-89 Days Percentage . . . . . . . . . . . . . %
90 or More Days Percentage . . . . . . . . . . %
Foreclosures and Bankruptcies . . . . . . . . .
</TABLE>
LOSS EXPERIENCE
(DOLLARS IN THOUSANDS
<TABLE>
<CAPTION>
<S> <C>
For the Year
Ending ________
Average Amount
Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross Charge-Offs . . . . . . . . . . . . . . . . . . . . . . . $
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net Losses as a Percentage
of Average Amount Outstanding . . . . . . . . . . . . . . . . %
</TABLE>
SERVICING OF THE MORTGAGE LOANS
The information set forth below concerning the Servicer and its
servicing policies has been provided by the Servicer. The Depositor does not
make any representation as to the accuracy or completeness of such
information.
SERVICING OF MORTGAGE LOANS
The Servicer will be responsible for servicing the Mortgage Loans as
agent for the Trust in accordance with the Servicer's policies and procedures
for servicing home equity loans and in accordance with the terms of the
Pooling and Servicing Agreement.
With respect to real estate secured loans, the general policy of the
Servicer is to initiate foreclosure on the underlying property (i) after such
loan is 90 days or more delinquent; (ii) if a notice of default on a senior
lien is received by the Servicer; or (iii) if circumstances are discovered by
the Servicer which would indicate that a potential for loss exists.
Foreclosure proceedings may be terminated if the delinquency is cured.
However, under certain circumstances, the Servicer may elect not to commence
foreclosure or stay the foreclosure proceeding if the borrower's default is
due to special circumstances which are temporary and are not expected to last
beyond a specified period. The loans to borrowers in bankruptcy proceedings
will be restructured in accordance with law and with a view to maximizing
recovery of such home equity loans, including any deficiencies.
Additionally, any time during foreclosure, a forbearance, short sale,
deed-in-lieu or a payment plan can be authorized.
After foreclosure, if the home equity loan is secured by a first
mortgage lien, title to the related Mortgaged Property will pass to the
Servicer, or a wholly-owned subsidiary of the Servicer, who will liquidate
the Mortgaged Property and charge-off the balance of the home equity loan
balance which was not recovered by the liquidation proceeds. If the
Mortgaged Property was subject to a senior lien position, the Servicer will
either satisfy such lien at the time of foreclosure sale or take other action
as deemed necessary to protect the Servicer's interest in the Mortgaged
Property. If in the judgment of the Servicer, the cost of maintaining or
purchasing the senior lien position exceeds the economic benefit of such
action, the Servicer will generally charge-off the entire home equity loan,
seek a money judgment against the borrower or will not pursue any recovery.
Servicing and charge-off policies and collection practices may change
over time in accordance with the Servicer's business judgment, changes in the
Servicer's real estate secured (revolving credit line) loans and applicable
laws and regulations, and other considerations.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each billing cycle, other than the first billing cycle,
the servicing compensation to be paid to the Servicer in respect of its
servicing activities relating to the Mortgage Loans will be paid to it from
interest collections in respect of the Mortgage Loans and will be equal to
____% per annum (the "Servicing Fee Rate") on the aggregate Principal
Balances of the Mortgage Loans as of the first day of each such billing cycle
(the "Servicing Fee"). With respect to the first billing cycle, the Servicer
will receive from such collections ___ of the amount calculated in the
preceding sentence. All assumption fees, late payment charges and other fees
and charges, to the extent collected from borrowers, will be retained by the
Servicer as additional servicing compensation.
The Servicer will pay certain ongoing expenses associated with the Trust
and incurred by it in connection with its responsibilities under the
Servicing Agreement, including, without limitation, payment of the fees and
disbursements of the Trustee, any custodian appointed by the Trustee, the
Registrar and any paying agent. In addition, the Servicer will be entitled
to reimbursement for certain expenses incurred by it in connection with
defaulted Mortgage Loans and in connection with the restoration of Mortgaged
Properties related thereto, such right of reimbursement being prior to the
rights of Certificateholders to receive any related Liquidation Proceeds.
DESCRIPTION OF THE MORTGAGE LOANS
MORTGAGE LOANS
The Mortgage Loans were originated pursuant to loan agreements and
disclosure statements (the "Loan Agreements") and are secured by mortgages or
deeds of trust, most of which are second mortgages or second deeds of trust,
on Mortgaged Properties. The Mortgaged Properties securing the Mortgage
Loans consist primarily of residential properties (or, in certain limited
cases, mixed-use properties) that are one to four-family properties. (All of
the Mortgaged Properties are owner occupied.) Mixed-use properties will
consist of structures of not more than three stories which include one to
four residential dwellings units and space used for retail, professional or
other commercial uses. Such uses, which will not involve more than 50% of
the space in the structure, may include doctor, dentist or law offices, real
estate agencies, boutiques, newsstands, convenience stores or other similar
types of uses intended to cater to individual customers. The properties may
be located in suburban or metropolitan districts. Any such non-residential
use will be in compliance with local zoning laws and regulations. See"--
Mortgage Loan Pool Statistics" below.
The Cut-Off Date Pool Balance is $___________, which is equal to the
aggregate Principal Balances of the Mortgage Loans as of ______, 199_ (the
"Cut-Off Date"). As of the _______, the Mortgage Loans were not more than 89
days delinquent and had a Loan Rate of at least ____% per annum. The average
Cut-Off Date Principal Balance was $_______, the minimum Mortgage Cut-Off
Date Principal Balance was zero, the maximum Cut-Off Date Principal Balance
was $_________, (the minimum Loan Rate and the maximum Loan Rate on the Cut-
Off Date were ____% and ____% per annum, respectively,) and the weighted
average Loan Rate on the Cut-Off Date was ____% per annum. (As of the Cut-
Off Date, the weighted average Credit Limit Utilization Rate was ____%, the
minimum Credit Limit Utilization Rate was zero and the maximum Credit Limit
Utilization Rate was ______%. The "Credit Limit Utilization Rate" is
determined by dividing the Cut-Off Date Principal Balance of a Mortgage Loan
by the Credit Limit of the related Loan Agreement.) The weighted average
Combined Loan-to-Value Ratio of the Mortgage Loans was ____% as of the Cut-
Off Date.
MORTGAGE LOAN POOL STATISTICS
The Depositor has compiled the following additional information as of
the Cut-Off Date with respect to the Mortgage Loans to be included in the
Trust.
(TABULAR INFORMATION)
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the Certificates, the Depositor will transfer
to the Trust all of its right, title and interest in and to each Mortgage
Loan (including its right to purchase any Additional Balances arising in the
future), related Loan Agreements, mortgages and other related documents
(collectively, the "Related Documents"), including all collections received
on or with respect to each such Mortgage Loan on or after the Cut-Off Date
pursuant to an assignment of the Depositor's rights and obligations under the
Purchase Agreement. The Trustee, concurrently with such transfer, will
deliver the Certificates. Each Mortgage Loan transferred to the Trust will
be identified on a schedule (the "Mortgage Loan Schedule") delivered to the
Trustee pursuant to the Pooling and Servicing Agreement. Such schedule will
include information as to the Cut-Off Date Principal Balance of each Mortgage
Loan, as well as information with respect to the Loan Rate.
(The Pooling and Servicing Agreement will require that, within the time
period specified therein, the Seller deliver to the Trustee (or a custodian,
as the Trustee's agent for such purpose) the Mortgage Loans endorsed in blank
and the Related Documents. In lieu of delivery of original mortgages, the
Seller may deliver trust and correct copies thereof which have been certified
as to authenticity by the appropriate county recording office where such
mortgage is recorded.)
Under the terms of the Pooling and Servicing Agreement, the Seller,
acting at the Depositor's request, will have (__ days after the Closing Date)
to prepare and record assignments of the mortgages related to each Mortgage
Loan in favor of the Trustee (unless opinions of counsel satisfactory to the
Rating Agencies are delivered to the Trustee to the effect that recordation
of such assignments is not required in the relevant jurisdictions to protect
the interests of the Trustee in the Mortgage Loans).
Within 90 days of the Closing Date, the Trustee will review the Mortgage
Loans and the Related Documents and if any Mortgage Loan or Related Document
is found to be defective in any material respect and such defect is not cured
within 90 days following notification thereof to the Seller and the Depositor
by the Trustee, the Seller will be obligated to repurchase the Mortgage Loan
and to deposit the Repurchase Price into the Collection Account. Upon such
retransfer, the Principal Balance of such Mortgage Loan will be deducted from
the Pool Balance. In lieu of any such repurchase, the Seller may substitute
an Eligible Substitute Mortgage Loan. Any such repurchase or substitution
will be considered a payment in full of such Mortgage Loan. The obligation
of the Seller to accept a transfer of a Defective Mortgage Loan is the sole
remedy regarding any defects in the Mortgage Loans and Related Documents
available to the Trustee or the Certificateholders.
With respect to any Mortgage Loan, the "Repurchase Price" is equal to
the Principal Balance of such Mortgage Loan at the time of any transfer
described above plus accrued and unpaid interest thereon to the date of
repurchase.
An "Eligible Substitute Mortgage Loan" is a mortgaged loan substituted
by the Seller for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance), not 5% more or less than the Principal Balance
relating to such Defective Mortgage Loan; (ii) (have a Loan Rate not less
than the Loan Rate of the Defective Mortgage Loan and not more than 1% in
excess of the Loan Rate of such Defective Mortgage Loan; (iii) have a Loan
Rate based on the same Index with adjustments to such Loan Rate made on the
same Interest Rate Adjustment Date as that of the Defective Mortgage Loan;
(iv) have a Margin that is not less than the Margin of the Defective Mortgage
Loan and not more than 100 basis points higher than the Margin for the
Defective Mortgage Loan); (v) have a mortgage of the same or higher level of
priority as the mortgage relating to the Defective Mortgage Loan; (vi) have a
remaining term to maturity not more than six months earlier and not later
than the remaining term to maturity of the Defective Mortgage Loan; (vii)
comply with each representation and warranty as to the Mortgage Loans set
forth in the Purchase Agreement (deemed to be made as of the date of
substitution); and (viii) satisfy certain other conditions specified in the
Purchase Agreement. To the extent the Principal Balance of an Eligible
Substitute Mortgage Loan is less than the Principal Balance of the related
Defective Mortgage Loan, the Seller will be required to make a deposit to
the Collection Account equal to such difference ("Substitution Adjustment
Amounts").
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., Cut-Off Date Principal
Balance and the Loan Rate). In addition, the Seller will represent and
warrant, on the Closing Date, that, among other things: (i) at the time of
transfer to the Depositor, the Seller has transferred or assigned all of its
right, title and interest in each Mortgage Loan and the Related Documents,
free of any lien (subject to certain exceptions); and (ii) each Mortgage Loan
was generated under a Loan Agreement that complied, at the time of
origination, in all material respects with applicable state and federal laws.
Upon discovery of a breach of any such representation and warranty which
materially and adversely affects the interests of the Certificateholders in
the Mortgage Loan and Related Documents, the Seller will have a period of 60
days after discovery or notice of the breach to effect a cure. If the breach
cannot be cured within the 60-day period, the Seller will be obligated to
repurchase or substitute the Defective Mortgage Loan from the Trust. The
same procedure and limitations that are set forth above for the repurchase or
substitution of Defective Mortgage Loans will apply to the transfer of a
Mortgage Loan that is required to be repurchased or substituted because of a
breach of a representation or warranty in the Purchase Agreement that
materially and adversely affects the interests of the Certificateholders.
Mortgage Loans required to be transferred to the Seller as described in
the preceding paragraphs are referred to as "Defective Mortgage Loans."
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Senior Certificates offered hereby will be issued pursuant to a
Pooling and Servicing Agreement, dated as of ______ __, 199_ (the "Pooling
and Servicing Agreement"), among the Depositor, the Servicer and the Trustee.
Set forth below are summaries of the specific terms and provisions pursuant
to which the Senior Certificates will be issued. The following summaries do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, the provisions of the Pooling and Servicing
Agreement. When particular provisions or terms used in the Pooling and
Servicing Agreement are referred to, the actual provisions (including
definitions of terms) are incorporated by reference.
The Series 199_-___ Certificates will consist of the Class A
Certificates (the "Senior Certificates"), one or more classes of subordinate
certificates (collectively, the "Subordinate Certificates"), and the Class R
Certificates (the "Residual Certificates"). The Senior Certificates, the
Subordinate Certificates and the Residual Certificates are collectively
referred to herein as the "Certificates." Only the Senior Certificates are
offered hereby.
The Senior Certificates will have an initial Certificate Principal
Balance of approximately $_______________, and will evidence in the aggregate
an initial beneficial ownership interest of approximately ____% in the Trust
Fund. The remaining beneficial ownership interest in the Trust Fund will be
evidenced by the Subordinate Certificates and the Residual Certificates. The
rights of the Subordinate Certificateholders and the Residual
Certificateholders to receive distributions with respect to the Mortgage
Loans will be subordinated to the rights of the Senior Certificateholders to
the extent described herein.
The Senior Certificates will be issuable in fully registered form only.
The Senior Certificates will be issued in minimum dollar denominations of
$(1,000) and integral multiples of $(1) in excess thereof. A single
Certificate may be issued in an amount different than described above. The
assumed final maturity date of the Senior Certificates is ________ __, ____,
which is the Distribution Date immediately following the latest scheduled
maturity date of any Mortgage Loan in the Mortgage Pool.
BOOK-ENTRY CERTIFICATES
The Senior Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the
Senior Certificates ("Certificate Owners") will hold their Certificates
through the Depository Trust Company ("DTC") in the United States(, or Cedel
Bank, soci t anonyme, ("CEDEL") or the Euroclear System ("Euroclear") (in
Europe)) if they are participants of such systems, or indirectly through
organizations which are participants in such systems. The Book-Entry
Certificates will be issued in one or more certificates which equal the
aggregate principal balance of the Certificates and will initially be
registered in the name of Cede & Co., the nominee of DTC. (CEDEL and
Euroclear will hold omnibus positions on behalf of their participants through
customers' securities accounts in CEDEL's and Euroclear's names on the books
of their respective depositaries which in turn will hold such positions
in customers' securities accounts in the depositaries' names on the
books of DTC. Citibank N.A. will act as depositary for CEDEL and the
Brussels, Belgium Branch of Morgan Guarantee Trust Company of New York will
act as depositary for Euroclear (in such capacities, individually the
"Relevant Depositary" and collectively the "European Depositaries").)
Investors may hold such beneficial interests in the Book-Entry Certificates
in minimum denominations representing Certificate Principal Balances of
$1,000 and in integral multiples in excess thereof. Except as described
below, no person acquiring a Book-Entry Certificate (each, a "beneficial
owner") will be entitled to receive a physical certificate
representing such Certificate (a "Definitive Certificate"). Unless and
until Definitive Certificates are issued, it is anticipated that the only
"Certificateholder" of the Certificates will be Cede & Co., as nominee of
DTC. Certificate Owners will not be Certificateholders as that term is
used in the Pooling and Servicing Agreement. Certificate Owners are only
permitted to exercise their rights indirectly through Participants and
DTC.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Trustee shall establish and maintain on behalf of the Servicer an
account (the "Collection Account") for the benefit of the Certificateholders.
The Collection Account will be an Eligible Account (as defined herein).
Subject to the investment provision described in the following paragraphs,
upon receipt by the Servicer of amounts in respect of the Mortgage Loans
(excluding amounts representing the Servicing Fee, administrative charges,
taxes, assessments, credit insurance charges, insurance proceeds to be
applied to the restoration or repair of a Mortgaged Property or similar
items), the Servicer will deposit such amounts in the Collection Account.
Amounts so deposited may be invested in Eligible Investments (as described in
the Pooling and Servicing Agreement) maturing no later than one Business Day
prior to the date on which the amount on deposit therein is required to be
deposited in the Distribution Account or on such Distribution Date if
approved by the Rating Agencies.
The Trustee will establish an account (the "Distribution Account") into
which will be deposited amounts withdrawn from the Collection Account for
distribution to Certificateholders on a Distribution Date. The Distribution
Account will be an Eligible Account. Amounts on deposit therein may be
invested in Eligible Investments maturing on or before the Business Day prior
to the related Distribution Date.
An "Eligible Account" is an account that is ((i) maintained with a
depository institution whose debt obligations at the time of any deposit
therein have the highest short-term debt rating by the Rating Agencies, (ii)
one or more accounts with a depository institution which accounts are fully
insured by either the Savings Association Insurance Fund ("SAIF") or the Bank
Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation with a
minimum long-term unsecured debt rating of ( ), (iii) a segregated trust
account maintained with the Trustee or an affiliate of the Trustee in its
fiduciary capacity or (iv) otherwise acceptable to each Rating Agency as
evidenced by a letter from each Rating Agency to the Trustee, without
reduction or withdrawal of their then current ratings of the Certificates).
Eligible Investments are specified in the Pooling and Servicing
Agreement and are limited to investments which meet the criteria of the
Rating Agencies from time to time as being consistent with their then current
ratings of the Certificates.
DISTRIBUTIONS
General. Distributions on the Senior Certificates will be made by the
Trustee on the __th day of each month, or if such day is not a business day,
on the first business day thereafter, commencing on _______ __, 199_ (each, a
"Distribution Date"), to the persons in whose names such Certificates are
registered at the close of business on the last business day of the month
preceding the month of such Distribution Date (the "Record Date").
Distributions on each Distribution Date will be made by check mailed to
the address of the person entitled thereto as it appears on the applicable
Certificate Register or, in the case of a Certificateholder who holds
Certificates with an aggregate initial Certificate Principal Balance of
$___________ or more and who has so notified the Trustee in writing in
accordance with the Pooling and Servicing Agreement, by wire transfer in
immediately available funds to the account of such Certificateholder at a
bank or other depository institution having appropriate wire transfer
facilities; provided, however, that the final distribution in retirement of
the Senior Certificates will be made only upon presentment and surrender of
such Certificates at the Corporate Trust Office of the Trustee. On each
Distribution Date, a Certificateholder of a Senior Certificate will receive
such Certificateholder's Percentage Interest of the amounts required to be
distributed with respect to the Senior Certificates. The "Percentage
Interest" evidenced by a Senior Certificate will equal the percentage derived
by dividing the denomination of such Senior Certificate by the aggregate
denominations of all Senior Certificates.
DEPOSITS TO THE DISTRIBUTION ACCOUNT
The Trustee shall maintain a distribution account (the "Distribution
Account") on behalf of the Certificateholders. The Trustee shall, promptly
upon receipt, deposit in the Distribution Account and retain therein the
following:
(i) the aggregate amount remitted by the Servicer from the
Certificate Account;
((ii) all Advances;) and
(iii) any amount required to be deposited by the Servicer in
connection with any losses on Permitted Investments.
WITHDRAWALS FROM THE DISTRIBUTION ACCOUNT
The Trustee shall withdraw funds from the Distribution Account for
distribution to Certificateholders as described below under "--Allocation of
Available Funds" and may from time to time make withdrawals from the
Distribution Account for the following purposes:
(i) to pay to the Servicer as servicing compensation earnings on or
investment income with respect to funds in or credited to the
Distribution Account;
(ii) to withdraw any amount deposited in the Distribution Account
and not required to be deposited therein; and
(iii) to clear and terminate the Distribution Account upon the
termination of the Pooling and Servicing Agreement.
ALLOCATION OF AVAILABLE FUNDS.
General. Distributions to Certificateholders will be made on each
Distribution Date in an amount equal to the amount of Available Funds.
"Available Funds" as of any Distribution Date, is the sum of the following
amounts:
(i) the aggregate amount on deposit in the Certificate Account as
of the close of business on the immediately preceding Determination
Date; and
(ii) Advances with respect to such Distribution Date,
less the sum of:
(x) the portion thereof representing (A) Principal Prepayments
and Liquidation Proceeds received after the last day of the related
Prepayment Period and (B) all Scheduled Payments or portions
thereof received in respect of scheduled principal and interest on
the Mortgage Loans due after the preceding Due Date, and
(y) amounts permitted to be withdrawn from the Certificate
Account pursuant to clauses (i)-(vii), inclusive under "-
-Withdrawals from the Certificate Account" above.
On each Distribution Date, the Trustee shall withdraw from the
Distribution Account the Available Funds and make distributions thereof as
described below and to the extent of Available Funds:
(i) to the Senior Certificateholders, an amount equal to the sum of (a)
interest accrued during the related Interest Accrual Period at the
applicable Pass-Through Rate for the Senior Certificates on the Senior
Certificate Principal Balance immediately prior to the related
Distribution Date, reduced by such Class' pro rata share of shortfalls
in interest due to prepayments on the Mortgage Loans for such
Distribution Date and (b) any Unpaid Interest Shortfall with respect to
such Class;
(ii) to the Senior Certificateholders, an amount equal to the Class A
Principal Formula Amount to reduce the Certificate Principal Balance
thereof to zero; and
(iii) to the Servicer, Nonrecoverable Advances not previously
reimbursed.
As more fully described in the Pooling and Servicing Agreement, the
remaining Available Funds for such Distribution Date, if any, will be
distributed to the Certificateholders of the Subordinate and Residual
Certificates.
Definitions.
The "Pass-Through Rate" for any Distribution Date is defined in the
Summary of Terms above. The "Unpaid Interest Shortfall" as to any
Distribution Date is the amount, if any, by which the aggregate of the
Interest Shortfalls for a Class of Certificates for prior Distribution Dates
exceeds the aggregate of the amounts paid on prior Distribution Dates to
Certificateholders of Certificates of such Class as Unpaid Interest
Shortfalls. The "Interest Shortfall" as to any Distribution Date is the
amount, if any, by which the amount paid to Certificateholders of a Class of
Certificates on such Distribution Date is less than the amount of current
interest required to be paid to the Certificateholders of such Class on such
Distribution Date.
The "Class A Principal Formula Amount" with respect to any Distribution
Date is an amount equal to the sum of (i) the Class A Percentage of the
aggregate of the principal portion of each Scheduled Payment due during the
related Due Period, whether or not received; (ii) the Class A Prepayment
Percentage of the aggregate of Principal Prepayments for such Distribution
Date; (iii) with respect to unscheduled recoveries allocable to principal
(including insurance proceeds) of any Mortgage Loan which was finally
liquidated during the related Prepayment Period, the lesser of (A) the Class
A Prepayment Percentage of such recovery attributable to principal of such
Mortgage Loan and (B) the Class A Percentage times the related Principal
Balance; and (iv) any Unpaid Principal Shortfall for such Distribution Date.
The "Class A Percentage" with respect to any Distribution Date equals
the percentage equivalent of a fraction the numerator of which is the
Certificate Principal Balance of the Senior Certificates and the denominator
of which is the Pool Principal Balance. The "Pool Principal Balance" with
respect to any Distribution Date equals the aggregate of the Principal
Balances of the Mortgage Loans outstanding on the Due Date in the month
preceding the month of such Distribution Date.
The "Class A Prepayment Percentage" with respect to any Distribution
Date is 100%; provided, however, that the Class A Prepayment Percentage for a
Distribution Date occurring in or after _______ 199_ will be equal to the
Class A Percentage for such Distribution Date if:
(a) the percentage, for the preceding Distribution Date, determined
by dividing
(i) the aggregate Certificate Principal Balances of the
Subordinate Certificates by
(ii) the Pool Principal Balance
is equal to or greater than __%; and
(b) (i) either
(A) aggregate Realized Losses do not exceed __% of the
Original Certificate Principal Balance of the Subordinate
Certificates, and no more than __% of the Mortgage Loans
(measured by Principal Balance) are 61 days or more delinquent
(or are in foreclosure or converted to REO Properties); or
(B) aggregate Realized Losses do not exceed __% of the
Original Certificate Principal Balance of the Subordinate
Certificates; and (ii) at least one of the following
conditions is satisfied: (1) no more than __% of the Mortgage
Loans (measured by Principal Balance) are 61 days or more
delinquent (or are in foreclosure or converted to REO
Properties) or (2) no more than __% (or ____%, if certain
additional tests are met regarding recent performance)
(measured by Principal Balance) are 91 days or more delinquent
(or are in foreclosure or converted to REO Properties); and
(c) no Rating Agency has reduced the original rating assigned to
the Senior Certificates due to a perceived deterioration in the credit
quality of the Mortgage Loans;
or certain other criteria more fully described in the Pooling and Servicing
Agreement are met.
The "Certificate Principal Balance" with respect to the Class A
Certificates, as of any Distribution Date, will be equal to the Certificate
Principal Balance thereof on the Closing Date (the "Original Certificate
Principal Balance") minus all distributions of principal with respect thereto
on previous Distribution Dates.
A "Principal Prepayment" with respect to any Distribution Date is any
mortgagor payment or other recovery of principal on a Mortgage Loan that is
received in advance of its scheduled Due Date and is not accompanied by an
amount as to interest representing scheduled interest due on any date or
dates in any month or months subsequent to the month of prepayment.
The "Unpaid Liquidation Loss Amount" with respect to any Distribution
Date is the amount calculated under clause (iii)(B) of the definition of
"Class A Formula Amount" for all Liquidated Loans for the Distribution Date
following the Prepayment Period during which such Mortgage Loans or related
REO Properties became Liquidated Loans, less the sum of (a) the aggregate of
amounts actually distributed pursuant to clause (iii) of such definition with
respect to such Liquidated Loans on any such Distribution Date and (b) the
aggregate of Unpaid Liquidation Loss Amounts distributed to the
Certificateholders of the Senior Certificates on any prior Distribution Date.
The "Unpaid Principal Shortfall" with respect to any Distribution Date
is the amount, if any, by which previous distributions of principal of the
Senior Certificates are less than the aggregate Class A Formula Amounts (net
of amounts under clause (iv) of the definition of "Class A Formula Amount")
distributed on prior Distribution Dates.
The "Principal Balance" of any Mortgage Loan or related REO Property
equals (i) as of the Cut-off Date, the Cut-off Date Principal Balance, and
(ii) as of any other date, the Cut-off Date Principal Balance minus the sum
of (a) the principal portion of the Scheduled Payments due with respect to
such Mortgage Loan or REO Property during each Due Period ending prior to the
most recent Distribution Date which were received or with respect to which an
Advance was made, and (b) all Principal Prepayments with respect to such
Mortgage Loan or REO Property, and all Liquidation Proceeds to the extent
applied by the Servicer as recoveries of principal with respect to such
Mortgage Loan or REO Property, which were distributed on any previous
Distribution Date, and (c) any Realized Loss with respect thereto allocated
for any previous Distribution Date.
A "Realized Loss" (i) with respect to any defaulted Mortgage Loan that
is finally liquidated (a "Liquidated Loan"), is the amount of loss realized
equal to the portion of the Principal Balance remaining after application of
all amounts recovered (net of amounts reimbursable to the Servicer for
related Advances, expenses and Servicing Fees) towards interest and principal
owing on the Mortgage Loan and (ii) with respect to certain Mortgage Loans
the principal balances or the scheduled payments of principal and interest of
which have been reduced in connection with bankruptcy proceedings, the amount
of such reduction.
SUBORDINATION OF THE SUBORDINATE CERTIFICATES
The rights of the Certificateholders of the Subordinate Certificates and
the Residual Certificates to receive distributions with respect to the
Mortgage Loans will be subordinated to such rights of the Certificateholders
of the Senior Certificates to the extent described below. This subordination
is intended to enhance the likelihood of regular receipt by the
Certificateholders of the Senior Certificates of the full amount of the
monthly distributions due them, and to afford such Certificateholders
protection against Realized Losses. The protection afforded to the
Certificateholders of Senior Certificates by means of the subordination
feature will be accomplished by the preferential right of such
Certificateholders to receive, prior to any distribution being made on a
Distribution Date in respect of the Subordinate Certificates, the amounts due
them on each Distribution Date out of Available Funds on deposit on such date
in the Certificate Account and, if necessary, by the right of such
Certificateholders to receive future distributions with respect to the
Mortgage Loans that would otherwise have been payable to the
Certificateholders of the Subordinate Certificates.
Unless reduced by cash flow deficiencies due to delinquencies or
liquidation losses, the entitlement of the Senior Certificates to a
disproportionate percentage (100% unless certain tests are satisfied as set
forth in the definition of Class A Prepayment Percentage) of all Principal
Prepayments will have the effect of accelerating the amortization of such
Class from what it would have been if such amounts had been distributed pro
rata on the basis of the Certificate Principal Balances of all of the Classes
of Certificates. Any such acceleration will increase the relative interests
of the Subordinate Certificates in the Trust Fund and the protection afforded
to the Senior Certificates afforded thereby. If, however, as a result of
losses on the Mortgage Loans, the Pool Principal Balance becomes less than
the aggregate Certificate Principal Balance of the Senior Certificates, the
protection afforded by the subordination feature will be exhausted and the
Senior Certificateholders will thereafter bear all losses and delinquencies
in respect of the Mortgage Loans.
On each Distribution Date, the Certificateholders of Subordinate
Certificates will be entitled to distributions of principal and interest from
Available Funds, if any, remaining in the Certificate Account after
distribution to the Senior Certificateholders of amounts representing
principal and interest described above under "Distributions."
EXAMPLE OF DISTRIBUTIONS
The following chart sets forth an example of distributions on the
Certificates for the first month of the Trust Fund's existence:
____ _ Cut-off Date.
____ _ - ____ (A) Prepayment Period. The Servicer receives Principal
Prepayments and interest thereon to the date of such
prepayment. For succeeding Distribution Dates, the
Prepayment Period will commence on the __th of the
preceding calendar month and end on the __th of the
month of such Distribution Date.
____ __ (B) Record Date (the last business day of the month
preceding the month of the related Distribution Date).
____ __ (C) Due Date (the first calendar day of the month in which
the related Distribution Date occurs). Scheduled
Payments of principal and interest on the Mortgage
Loans are due from Mortgagors.
Through ____ __ (D) The Servicer receives Scheduled Payments due on
____ __ during this period.
____ __ (E) Determination Date (the __th day of each month). The
Trustee determines the amount of principal and
interest (including the amount, if any, of Advances to
be made by the Servicer) to be distributed to
Certificateholders on the following Distribution Date.
____ __ (F) Distribution Date.
Succeeding monthly periods follow the pattern of (A) through (F), except that
the Prepayment Period is as indicated in the description above.
________________
(A) Principal Prepayments received during this period will be distributed to
Certificateholders on ____ __, 199_. When a Mortgage Loan is prepaid in
full, interest on the amount prepaid is collected only from the last
scheduled Due Date to the date of prepayment. Interest in respect of
Principal Prepayments received during the period from the second through
the __th day of a month will be paid to the Servicer as additional
servicing compensation. With respect to Prepayment Interest Shortfalls
resulting from Principal Prepayments received during the period from the
__th through the last day of a calendar month, the Servicer will reduce
its Servicing Fee for such month and make a corresponding deposit in the
Certificate Account, in each case to the extent described under
"Servicing of Mortgage Loans--Adjustment to Servicing Fee in Connection
with Certain Prepaid Mortgage Loans" herein.
(B) Distributions of principal and interest on ____ __, 199_ will be made to
Senior Certificateholders of record at the close of business on the
Record Date.
(C) Scheduled Payments are due on this date and, when received, will be
passed through on the related Distribution Date, with the interest
adjusted to the applicable Net Loan Rates.
(D) Scheduled Payments due on ____ _, 199_ will be deposited by the Servicer
in the Certificate Account within one Business Day of receipt. Such
payments will include the scheduled principal payments, plus interest at
the applicable Net Loan Rates on the Cut-off Date Principal Balance.
(E) As of the close of business on __________ __, 199_ the Trustee will
determine the amount of principal and interest (including the amount, if
any, of Advances to be made by the Servicer) which will be passed
through to Senior Certificateholders. The Trustee will be obligated to
distribute those Scheduled Payments due on ____ _, 199_ which have been
received on or before ___________ __, 199_ (or which were the subject of
an Advance), as well as all Principal Prepayments received on Mortgage
Loans during the related Prepayment Period (the Cut-off Date through
____ __, 199_). In the event a Prepayment Interest Shortfall occurs
during such Prepayment Period, the Servicing Fee otherwise payable to
the Servicer for such month shall, to the extent of such Prepayment
Interest Shortfall, be deposited by the Servicer in the Certificate
Account for distribution to Certificateholders on ____ __, 199_.
(F) The Trustee will make distributions to Certificateholders on the __th
day of the month in which the related Due Date occurs, or if such day is
not a business day, on the next business day.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will forward to each
Certificateholder a statement generally setting forth:
(i) the amount of the related distribution to Certificateholders of
such Class of Certificates allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments included
therein, any Unpaid Principal Shortfall included in such distribution
and any remaining Unpaid Principal Shortfall after giving effect to such
distribution;
(ii) the amount of such distribution to Certificateholders of such
Class of Certificates allocable to interest, any Unpaid Interest
Shortfall included in such distribution and any remaining Unpaid
Interest Shortfall after giving effect to such distribution;
(iii) if the distribution to the Certificateholders of such Class
of Certificates is less than the full amount that would be distributable
to such Certificateholders if there were sufficient funds available
therefor, the amount of the shortfall and the allocation thereof as
between principal and interest;
(iv) the Certificate Principal Balance of each Class of
Certificates after giving effect to the distribution of principal on
such Distribution Date;
(v) the Pool Principal Balance for the following Distribution Date;
(vi) the Class A Percentage for the following Distribution Date;
(vii) the related amount of the Servicing Fees paid to or retained
by the Servicer;
(viii) the Pass-Through Rate for such Class of Certificates with
respect to the current Due Period;
((ix) the amount of Advances included in the distribution on such
Distribution Date and the aggregate amount of Advances outstanding as of
the close of business on such Distribution Date;)
(x) the number and aggregate principal amounts of Mortgage Loans
(A) delinquent (exclusive of Mortgage Loans in foreclosure) (1) 1 to 30
days, (2) 31 to 60 days, (3) 61 to 90 days and (4) 91 or more days and
(B) in foreclosure and delinquent (1) 1 to 30 days, (2) 31 to 60 days,
(3) 61 to 90 days and (4) 91 or more days, as of the close of business
on the last day of the calendar month preceding such Distribution Date;
(xi) with respect to any Mortgage Loan that became an REO Property
during the preceding calendar month, the loan number and Principal
Balance of such Mortgage Loan as of the close of business on the
Determination Date preceding such Distribution Date and the date of
acquisition thereof;
(xii) the total number and principal balance of any REO Properties
as of the close of business on the Determination Date preceding such
Distribution Date;
(xiii) the Class A Prepayment Percentage for the following
Distribution Date;
(xiv) the aggregate amount of Realized Losses incurred during the
preceding calendar month; and
(xv) the Unpaid Liquidation Loss Amount.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each Certificateholder
of record during the previous calendar year a statement containing
information necessary to enable Certificateholders to prepare their tax
returns. Such statements will not have been examined and reported upon by an
independent public accountant.
AMENDMENT
The Pooling and Servicing Agreement may be amended by the Depositor, the
Servicer and the Trustee, without the consent of Certificateholders, for any
of the purposes set forth under "The Pooling and Servicing Agreement--
Amendment" in the Prospectus. In addition, the Pooling and Servicing
Agreement may be amended by the Depositor, the Servicer and the Trustee with
the consent of the Certificateholders of a Majority in Interest of each Class
of Senior and Subordinate Certificates affected thereby for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Pooling and Servicing Agreement or of modifying in any
manner the rights of the Certificateholders; provided, however, that no such
amendment may (i) reduce in any manner the amount of, or delay the timing of,
payments required to be distributed on any Certificate without the consent of
the Certificateholder of such Certificate; (ii) adversely affect in any
material respect the interests of the Certificateholders of any Class of
Certificates in a manner other than as described in clause (i) above, without
the consent of the Certificateholders of Certificates of such Class
evidencing as to such Class Percentage Interests aggregating at least 66%; or
(iii) reduce the aforesaid percentage of aggregate outstanding principal
amounts of Certificates of each Class, the Certificateholders of which are
required to consent to any such amendment, without the consent of the
Certificateholders of all Certificates of such Class.
OPTIONAL TERMINATION
The Servicer will have the right to repurchase all remaining Mortgage
Loans and REO Properties in the Mortgage Pool and thereby effect early
retirement of the Certificates, subject to the Pool Principal Balance of such
Mortgage Loans and REO Properties at the time of repurchase being less than
or equal to __ of the Cut-off Date Principal Balance thereof. In the event
the Servicer exercises such option, the purchase price distributed with
respect to each Certificate will be 100% of its then outstanding Certificate
Principal Balance and in the case of a Senior Certificate, one month's
interest thereon at the applicable Pass-Through Rate plus any unpaid accrued
interest. Any repurchase of the Mortgage Loans and REO Properties may result
in an early retirement of the Senior Certificates.
OPTIONAL PURCHASE OF DEFAULTED LOANS
As to any Mortgage Loan which is delinquent in payment by 91 days or
more, the Servicer may, at its option, purchase such Mortgage Loan from the
Trust Fund at a price equal to 100% of the Principal Balance thereof plus
accrued interest thereon at the applicable Net Loan Rate from the date
through which interest was last paid by the related mortgagor or advanced to
the first day of the month in which such amount is to be distributed.
EVENTS OF DEFAULT
Events of Default will consist of: (i) any failure by the Servicer to
deposit in the Certificate Account the required amounts or remit to the
Trustee any payment (other than an Advance required to be made under the
terms of the Pooling and Servicing Agreement) which continues unremedied for
five business days after the giving of written notice of such failure to the
Servicer by the Trustee or the Depositor or to the Servicer and the Trustee
by the Certificateholders of Certificates having not less than 25% of the
Voting Rights evidenced by the Certificates; (ii) any failure by the Servicer
to observe or perform in any material respect any other of its covenants
or agreements in the Pooling and Servicing Agreement, which continues
unremedied for 60 days after the giving of written notice of such failure to
the Servicer by the Trustee or the Depositor, or to the Servicer and the
Trustee by the Certificateholders of Certificates evidencing not less than
25% of the Voting Rights evidenced by the Certificates; (iii) insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings, and certain actions by or on behalf of the Servicer indicating
its insolvency or inability to pay its obligations or (vi) any failure of
the Servicer to make any Advance which continues unremedied for the period
of one business day after the date on which telecopied notice of such
failure, requiring the same to be remedied, shall have been given to the
Servicer by the Trustee. As of any date of determination, 99% of the Voting
Rights will be allocated among Certificateholders of the Class A and
Subordinate Certificates in proportion to the Certificate Principal Balances
of their respective Certificates on such date; and Certificateholders of the
Residual Certificates will collectively be entitled to 1% of the Voting
Rights. Voting Rights will be allocated among the Certificates of each such
Class in accordance with the respective Percentage Interests.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default under the Pooling and Servicing Agreement
remains unremedied, the Trustee may, and upon the receipt of instructions
from Certificateholders of Certificates having not less than 25% of the
Voting Rights evidenced by the Certificates, the Trustee shall, terminate all
of the rights and obligations of the Servicer under the Pooling and Servicing
Agreement and in and to the Mortgage Loans, whereupon the Trustee will
succeed to all of the responsibilities, duties, and liabilities of the
Servicer under the Pooling and Servicing Agreement, including the obligation
to make Advances. Notwithstanding the foregoing, in the event of an Event of
Default arising from the Servicer's failure to make an Advance as described
in clause (vi) in the preceding paragraph, the Trustee shall terminate all of
the rights and obligations of the Servicer under the Pooling and Servicing
Agreement and in and to the Mortgage Loans as described in the preceding
sentence.
No Certificateholder, solely by virtue of such Certificateholder's
status as a Certificateholder, will have any right under the Pooling and
Servicing Agreement to institute any proceeding with respect thereto, unless
such Certificateholder previously has given to the Trustee written notice of
default and unless the Certificateholders of Certificates having not less
than 25% of the Voting Rights evidenced by the Certificates have made written
request to the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity, and
the Trustee for ___ days has neglected or refused to institute any such
proceeding.
THE TRUSTEE
( ) will be the Trustee under the Pooling and Servicing
Agreement. The Depositor and ( ) may maintain other banking
relationships in the ordinary course of business with the Trustee. Senior
Certificates may be surrendered at the Corporate Trust Office of the Trustee
located at (___________________________________ _____), Attention:
(__________ Series 199_-___) or at such other addresses as the Trustee may
designate from time to time.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
(DELAY IN DISTRIBUTIONS; INDEX LAG
The effective yield to the holders of the Senior Certificates will be
lower than the yield otherwise produced by the applicable rate at which
interest is passed through to such holders and the purchase price of such
Certificates because monthly distributions will not be payable to such
holders until the __th day (or following business day) of the month following
the month in which interest accrues on the Mortgage Loans (without any
additional distribution of interest or earnings thereon in respect of such
delay). (In addition, the Loan Rate applicable for any Adjustment Date will
be the most recent Index announced 45 days prior to each Adjustment Date. See
"The Mortgage Pool" herein.))
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
The Servicer may purchase from the Trust Fund a Mortgage Loan which is
delinquent in payment 91 days or more. The purchase price for such Mortgage
Loan shall be equal to 100% of the Principal Balance thereof plus accrued
interest thereon at the applicable Net Loan Rate from the date through which
interest was last paid by the related mortgagor or advanced to the first day
of the month in which such amount is to be distributed. To the extent
such rights are exercised, prepayments allocated to the Senior Certificates
will increase.
(LIMITATION ON ADJUSTMENTS
Although each of the Mortgage Loans bears interest at an
(fixed)(adjustable) Loan Rate, the monthly adjustments of the Loan Rate for
any Mortgage Loan will not exceed the Periodic Rate Cap and the Loan Rate
will in no event exceed the Maximum Rate for such Mortgage Loan, regardless
of the level of interest rates generally or the rate otherwise produced by
the Index and the Gross Margin. (In addition, such adjustments will be
subject to rounding to the nearest one-eighth of 1%.))
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Senior
Certificates (together with the net proceeds of the sale of the Subordinate
Certificates) against the purchase price of the Mortgage Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the Trust Fund as a "real estate
mortgage investment conduit" (a "REMIC") for federal income tax purposes. The
Senior and Subordinate Certificates will constitute "regular interests" in
the REMIC and the Residual Certificates will constitute the sole class of
"residual interests" in the REMIC.
ORIGINAL ISSUE DISCOUNT
The Senior Certificates may be issued at a premium. For purposes of
determining the amount and rate of accrual of original issue discount and
market discount, the Depositor intends to assume that there will be
prepayments on the Mortgage Loans at a rate equal to __% CPR. No
representation is made as to whether the Mortgage Loans will prepay at that
rate or any other rate. See "Yield, Prepayment and Maturity Considerations"
herein and "Certain Federal Income Tax Consequences" in the Prospectus. If
the Certificateholders of the Senior Certificates are treated as holding such
Certificates at a premium, such Certificateholders should consult their tax
advisors regarding the election to amortize bond premium and the method to be
employed.
As is described more fully under "Certain Federal Income Tax
Consequences" in the Prospectus, the Senior Certificates will represent
qualifying assets under Sections 856(c)(5)(A) and 7701(a)(19)(C)(v) of the
Code, and net interest income attributable to the Senior Certificates will be
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code, to the extent the assets of the
Trust Fund are assets described in such sections. The Senior Certificates
will represent qualifying assets under Section 860G(a)(3) if acquired by a
REMIC within the prescribed time periods of the Code.
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (the "Prohibited Transactions Tax"). In
general, subject to certain specified exceptions, a prohibited transaction
means the disposition of a Mortgage Loan, the receipt of income from a source
other than a Mortgage Loan or certain other permitted investments, the
receipt of compensation for services, or gain from the disposition of an
asset purchased with the payments on the Mortgage Loans for temporary
investment pending distribution on the Certificates. It is not anticipated
that the Trust Fund will engage in any prohibited transactions in which it
would recognize a material amount of net income.
In addition, certain contributions to a Trust Fund that elects to be
treated as a REMIC made after the day on which such Trust Fund issues all of
its interests could result in the imposition of a tax on the Trust Fund equal
to 100% of the value of the contributed property (the "Contributions Tax").
The Trust Fund will not accept contributions that would subject it to such
tax.
In addition, a Trust Fund that elects to be treated as a REMIC may also
be subject to federal income tax at the highest corporate rate on "net income
from foreclosure property," determined by reference to the rules applicable
to real estate investment trusts. "Net income from foreclosure property"
generally means gain from the sale of a foreclosure property other than
qualifying rents and other qualifying income for a real estate investment
trust. It is not anticipated that the Trust Fund will recognize net
income from foreclosure property subject to federal income tax.
Where any Prohibited Transactions Tax, Contributions Tax, tax on net
income from foreclosure property or state or local income or franchise tax
that may be imposed on the REMIC arises out of a breach of the Servicer's or
the Trustee's obligations, as the case may be, under the Pooling and
Servicing Agreement and in respect of compliance with then applicable law,
such tax will be borne by the Servicer or Trustee in either case out of its
own funds. In the event that either the Servicer or the Trustee, as the case
may be, fails to pay or is not required to pay any such tax as provided
above, such tax will be borne by the Certificateholders of the Subordinate
Certificates. It is not anticipated that any material state or local income
or franchise tax will be imposed on the Trust Fund.
ERISA CONSIDERATIONS
Any Plan fiduciary which proposes to cause a Plan to acquire any of the
Senior Certificates should consult with its counsel with respect to the
potential consequences under the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and the Code, of the Plan's acquisition and
ownership of such Certificates. See "ERISA Considerations" in the Prospectus.
Section 406 of ERISA prohibits "parties in interest" with respect to an
employee benefit plan subject to ERISA and the excise tax provisions set
forth under Section 4975 of the Code (a "Plan") from engaging in certain
transactions involving such Plan and its assets unless a statutory or
administrative exemption applies to the transaction. Section 4975 of the Code
imposes certain excise taxes on prohibited transactions involving plans
described under that Section; ERISA authorizes the imposition of civil
penalties for prohibited transactions involving plans not covered under
Section 4975 of the Code.
Certain employee benefit plans, including governmental plans and certain
church plans, are not subject to ERISA's requirements. Accordingly, assets of
such plans may be invested in the Senior Certificates without regard to the
ERISA considerations described herein and in the Prospectus, subject to the
provisions of other applicable federal and state law. Any such plan which is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the
Code may nonetheless be subject to the prohibited transaction rules set forth
in Section 503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's
general fiduciary requirements, including the requirement of investment
prudence and diversification and the requirement that a Plan's investments be
made in accordance with the documents governing the Plan. A fiduciary which
decides to invest the assets of a Plan in the Senior Certificates should
consider, among other factors, the extreme sensitivity of the investments to
the rate of principal payments (including prepayments) on the Mortgage Loans.
The U.S. Department of Labor has granted to Greenwich Capital Markets,
Inc., an administrative exemption (Prohibited Transaction Exemption 90-59;
Exemption Application No. D-8374) (the "Exemption") from certain of the
prohibited transaction rules of ERISA and the related excise tax provisions
of Section 4975 of the Code with respect to the initial purchase, the holding
and the subsequent resale by Plans of certificates in pass-through trusts
that consist of certain receivables, loans and other obligations that meet
the conditions and requirements of the Exemption. The Exemption applies to
mortgage loans such as the Mortgage Loans in the Trust Fund.
Among the conditions that must be satisfied for the Exemption to apply
are the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arm's length transaction
with an unrelated party;
(2) the rights and interest evidenced by the certificates acquired
by the Plan are not subordinated to the rights and interests evidenced
by other certificates of the trust fund;
(3) the certificates acquired by the Plan have received a rating at
the time of such acquisition that is one of the three highest generic
rating categories from Standard & Poor's Corporation ("S&P"), Moody's
Investors Service, Inc. ("Moody's"), Duff & Phelps Inc. ("D&P") or Fitch
Investors Service, Inc. ("Fitch");
(4) the trustee must not be an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the
underwriters in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the seller
pursuant to the assignment of the loans to the trust fund represents not
more than the fair market value of such loans; the sum of all payments
made to and retained by the servicer and any other servicer represents
not more than reasonable compensation for such person's services under
the agreement pursuant to which the loans are pooled and reimbursements
of such person's reasonable expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933.
The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets
of the type that have been included in other investment pools;
(ii) certificates in such other investment pools must have
been rated in one of the three highest rating categories of S&P,
Moody's, Fitch or D&P for at least one year prior to the Plan's
acquisition of certificates; and
(iii) certificates evidencing interests in such other
investment pools must have been purchased by investors other than
Plans for at least one year prior to any Plan's acquisition of
certificates.
Moreover, the Exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust as to
which the fiduciary (or its affiliate) is an obligor on the receivables held
in the trust provided that, among other requirements, (i) in the case of an
acquisition in connection with the initial issuance of certificates, at least
fifty percent of each class of certificates in which Plans have invested is
acquired by persons independent of the Restricted Group; (ii) such fiduciary
(or its affiliate) is an obligor with respect to five percent or less of the
fair market value of the obligations contained in the trust; (iii) the Plan's
investment in certificates of any Class does not exceed twenty-five percent
of all of the certificates of that Class outstanding at the time of the
acquisition; and (iv) immediately after the acquisition, no more than
twenty-five percent of the assets of the Plan with respect to which such
person is a fiduciary are invested in certificates representing an interest
in one or more trusts containing assets sold or serviced by the same entity.
The Exemption does not apply to Plans sponsored by the Seller, the
Underwriter, the Trustee, the Servicer, any obligor with respect to Mortgage
Loans included in the Trust Fund constituting more than five percent of the
aggregate unamortized principal balance of the assets in the Trust Fund, or
any affiliate of such parties (the "Restricted Group").
The Underwriter believes that the Exemption will apply to the
acquisition and holding of the Senior Certificates by Plans and that all
conditions of the Exemption other than those within the control of the
investors will be met. In addition, as of the date hereof, there is no single
Mortgagor that is the obligor on 5% of the Mortgage Loans included in the
Trust Fund by aggregate unamortized principal balance of the assets of the
Trust Fund.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 83-1
described in the Prospectus and the Exemption, and the potential consequences
in their specific circumstances, prior to making an investment in the Senior
Certificates. Moreover, each Plan fiduciary should determine whether under
the general fiduciary standards of investment prudence and diversification,
an investment in the Senior Certificates is appropriate for the Plan, taking
into account the overall investment policy of the Plan and the composition of
the Plan's investment portfolio.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and the Underwriter (an affiliate of the
Depositor), the Depositor has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase from the Depositor, the Senior
Certificates. Distribution of the Senior Certificates will be made by the
Underwriter from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. In connection with the
sale of the Senior Certificates, the Underwriter may be deemed to have
received compensation from the Depositor in the form of underwriting
discounts.
The Depositor has been advised by the Underwriter that it intends to
make a market in the Senior Certificates but has no obligation to do so.
There can be no assurance that a secondary market for the Senior Certificates
will develop or, if it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor and for the
Underwriter by Brown & Wood LLP, New York, New York.
RATINGS
It is a condition of the issuance of the Senior Certificates that they
be rated "( )" by ( ) and ( ) by ( ) (together with ( ), the
"Rating Agencies").
The ratings assigned by Duff & Phelps Credit Rating Co. ("D&P") to
securities address the likelihood of the receipt by the holders of such
securities of all distributions to which they are entitled under the
transaction structure. D&P's ratings reflect its analysis of the riskiness
of the mortgages and its analysis of the structure of the transaction as set
forth in the operative documents. D&P's ratings do not address the effect on
yield on the securities attributable to prepayments or recoveries on the
underlying assets.
The ratings assigned by Fitch Investors Service, L.P. ("Fitch") to
securities address the likelihood of the receipt of all distributions on the
assets by the related holders of securities under the agreements pursuant to
which such securities are issued. Fitch's ratings take into consideration
the credit quality of the related pool, including any credit support
providers, structural and legal aspects associated with such securities, and
the extent to which the payment stream on the pool is adequate to make the
payments required by such securities. Fitch ratings on such securities do
not, however, constitute a statement regarding frequency of prepayments of
the assets.
The ratings assigned by Moody's Investors Service, Inc. ("Moody's") to
securities address the likelihood of the receipt by holders of securities of
all distributions to which such holders of securities are entitled. Moody's
ratings on securities do not represent any assessment of the likelihood or
rate of principal prepayments. The ratings do not address the possibility
that holders of securities might suffer a lower than anticipated yield as a
result of prepayments.
The ratings assigned by Standard & Poor's Ratings Services, a Division
of The McGraw-Hill Companies, Inc. ("Standard & Poor's"), to securities
address the likelihood of the receipt of all distributions on the assets by
the related holders of securities under the agreements pursuant to which such
securities are issued. Standard & Poor's ratings take into consideration the
credit quality of the related pool, including any credit support providers,
structural and legal aspects associated with such securities, and the extent
to which the payment stream on such pool is adequate to make payments
required by such securities. Standard & Poor's ratings on such certificates
do not, however, constitute a statement regarding frequency of prepayments on
the related assets. The letter "r" attached to a Standard & Poor's rating
highlights derivative, hybrid and certain other types of securities that
Standard & Poor's believes may experience high volatility or high variability
in expected returns due to non-credit risks. The absence of an "r" symbol in
the rating of a class of securities should not be taken as an indication that
such securities will exhibit no volatility or variability in total return.
<TABLE>
<CAPTION>
<S> <C>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE DEPOSITOR OR
THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE $__,___,___,___
PROSPECTUS DO NOT CONSTITUTE AN OFFER OF ANY
SECURITIES OTHER THAN THOSE TO WHICH THEY RELATE OR
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER $______
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE ASSET BACKED CERTIFICATES,
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THEIR RESPECTIVE DATES.
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
Summary of Terms S-3
Risk Factors S-7
The Mortgage Lending Program S-8
Servicing of the Mortgage Loans S-10
Description of the Mortgage Loans S-11
Description of the Certificates S-13
Yield, Prepayment and Maturity
Considerations S-22
Use of Proceeds S-22
Certain Federal Income Tax Consequences S-22
ERISA Considerations S-23
Underwriting S-25 FINANCIAL ASSET SECURITIES CORP.
Legal Matters S-25 (DEPOSITOR)
Ratings S-25 ---------------------------
PROSPECTUS PROSPECTUS SUPPLEMENT
( , 199 )
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 GREENWICH CAPITAL MARKETS, INC.
Risk Factors 12
The Trust Fund 17
Use of Proceeds 22
The Depositor 22
Loan Program 22
Description of the Securities 24
Credit Enhancement 33
Yield and Prepayment Considerations 38
The Agreements 41
Certain Legal Aspects of the Loans 54
Certain Federal Income Tax Considerations 66
State Tax Considerations 85
ERISA Considerations 85
Legal Investment 88
Method of Distribution 89
Legal Matters 90
Financial Information 90
Rating 90
</TABLE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION, DATED JUNE 17, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ___________, 1997)
$_____________
HOME EQUITY LOAN TRUST 199___
$___________ HOME EQUITY LOAN ASSET BACKED NOTES, SERIES 199_-_
$__________ HOME EQUITY LOAN ASSET BACKED CERTIFICATES, SERIES 199_-_
The Home Equity Loan Trust 199__ (the "Trust") will be formed pursuant
to a trust agreement to be dated as of ______, 199_ (the "Trust Agreement")
and entered into by Financial Asset Securities Corp. (the "Depositor"),
________________ and _____________, as owner trustee (the "Owner Trustee").
The Trust will issue $___________ aggregate principal amount of Home Equity
Loan Asset Backed Notes (the "Notes"). The Notes will be issued pursuant to
an indenture to be dated as of __________ __, 199_ (the "Indenture"), between
the Trust and ____________, as indenture trustee (the "Indenture Trustee").
The Trust will also issue $____________ aggregate principal amount of Home
Equity Loan Asset Backed Certificates, Series 199_-_ (the "Certificates" and,
together with the Notes, the "Securities").
The Trust will consist of certain (adjustable rate) (fixed rate) home
equity revolving credit line loans made or to be made in the future (the
"Mortgage Loans") secured (primarily) by second deeds of trust or mortgages
on residential properties that are primarily one- to four-family properties,
the collections in respect of such Mortgage Loans, and certain other property
relating to such mortgage loans. (In addition, the Securities will have the
benefit of an irrevocable and unconditional limited financial guaranty
insurance policy (the "Policy") issued by ______________ (the "Certificate
Insurer") covering (describe).)
Distributions of principal and interest on the Notes will be made on the
_________ day of each month or, if such date is not a Business Day, then on
the succeeding Business Day (each a "Distribution Date"), commencing on
________, 199_ to the extent described herein. Interest will accrue on the
Notes at a rate (the "Note Rate") equal to ___% per annum from the Closing
Date to the first Distribution Date and at (a floating rate equal to LIBOR
(as defined herein) plus ___% per annum) (___% per annum) thereafter.
The Certificates will represent fractional undivided interests in the
Trust. Distribution of principal and interest on the Certificates will be
made on each Distribution Date to the extent described herein. Interest will
accrue on the Certificates at a rate (the "Pass-Through Rate") equal to ___%
per annum from the Closing Date to the first Distribution Date and at (a
floating rate equal to LIBOR plus ___% per annum) (___% per annum)
thereafter.
Payments of interest and principal on the Notes will have equal priority
with payments of principal and interest (and will be made pro rata) on the
Certificates.
There is currently no market for the Securities offered hereby and there
can be no assurance that such a market will develop or if it does develop
that it will continue. See "RISK FACTORS" herein.
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
SECURITIES, SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE S-10 AND IN THE
PROSPECTUS ON PAGE 11.
____________________
THE SECURITIES REPRESENT INTERESTS IN OR OBLIGATIONS OF THE TRUST ONLY AND DO
NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, OWNER TRUSTEE,
INDENTURE TRUSTEE OR ANY AFFILIATE THEREOF, EXCEPT TO THE EXTENT PROVIDED
HEREIN. THE SECURITIES ARE NOT INSURED OR GUARANTEED BY ANY GOVERNMENTAL
AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The Securities offered hereby will be purchased by Greenwich Capital
Markets, Inc. (and ) ((collectively,) the "Underwriter") from the
Depositor and will, in each case, be offered by the Underwriter from time to
time to the public in negotiated transactions or otherwise at varying prices
to be determined at the time of sale. The aggregate proceeds to the
Depositor from the sale of the Notes are expected to be $_____________ and
from the sale of the Certificates are expected to be $__________ before
deducting expenses payable by the Depositor of $_______.
The Securities are offered subject to prior sale and subject to the
Underwriters' right to reject orders in whole or in part. It is expected
that the Notes will be delivered in book-entry form through the facilities of
The Depository Trust Company, (Cedel Bank, soci t anonyme, and the Euroclear
System) on or about _______, 199_. The Securities will be offered in (Europe
and) the United States of America.
____________________
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND PROSPECTUS TO INVESTORS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS ACTING AS UNDERWRITERS TO DELIVER A PROSPECTUS
SUPPLEMENT AND PROSPECTUS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
____________________
Each Series of Securities offered hereby constitute part of a separate
Series of Asset Backed Securities being offered by Greenwich Capital Markets,
Inc. from time to time pursuant to the Prospectus dated _________ __, 1996.
This Prospectus Supplement does not contain complete information about the
offering of the Securities. Additional information is contained in the
Prospectus and investors are urged to read both this Prospectus Supplement
and the Prospectus in full. Sales of the Securities may not be consummated
unless the purchaser has received both this Prospectus Supplement and the
Prospectus.
____________________
GREENWICH CAPITAL MARKETS, INC.
_______________, 199_
SUMMARY
The following summary of certain pertinent information is qualified in
its entirety by reference to the detailed information appearing
elsewhere in this Prospectus Supplement and in the accompanying
Prospectus. Certain capitalized terms used herein are defined elsewhere
in the Prospectus Supplement or in the Prospectus.
Trust Home Equity Loan Trust 199_-_ (the "Trust" or the
"Issuer"), a Delaware business trust
established pursuant to the Trust Agreement (as
defined herein), dated as of ___, 199_ (the
"Cut-Off Date"). The property of the Trust
will include: a pool of (adjustable) (fixed)
rate home equity loan revolving credit line
loans made or to be made in the future (the
"Mortgage Loans"), under certain home equity
revolving credit line loan agreements (the
"Credit Line Agreements") and secured
(primarily) by second (deeds of trust)
(mortgages) on residential properties that are
primarily one- to four-family properties (the
"Mortgaged Properties"); the collections in
respect of the Mortgage Loans received after
the Cut-Off Date; property that secured a
Mortgage Loan which has been acquired by fore-
closure or deed in lieu of foreclosure; (a
surety bond or letter of credit); an assignment
of the Depositor's rights under the Purchase
Agreement; rights under certain hazard
insurance policies covering the Mortgaged
Properties; and certain other property, as
described more fully herein.
The Trust will include the unpaid principal
balance of each Mortgage Loan as of the Cut-Off
Date (the "Cut-Off Date Principal Balance")
plus any additions thereto as a result of new
advances made pursuant to the applicable Credit
Line Agreement (the "Additional Balances")
during the life of the Trust. With respect to
any date, the "Pool Balance" will be equal to
the aggregate of the Principal Balances of all
Mortgage Loans as of such date. The "Principal
Balance" of a Loan (other than a Liquidated
Loan) on any day is equal to its Cut-Off Date
Principal Balance, plus (i) any Additional
Balances in respect of such Mortgage Loan,
minus (ii) all collections credited against the
Principal Balance of such Mortgage Loan in
accordance with the related Credit Line
Agreement prior to such day. The Principal
Balance of a Liquidated Loan after the final
recovery of related Liquidation Proceeds shall
be zero.
Securities Offered (i) Home Equity Loan Asset Backed Notes, (the
"Notes"); and (ii) Home Equity Loan Asset
Backed Certificates (the "Certificates" and,
together with the Notes, the "Securities").
Each Security represents the right to receive
payments of interest at the variable rate
described below, payable monthly, and payments
of principal at such time and to the extent
provided below.
Depositor Financial Asset Securities Corp., a Delaware
corporation, and an indirect limited purpose
finance subsidiary of National Westminster Plc
and an affiliate of Greenwich Capital Markets,
Inc.
Servicer __________ (the "Servicer"). The Servicer will
service the Mortgage Loans pursuant to a
Servicing Agreement dated _________ 1, 199_
between the Issuer and the Servicer.
Indenture The Notes will be issued pursuant to an indenture
dated as of _________, 199_ (the "Indenture")
between the Trust and ________________________
in its capacity as indenture trustee (the
"Indenture Trustee"). The Indenture Trustee
will allocate distributions of principal and
interest to holders of the Notes (the
"Noteholders") in accordance with the
Indenture.
Trust Agreement Pursuant to a trust agreement dated as of ________
1, 199_ (the "Trust Agreement"), among the
Depositor, ________ and _________________ in
its capacity as owner trustee (the "Owner
Trustee"), the Trust will issue the
Certificates in an initial aggregate amount of
$__________. The Certificates will represent
fractional undivided interests in the Trust.
The Mortgage Loans The Mortgage Loans are (primarily) secured by second
deeds of trust or mortgages on Mortgaged
Properties. The Mortgage Loans were originated
by ( ) and on or prior to the Closing Date, (
) will sell the Mortgage Loans to the
Depositor pursuant to a purchase agreement (the
"Purchase Agreement"). The aggregate Cut-Off
Date Principal Balance of the Mortgage loans is
$___________ (the "Cut-Off Date Pool Balance").
The combined loan-to-value ratio of each Mortgage
Loan, computed using the maximum amount the
borrower was permitted to draw down under the
related Credit Line Agreement (the "Credit
Limit") and taking into account the amounts of
any related senior mortgage loans (the
"Combined Loan-to-Value Ratio") did not exceed
__% as of the Cut-Off Date. The weighted
average Combined Loan-to-Value Ratio of the
Mortgage Loans was ____% as of the Cut-Off
Date. See "THE HOME EQUITY LENDING PROGRAM--
Underwriting Procedures Relating to the
Mortgage Loans" herein.
Interest on each Mortgage Loan is payable monthly
and computed on the related average daily
outstanding Principal Balance for each billing
cycle at a variable rate per annum (the "Loan
Rate") equal at any time (subject to minimum
and maximum rates, as described herein under
"THE HOME EQUITY LENDING PROGRAM--Mortgage Loan
Terms," and further subject to applicable usury
limitations) to the sum of (i) (the prime rate
published in the "Money Rates" section of The
Wall Street Journal generally on the Monday of
the week in which such Loan Rate adjusts (or,
if no rate is published on such day, then on
the next succeeding calendar day on which a
prime rate is published), rounded to the
nearest 1/8 of 1 percent) and (ii) a margin
generally within the range of ___% to ___%.
The Loan Rate is subject to adjustment (
). With respect to each Mortgage Loan, a
"billing cycle" is the calendar month preceding
a Due Date. Interest accrued at such rate will
be due on the Due Date in the month following
the close of the billing cycle. (As to each
Mortgage Loan, the Due Date is the __th day of
the month.) The Cut-Off Date Principal
Balances ranged from $______ to $_______ and
averaged $_______. Credit Limits under the
Mortgage Loans as of the Cut-Off ranged from
approximately $_____ to $______ and averaged
$______. Each Mortgage Loan was originated in
the period from _______ to _________, and, as
of the Cut-Off Date, the weighted average
Credit Limit Utilization Rate (as defined
herein) was approximately ___%. See "THE HOME
EQUITY LENDING PROGRAM" and "DESCRIPTION OF THE
MORTGAGE LOANS" herein.
Collections All collections on the Mortgage Loans will be
allocated by the Servicer in accordance with
the Loan Agreements between amounts collected
in respect of interest ("Interest Collections")
and amounts collected in respect of principal
("Principal Collections" and collectively with
Interest Collections, the "Collections"). The
Servicer will generally deposit Collections
distributable to the Holders in an account
established for such purpose under the
Servicing Agreement (the "Collection Account").
See "DESCRIPTION OF THE SERVICING AGREEMENT--
Allocation and Collection" herein and "THE
AGREEMENTS--Payments on Loans; Deposits to
Security Account" and "--Collection Procedures"
in the Prospectus.
Description of the Securities
A. Distributions On each Distribution Date, collections on the
Mortgage Loans will be applied in the following
order of priority:
(i) to the Servicer, the Servicing Fee;
(ii) as payment for the accrued interest due and any
overdue accrued interest (with interest
thereon) on the respective Security Principal
Balances of the Notes and the Certificates;
(iii) as principal on the Securities, the excess of
Principal Collections over Additional Balances
created during the preceding Collection Period,
such amount to be allocated between the Notes
and Certificates, pro rata, based on their
respective Security Principal Balances;
(iv) as principal on the Securities, as payment for
any Liquidation Loss Amounts on the Mortgage
Loans;
(v) as payment for the premium on the Policy;
(vi) to reimburse prior draws made on the Policy;
and
(vii) any remaining amounts to the Depositor.
As to any Distribution Date, the "Collection Period"
is the calendar month preceding the month of
such Distribution Date.
"Liquidation Loss Amount" means with respect to any
Liquidated Mortgage Loan, the unrecovered
Principal Balance thereof at the end of the
related Collection Period in which such
Mortgage Loan became a Liquidated Mortgage Loan
after giving effect to the Net Liquidation
Proceeds in connection therewith.
B. Note Rate Interest will accrue on the unpaid Security
Principal Balance of the Notes at the per annum
rate (the "Note Rate") equal to ___% per annum
from the Closing Date to the first Distribution
Date and thereafter interest will accrue on the
Notes from and including the preceding
Distribution Date to but excluding such current
Distribution Date (each, an "Interest Accrual
Period") at (a floating rate equal to LIBOR (as
defined herein) plus ___%) (___%). (Interest
will be calculated on the basis of the actual
number of days in each Interest Accrual Period
divided by 360.) A failure to pay interest on
any Notes on any Distribution Date that
continues for five days constitutes an Event of
Default under the Indenture.
C. Pass-Through
Rate Interest will accrue on the unpaid Principal Balance
of the Certificates at the per annum rate (the
"Pass-Through Rate") equal to ___% per annum
from the Closing Date to the first Distribution
Date and thereafter interest will accrue on the
Certificates for each Interest Accrual Period
at (a floating rate equal to LIBOR (as defined
herein) plus ___%) (___%). (Interest will be
calculated on the basis of the actual number of
days in each Interest Accrual Period divided by
360.) A failure to pay interest on any
Certificates on any Distribution Date that
continues for five days constitutes an Event of
Default under the Trust Agreement.
D. Distribution
Date The ____ day of each month or, if such day is not a
Business Day, the next succeeding Business Day,
commencing with _______, 199_. A "Business
Day" is any day other than a Saturday or Sunday
or another day on which banking institutions in
New York, New York (and ____________) are
authorized or obligated by law, regulations or
executive order to be closed.
E. Record Date The last day preceding a Distribution Date or, if
the Securities are no longer Book-Entry
Securities, the last day of the month preceding
a Distribution Date.
F. Final Scheduled
Distribution
Dates With respect to the Certificates,
___________________. To the extent not
previously paid, the Security Principal Balance
of the Notes will be due on the Distribution
Date in _______, 199_. Failure to pay the full
principal balance of Notes on or before the
applicable final scheduled payment dates
constitutes an Event of Default under the
Indenture.
G. Form and
Registration The Securities will initially be delivered in
book-entry form ("Book-Entry Securities").
Holders of such Securities may elect to hold
their interests through The Depository Trust
Company ("DTC"), (in the United States, or
Cedel Bank, soci t anonyme, ("Cedel") or the
Euroclear System ("Euroclear"), in Europe).
Transfers within DTC (, Cedel or Euroclear, as
the case may be,) will be in accordance with
the usual rules and operating procedures of the
relevant system. So long as the Securities are
Book-Entry Securities, such Securities will be
evidenced by one or more securities registered
in the name of Cede & Co. ("Cede"), as the
nominee of DTC (or one of the relevant
depositaries (collectively, the "European
Depositaries")). Cross-market transfers
between persons holding directly or indirectly
through DTC(, on the one hand, and
counterparties holding directly or indirectly
through Cedel or Euroclear, on the other,) will
be effected in DTC through Citibank N.A.
("Citibank") or Morgan Guaranty Trust Company
of New York ("Morgan"), the relevant
depositaries of Cedel and Euroclear,
respectively, and each a participating member
of DTC. The Securities will initially be
registered in the name of Cede. The interests
of such Holders will be represented by book
entries on the records of DTC and participating
members thereof. No Holder of a Security will
be entitled to receive a definitive note
representing such person's interest, except in
the event that Securities in fully registered,
certificated form ("Definitive Securities") are
issued under the limited circumstances
described in "DESCRIPTION OF THE SECURITIES--
Book-Entry Registration of Securities" in the
Prospectus. All references in this Prospectus
Supplement to Securities reflect the rights of
Holders of such Notes only as such rights may
be exercised through DTC and its participating
organizations for so long as such Securities
are held by DTC. See "RISK FACTORS --
Book-Entry Securities" herein.
H. Denominations The Securities will be issued in minimum
denominations of $(________) and integral
multiples thereof.
(Letter of Credit)
(Surety Bond)
Issuer _________________ (the "(Letter of Credit) (Surety
Bond) Issuer"). See "THE (LETTER OF CREDIT)
(SURETY BOND) ISSUER" herein.
(Letter of Credit)
(Surety Bond) On the Closing Date, the (Letter of Credit) (Surety
Bond) Issuer will issue a (letter of credit)
(surety bond) (the "(Letter of Credit) (Surety
Bond)") in favor of the Owner Trustee on behalf
of the Trust. In the event that, on any
Distribution Date, available amounts on deposit
in the Collection Account with respect to the
preceding Collection Period are insufficient to
provide for the payment of the amount required
to be distributed to the Holders and the
Servicer on such Distribution Date, the Trustee
will draw on the (Letter of Credit) (Surety
Bond), to the extent of the (Letter of Credit)
(Surety Bond) Amount for such Distribution
Date, in an amount equal to such deficiency.
See "DESCRIPTION OF THE SECURITIES--The (Letter
of Credit) (Surety Bond) and "--Distributions
on the Securities" herein and "CREDIT
ENHANCEMENT" in the Prospectus.
((Letter of Credit)
(Surety Bond)
Amount The amount available under the (Letter of Credit)
(Surety Bond) (the "(Letter of Credit) (Surety
Bond) Amount") for the initial Distribution
Date will be $ . For each
Distribution Date thereafter, the (Letter of
Credit) (Surety Bond) Amount will equal the
lesser of (i) % of the Pool Balance as of
the first day of the preceding Collection
Period (after giving effect to any amounts
distributed with respect to principal of the
Mortgage Loans on the Distribution Date
occurring in such preceding Collection Period)
and (ii) the (Letter of Credit) (Surety Bond)
Amount as of the first day of the preceding
Collection Period, minus any amounts drawn
under the (Letter of Credit) (Surety Bond)
during such preceding Collection Period, plus
any amounts paid to the (Letter of Credit)
(Surety Bond) Issuer on the Distribution Date
occurring in such preceding Collection Period
up to the amount of any previous draws on the
(Letter of Credit) (Surety Bond).)
Servicing The Servicer will be responsible for servicing,
managing and making collections on the Mortgage
Loans. On the ________ business day, but no
later than the ________ calendar day, of each
month (the "Determination Date"), the Servicer
will calculate, and instruct the Trustee
regarding, the amounts to be paid, as described
herein, with respect to the related Collection
Period to the Holders. See "DESCRIPTION OF THE
SECURITIES--Distributions on the Securities"
herein. The Servicer will receive a monthly
servicing fee in the amount of ____% per annum
(the "Servicing Fee Rate"), of the related Pool
Balance and certain other amounts, as servicing
compensation from the Trust. See "SERVICING OF
THE MORTGAGE LOANS--Servicing Compensation and
Payment of Expenses" herein. In certain
limited circumstances, the Servicer may resign
or be removed, in which event either the
Trustee or a third-party servicer will be
appointed as successor Servicer. See
"SERVICING OF THE LOANS--Certain Matters
Regarding the Servicer" and "THE AGREEMENTS--
Events of Default; Rights Upon Events of
Default" in the Prospectus.
(Final Payment of Principal;
Termination The Trust will terminate on the Distribution Date
following the earlier of (i)
_________________________ and (ii) the final
payment or other liquidation of the last
Mortgage Loan and Private Security in the
Trust. The Mortgage Loans will be subject to
optional repurchase by the Servicer on any
Distribution Date after the Principal Balance
is reduced to an amount less than or equal to
$ ((5)% of the initial Principal
Balance). The repurchase price will be equal
to the sum of the outstanding Principal Balance
and accrued and unpaid interest thereon at the
weighted average of the Loan Rates through the
day preceding the final Distribution Date. See
"DESCRIPTION OF THE SECURITIES--Optional
Termination" herein and "THE AGREEMENTS--
Termination; Optional Termination" in the
Prospectus.)
Certain Federal Income Tax
Consequences In the opinion of Tax Counsel (as defined herein),
for federal income tax purposes, the Securities
will be characterized as indebtedness, and the
Trust should be characterized as an owner trust
and will not be characterized as an association
(or publicly traded partnership) taxable as a
corporation. Each holder of a Security, by the
acceptance of a Security, will agree to treat
the Security as indebtedness and the Trust as
an owner trust for federal, state and local
income and franchise tax purposes. See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES" and
"STATE TAX CONSEQUENCES" herein and "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS" and "STATE
TAX CONSIDERATIONS" in the Prospectus concern-
ing the application of federal, state and local
tax laws.
Legal Investment The Securities will not constitute "mortgage related
securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984
("SMMEA"), because some of the Mortgages
securing the Mortgage Loans are not first
mortgages. Accordingly, many institutions with
legal authority to invest in comparably rated
securities based solely on first mortgages may
not be legally authorized to invest in the
Certificates. See "LEGAL INVESTMENT
CONSIDERATIONS" herein and "LEGAL INVESTMENT"
in the Prospectus.
ERISA Generally, plans that are subject to the
requirements of ERISA and the Code are
permitted to purchase instruments like the
Notes that are debt under applicable state law
and have no "substantial equity features"
without reference to the prohibited transaction
requirements of ERISA and the Code. In the
opinion of ERISA Counsel (as defined herein),
the Notes will be classified as indebtedness
without substantial equity features for ERISA
purposes. However, if the Notes are deemed to
be equity interests and no statutory,
regulatory or administrative exemption applies,
the Trust will hold plan assets by reason of a
Plan's investment in the Notes. Accordingly,
any Plan fiduciary considering whether to
purchase the Notes on behalf of a Plan should
consult with its counsel regarding the
applicability of the provisions of ERISA and
the Code and the availability of any
exemptions. Under current law the purchase and
holding of the Certificates by or on behalf of
any employee benefit plan (a "Plan") subject to
the fiduciary responsibility provisions of the
Employee Retirement Income Security Act of
1974, as amended ("ERISA"), may result in a
"prohibited transaction" within the meaning of
ERISA and the Code or other violation of the
fiduciary responsibility provisions of ERISA
and Section 4975 of the Code. (Consequently,
Certificates may not be transferred to a
proposed transferee that is a Plan subject to
ERISA or that is described in Section
4975(e)(1) of the Code, or a person acting on
behalf of any such Plan or using the assets of
such plan unless the Owner Trustee and the
Depositor receive the opinion of counsel
reasonably satisfactory to the Owner Trustee
and the Depositor to the effect that the
purchase and holding of such Certificate will
not result in the assets of the Trust being
deemed to be "plan assets" for ERISA purposes
and will not be a prohibited transaction under
ERISA or Section 4975 of the Code.) See "ERISA
CONSIDERATIONS" herein and in the Prospectus.
Rating It is a condition to the issuance of the Securities
that they be rated _________ by at least ____
nationally recognized statistical rating
organizations (each a "Rating Agency"). In
general, ratings address credit risk and do not
address the likelihood of prepayments. A
security rating is not a recommendation to buy,
sell or hold securities.
RISK FACTORS
(CASH FLOW CONSIDERATIONS
During the first ( )-year draw down period under the related Credit
Line Agreements for the Mortgage Loans, collections on such Mortgage Loans
may vary because, among other things, borrowers are not required to make
monthly payments of principal. With respect to some of the Mortgage Loans,
during the second ( )-year draw down period, no monthly payments of
principal are required. Collections on the Mortgage Loans may also vary due
to seasonal purchasing and payment habits of borrowers.
General credit risk may also be greater to Holders than to holders of
instruments representing interests in level payment first mortgage loans
since no paymentof principal generally is required until after either a five-
or ten-year interest only period under the related Credit Line Agreements.
Minimum monthly payments will at least equal and may exceed accrued interest.
Even assuming that the Mortgaged Properties provide adequate security for the
Mortgage Loans, substantial delay could be encountered in connection with the
liquidation of Mortgage Loans that are delinquent and corresponding delays in
the receipt of related proceeds by Holders could occur if the (Letter of
Credit) (Surety Bond) provider were unable to perform on its obligations
under the (Letter of Credit) (Surety Bond). Further, liquidation expenses
(such as legal fees, real estate taxes, and maintenance and preservation
expenses) will reduce the proceeds payable to Holders and thereby reduce the
security for the Mortgage Loans. In the event any of the Mortgaged
Properties fail to provide adequate security for the related Mortgage Loans,
Holders could experience a loss if the (Letter of Credit) (Surety Bond)
provider were unable to perform its obligations under the (Letter of Credit)
(Surety Bond).)
PREPAYMENT CONSIDERATIONS
All of the Mortgage Loans may be prepaid in whole or in part at any time
without penalty. Home equity loans, such as the Mortgage Loans, have been
originated in significant volume only during the past few years and neither
the Depositor nor the Servicer is aware of any publicly available studies or
statistics on the rate of prepayment of such loans. Generally, home equity
loans are not viewed by borrowers as permanent financing. Accordingly, the
Mortgage Loans may experience a higher rate of prepayment than traditional
loans. The Trust's prepayment experience may be affected by a wide variety
of factors, including general economic conditions, interest rates, the
availability of alternative financing and homeowner mobility. In addition,
substantially all of the Mortgage Loans contain due-on-sale provisions and
the Servicer intends to enforce such provisions unless (i) such enforcement
is not permitted by applicable law or (ii) the Servicer, in a manner
consistent with reasonable commercial practice, permits the purchaser of the
related Mortgaged Property to assume the Mortgage Loan. To the extent
permitted by applicable law, such assumption will not release the original
borrower from its obligation under any such Mortgage Loan. See "CERTAIN
LEGAL ASPECTS OF THE LOANS--`Due-on-Sale' Clauses" in the Prospectus.
LEGAL CONSIDERATIONS
The Mortgage Loans are secured by deeds of trust or mortgages (which
generally are second mortgages). With respect to Mortgage Loans that are
secured by first mortgages, the Servicer has the power under certain
circumstances to consent to a new mortgage lien on the Mortgaged Property
having priority over such Mortgage Loan. Mortgage Loans secured by second
mortgages are entitled to proceeds that remain from the sale of the related
Mortgage Property after any related senior mortgage loan and prior statutory
liens have been satisfied. In the event that such proceeds are insufficient
to satisfy such loans and prior liens in the aggregate (and the (Letter of
Credit) (Surety Bond) provider is unable to perform its obligations under the
(Letter of Credit) (Surety Bond) or if the coverage under the (Letter of
Credit) (Surety Bond) is exhausted) the Trust and, accordingly, the Holders,
bear (i) the risk of delay in distributions while a deficiency judgment
against the borrower is obtained and (ii) the risk of loss if the deficiency
judgment cannot be obtained or is not realized upon. See "CERTAIN LEGAL
ASPECTS OF THE MORTGAGE LOANS" herein.
The sale of the Mortgage Loans from the Seller to the Depositor pursuant
to the Purchase Agreement will be treated as a sale of the Mortgage Loans.
The Seller will warrant that such transfer is either a sale of its interest
in the Mortgage Loans or a grant of a first priority perfected security
interest therein. In the event of an insolvency of the Seller, the receiver
of the Seller may attempt to recharacterize the sale of the Mortgage Loans as
a borrowing by the Seller secured by a pledge of the Mortgage Loans. If the
receiver decided to challenge such transfer, delays in payments of the
Securities and possible reductions in the amount thereof could occur. The
Depositor will warrant in the Trust Agreement that the transfer of its
interest in the Mortgage Loans to the Trust is a valid transfer and
assignment of such interest.
If a conservator, receiver or trustee were appointed for the Seller, or
if certain other events relating to the bankruptcy or insolvency of the
Seller were to occur, Additional Balances would not be transferred by the
Seller to the Trust pursuant to the Purchase Agreement (as assigned by the
Depositor to the Trust). In such an event, an Event of Default under the
Pooling and Servicing Agreement and Indenture would commence and the Owner
Trustee would attempt to sell the Mortgage Loans (unless Holders holding
Securities evidencing undivided interests aggregating at least 51% of each of
the Security Principal Balance of the Notes and the Certificates instruct
otherwise), thereby causing early payment of the Security Principal Balance
of the Notes and the Certificates.
In the event of a bankruptcy or insolvency of the Servicer, the
bankruptcy trustee or receiver may have the power to prevent the Trustee or
the Holders from appointing a successor Servicer.
SERVICER'S ABILITY TO CHANGE THE TERMS OF THE MORTGAGE LOANS
The Servicer may agree to changes in the terms of a Credit Line
Agreement, provided that such changes (i) do not adversely affect the
interest of the Holders, and (ii) are consistent with prudent business
practice. There can be no assurance that changes in applicable law or the
marketplace for home equity loans or prudent business practice will not
result in changes in the terms of the Mortgage Loans.
(DELINQUENT MORTGAGE LOANS
The Trust will include Mortgage Loans which are 89 or fewer days
delinquent. The Cut-Off Date Principal Balance of such delinquent Mortgage
Loans was $______________.)
THE TRUST
GENERAL
The Issuer, Home Equity Loan Trust 199_, is a business trust formed
under the laws of the State of Delaware pursuant to the Trust Agreement for
the transactions described in this Prospectus Supplement. The Trust
Agreement constitutes the "governing instrument" under the laws of the State
of Delaware relating to business trusts. After its formation, the Issuer
will not engage in any activity other than (i) acquiring, holding and
managing the Mortgage Loans and the other assets of the Trust and proceeds
therefrom, (ii) issuing the Notes and the Certificates, (iii) making payments
on the Notes and the Certificates and (iv) engaging in other activities that
are necessary, suitable or convenient to accomplish the foregoing or are
incidental thereto or connected therewith.
The property of the Trust will consist of: (i) each of the Mortgage
Loans that are _________; (ii) collections on the Mortgage Loans received
after the Cut-Off Date; (iii) Mortgaged Properties relating to the Mortgage
Loans that are acquired by foreclosure or deed in lieu of foreclosure; (iv)
the Collection Account and the Distribution Account (excluding net earnings
thereon); (v) the (Letter of Credit) (Surety Bond); and (vi) an assignment of
the Depositor's rights under the Purchase Agreement, including all rights of
the Depositor to purchase Additional Balances.
The Trust's principal offices are in __________, Delaware, in care of
________________________, as Owner Trustee, at ( ).
THE (LETTER OF CREDIT)(SURETY BOND) ISSUER
The following information with respect to _________ ("_______") has been
furnished by __________.
(Description of Letter of Credit/Surety Issuer)
THE HOME EQUITY LENDING PROGRAM
The information set forth below concerning (_______) and its
underwriting policies has been provided by (_______). The Depositor does not
make any representation as to the accuracy or completeness of such
information.
GENERAL
All of the Mortgage Loans were originated by
(_____________________________), (the "Seller" or the "Servicer") under its
home equity lending program. The Seller first offered adjustable rate home
equity revolving credit line loans ("home equity loans") in 19__. As of
(_____________), (____________) owned and serviced approximately $__________
aggregate principal amount of outstanding home equity loans secured by
properties located in __________ under home equity credit lines (the "Seller
Portfolio").
UNDERWRITING PROCEDURES RELATING TO THE MORTGAGE LOANS
Each home equity loan was originated after a review by the Seller in
accordance with its established underwriting procedures, which were intended
to assess the applicant's ability to assume and repay such home equity loans
and the adequacy of the real property which serves as collateral for such
home equity loans. The maximum Credit Limit for a home equity loan provided
by the Seller was $__________.
Each applicant for a home equity loan was required to complete an
application which listed the applicant's assets, liabilities, income, credit
and employment history and other demographic and personal information. If
information in the loan application demonstrated that there was sufficient
income and equity to justify making a home equity loan and the Seller (a)
received a satisfactory independent credit bureau report on the credit
history of the borrower and (b) obtained, in the case of all home equity
loans originated prior to __________ a drive-by appraisal of the related
Mortgaged Property or for all home equity loans originated as of __________,
a satisfactory appraisal completed on forms approved by FNMA, and if such
information met the Seller's underwriting standards, the Seller issued a
commitment subject to satisfaction of certain other conditions. These
conditions included: (i) obtaining and reviewing pay stubs, income tax
returns or a verification of employment from the applicant's employer; (ii)
obtaining and reviewing a verification of deposit; and (iii) obtaining and
reviewing a verification of the loan in the first lien position when the home
equity loan was to be in a second lien position.
Appraisals of the Mortgaged Properties were performed by a qualified
appraiser or an independent third-party, fee-based appraiser who had been
previously approved for such assignment by the Seller.
It is the Seller's policy to require a title policy insuring title
mortgage in accordance with the intended lien position. Regardless of
Combined Loan-to-Value Ratios, it is the Seller's policy not to accept a
position junior to any mortgage lien other than a first mortgage.
Generally, a home equity loan needed a Combined Loan-to-Value Ratio of
__% for loans which the Seller obtained full documentary support and was __%
for loans for which limited documentary support was obtained.
After obtaining all applicable employment, credit and property
information, the Seller determined whether sufficient unencumbered equity in
the property existed and whether the prospective borrower had sufficient
monthly income available to support the payments of interest at the current
prime rate plus the applicable margin based on the credit limit in addition
to any senior mortgage loan payments (including any escrows for property
taxes and hazard insurance premiums) and other monthly credit obligations
based on the prospective borrower's debt-to-gross income ratio. The
"debt-to-gross income ratio" is the ratio of (a) certain of the borrower's
debt obligations which include: (i) the monthly first mortgage payment plus
taxes; (ii) monthly installment debt payments with a term of more than ten
months; (iii) five percent of the total revolving obligations; (iv) monthly
alimony and child support obligations; and (v) the payment on the home equity
loan calculated at the Credit Limit and current prime rate plus margin for
such home equity loan to (b) the borrower's gross verifiable monthly income.
The debt-to-gross income ratio generally did not exceed (________%).
When the commitment conditions had been satisfied, the home equity loan
was completed by signing a Credit Line Agreement, rescission statement, and
mortgage which secured the repayment of principal of and interest on the
related home equity loan. The original mortgage was then recorded in the
appropriate county government office.
MORTGAGE LOAN TERMS
A borrower may access a home equity loan by writing a check. On all
home equity loans, there is (a ten-year) draw down period as long as the
borrower is not in default under the loan agreement. Home equity loans bear
interest at a variable rate which may change bi-weekly. Home equity loans
may be subject to a maximum per annum interest rate (the "Maximum Rate") of
___% per annum and in all cases, are subject to applicable usury
limitations. See "CERTAIN LEGAL ASPECTS OF THE LOANS--Applicability of Usury
Laws" in the Prospectus. The daily periodic rate on the home equity loans
(the "Loan Rate") is the sum of the Index Rate plus a spread (the "Margin")
which generally ranges between ____% and ____%, divided by 365 days or 366
days, as applicable.
The "Index Rate" is based on (the prime rate published in the "Money
Rates" section of The Wall Street Journal generally on the Monday of the week
in which such Loan Rate adjusts (or, if no rate is published on such day,
then on the next succeeding calendar day on which a prime rate is published),
rounded to the nearest 1/8 of 1 percent.) The annual percentage rate for any
bi-weekly period will be based on the Prime Rate in effect the Monday on
which the rate may change. (If a prime rate range is published in The Wall
Street Journal, then the midpoint (average) of that range will be used.)
There are no limitations on increases or decreases (except for those home
equity loans which have Maximum Rates). Only the home equity loans that have
Maximum Rates of ____% also have annual adjustment caps of __% as to both
increases and decreases in their Loan Rates.
Billing statements are mailed monthly. The statement details all debits
and credits and specifies the minimum payment due and the available credit
line. Notice of changes in the applicable Loan Rate are provided by the
Seller to the Borrower with such statements. All payments are due by the
tenth day after the date the billing statement is issued.
The Credit Line Agreements and Disclosure Statements further provide
that if publication of the Index Rate is discontinued, the Index Rate will be
changed upon notification in accordance with such Credit Line Agreements and
Disclosure Statements.
The right to obtain additional credit may be suspended or terminated or
the borrower may be required to pay the entire balance due plus all other
accrued but unpaid charges immediately, if the borrower fails to make any
required payment by the due date, if the total outstanding principal balance
including all charges payable exceeds the Credit Limit, if the borrower made
any statement or signature on any document which is fraudulent or contained a
material misrepresentation, if the borrower dies or becomes incompetent, if
the borrower becomes bankrupt or insolvent, if the borrower becomes subject
to any judgment, lien or attachment or execution is issued against the
Mortgaged Property, the borrower fails to obtain and maintain required
property insurance or if the borrower sells or transfers the Mortgaged
Property or does not maintain the property. In addition, the right to obtain
additional credit may be suspended or a borrower's Credit Limit may be
reduced, if the value of the Mortgaged Property decreases for any reason to
less than 80% of the original appraised value, if the borrower is in default
under the home equity loan, if government action impairs the Seller's lien
priority or if a regulatory agency has notified the Seller that continued
advances would constitute an unsafe and unsound practice.
DELINQUENCY AND LOSS EXPERIENCE OF THE SERVICER'S PORTFOLIO
The following tables set forth the delinquency and loss experience for
each of the periods shown for the home equity loans indicated on the table.
The Servicer believes that there have been no material trends or anomalies in
the historical delinquency and loss experience as represented in the
following tables. The data presented in the following tables are for
illustrative purposes only, and there is no assurance that the delinquency
and loss experience of the Mortgage Loans will be similar to that set forth
below.
DELINQUENCY EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C> <C>
As of _________
_____
Number of
Loans Amount
Amount Outstanding at
Period End . . . . . . . . . . . . .
Delinquency
30-59 Days . . . . . . . . . . . . . $
60-89 Days . . . . . . . . . . . . .
90 or More Days . . . . . . . . . . .
Foreclosures and Bankruptcies . . . . _________
Total Delinquencies . . . . . . . . . . $_________
30-59 Days Percentage . . . . . . . . . %
60-89 Days Percentage . . . . . . . . . %
90 or More Days Percentage . . . . . . %
Foreclosures and Bankruptcies . . . . .
</TABLE>
LOSS EXPERIENCE
(DOLLARS IN THOUSANDS
<TABLE>
<CAPTION>
<S> <C>
For the Year
Ending ________
Average Amount
Outstanding . . . . . . . . . . . . . . . . . . . . . $
Gross Charge-Offs . . . . . . . . . . . . . . . . . . . $
Recoveries . . . . . . . . . . . . . . . . . . . . . . $
Net Losses as a Percentage
of Average Amount Outstanding . . . . . . . . . . . . %
</TABLE>
SERVICING OF THE MORTGAGE LOANS
The information set forth below concerning the Servicer and its
servicing policies has been provided by the Servicer. The Depositor does not
make any representation as to the accuracy or completeness of such
information.
GENERAL
The Servicer will be responsible for servicing the Mortgage Loans as
agent for the Trust in accordance with the Servicer's policies and procedures
for servicing home equity loans and in accordance with the terms of the
Servicing Agreement.
With respect to real estate secured loans, the general policy of the
Servicer is to initiate foreclosure on the underlying property (i) after such
loan is 90 days or more delinquent; (ii) if a notice of default on a senior
lien is received by the Servicer; or (iii) if circumstances are discovered by
the Servicer which would indicate that a potential for loss exists.
Foreclosure proceedings may be terminated if the delinquency is cured.
However, under certain circumstances, the Servicer may elect not to commence
foreclosure or stay the foreclosure proceeding if the borrower's default is
due to special circumstances which are temporary and are not expected to last
beyond a specified period. The loans to borrowers in bankruptcy proceedings
will be restructured in accordance with law and with a view to maximizing
recovery of such home equity loans, including any deficiencies.
Additionally, any time during foreclosure, a forbearance, short sale,
deed-in-lieu or a payment plan can be authorized.
After foreclosure, if the home equity loan is secured by a first
mortgage lien, title to the related Mortgaged Property will pass to the
Servicer, or a wholly-owned subsidiary of the Servicer, who will liquidate
the Mortgaged Property and charge-off the balance of the home equity loan
balance which was not recovered by the liquidation proceeds. If the
Mortgaged Property was subject to a senior lien position, the Servicer will
either satisfy such lien at the time of foreclosure sale or take other action
as deemed necessary to protect the Servicer's interest in the Mortgaged
Property. If in the judgment of the Servicer, the cost of maintaining or
purchasing the senior lien position exceeds the economic benefit of such
action, the Servicer will generally charge-off the entire home equity loan,
seek a money judgment against the borrower or will not pursue any recovery.
Servicing and charge-off policies and collection practices may change
over time in accordance with the Servicer's business judgment, changes in the
Servicer's real estate secured revolving credit line loans and applicable
laws and regulations, and other considerations.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Collection Period, other than the first Collection
Period, the servicing compensation to be paid to the Servicer in respect of
its servicing activities relating to the Mortgage Loans will be paid to it
from interest collections in respect of the Mortgage Loans and will be equal
to ____% per annum (the "Servicing Fee Rate") on the aggregate Principal
Balances of the Mortgage Loans as of the first day of each such Collection
Period (the "Servicing Fee"). With respect to the first Collection Period,
the Servicer will receive from such collections ___ of the amount calculated
in the preceding sentence. All assumption fees, late payment charges and
other fees and charges, to the extent collected from borrowers, will be
retained by the Servicer as additional servicing compensation.
The Servicer will pay certain ongoing expenses associated with the Trust
and incurred by it in connection with its responsibilities under the
Servicing Agreement, including, without limitation, payment of the fees and
disbursements of the Trustee, any custodian appointed by the Trustee, the
Registrar and any paying agent. In addition, the Servicer will be entitled
to reimbursement for certain expenses incurred by it in connection with
defaulted Mortgage Loans and in connection with the restoration of Mortgaged
Properties related thereto, such right of reimbursement being prior to the
rights of Holders to receive any related Liquidation Proceeds.
DESCRIPTION OF THE MORTGAGE LOANS
MORTGAGE LOANS
The Mortgage Loans were originated pursuant to loan agreements and
disclosure statements (the "Credit Line Agreements") and are secured by
mortgages or deeds of trust, most of which are second mortgages or second
deeds of trust, on Mortgage Properties. The Mortgaged Properties securing
the Mortgage Loans consist primarily of residential properties that are one
to four-family properties. ____ of the Mortgaged Properties are owner
occupied. See "--Mortgage Loan Pool Statistics" below.
The Cut-Off Date Pool Balance is $___________, which is equal to the
aggregate Principal Balances of the Mortgage Loans as of ______, 199_ (the
"Cut-Off Date"). As of the Cut-Off Date, the Mortgage Loans were not more
than 89 days delinquent and had a Loan Rate of at least ____% per annum. The
average Cut-Off Date Principal Balance was $_______, the minimum Mortgage
Cut-Off Date Principal Balance was zero, the maximum Cut-Off Date Principal
Balance was $_________, the minimum Loan Rate and the maximum Loan Rate on
the Cut-Off Date were ____% and ____% per annum, respectively, and the
weighted average Loan Rate on the Cut-Off Date was ____% per annum. As of
the Cut-Off Date, the weighted average Credit Limit Utilization Rate was
____%, the minimum Credit Limit Utilization Rate was zero and the maximum
Credit Limit Utilization Rate was ______%. The "Credit Limit Utilization
Rate" is determined by dividing the Cut-Off Date Principal Balance of a
Mortgage Loan by the Credit Limit of the related Credit Line Agreement. The
weighted average Combined Loan-to-Value Ratio of the Mortgage Loans was ____%
as of the Cut-Off Date.
MORTGAGE LOAN POOL STATISTICS
The Depositor has compiled the following additional information as of
the Cut-Off Date with respect to the Mortgage Loans to be included in the
Trust.
(TABULAR INFORMATION)
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the Securities, the Depositor will transfer
to the Trust all of its right, title and interest in and to each Mortgage
Loan (including its right to purchase any Additional Balances arising in the
future), related Credit Line Agreements, mortgages and other related
documents (collectively, the "Related Documents"), including all collections
received on or with respect to each such Mortgage Loan on or after the Cut-
Off Date pursuant to an assignment of the Depositor's rights and obligations
under the Purchase Agreement. The Owner Trustee, concurrently with such
transfer, will deliver the Securities. Each Mortgage Loan transferred to the
Owner Trust will be identified on a schedule (the "Mortgage Loan Schedule")
delivered to the Owner Trustee pursuant to the Purchase Agreement. Such
schedule will include information as to the Cut-Off Date Principal Balance of
each Mortgage Loan, as well as information with respect to the Loan Rate.
The Purchase Agreement will require that, within the time period
specified therein, the Seller deliver to the Owner Trustee (or a custodian,
as the Owner Trustee's agent for such purpose) the Mortgage Loans endorsed in
blank and the Related Documents. In lieu of delivery of original mortgages,
the Seller may deliver trust and correct copies thereof which have been
certified as to authenticity by the appropriate county recording office where
such mortgage is recorded.
Under the terms of the Purchase Agreement, the Seller, acting at the
Depositor's request, will have (__ days after the Closing Date) to prepare
and record assignments of the mortgages related to each Mortgage Loan in
favor of the Owner Trustee (unless opinions of counsel satisfactory to the
Rating Agencies and the Certificate Insurer are delivered to the Owner
Trustee and the Certificate Insurer to the effect that recordation of such
assignments is not required in the relevant jurisdictions to protect the
interests of the Owner Trustee in the Mortgage Loans).
Within 90 days of the Closing Date, the Owner Trustee will review the
Mortgage Loans and the Related Documents and if any Mortgage Loan or Related
Document is found to be defective in any material respect and such defect is
not cured within 90 days following notification thereof to the Seller and the
Depositor by the Owner Trustee, the Seller will be obligated to repurchase
the Mortgage Loan and to deposit the Repurchase Price into the Collection
Account. Upon such retransfer, the Principal Balance of such Mortgage Loan
will be deducted from the Pool Balance. In lieu of any such repurchase, the
Seller may substitute an Eligible Substitute Mortgage Loan. Any such
repurchase or substitution will be considered a payment in full of such
Mortgage Loan. The obligation of the Seller to accept a transfer of a
Defective Mortgage Loan is the sole remedy regarding any defects in the
Mortgage Loans and Related Documents available to the Owner Trustee or the
Holders.
With respect to any Mortgage Loan, the "Repurchase Price" is equal to
the Principal Balance of such Mortgage Loan at the time of any transfer
described above plus accrued and unpaid interest thereon to the date of
repurchase.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted by
the Seller for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance), not 5% more or less than the Principal Balance
relating to such Defective Mortgage Loan; (ii) have a Loan Rate not less than
the Loan Rate of the Defective Mortgage Loan and not more than 1% in excess
of the Loan Rate of such Defective Mortgage Loan; (iii) have a Loan Rate
based on the same Index with adjustments to such Loan Rate made on the same
Interest Rate Adjustment Date as that of the Defective Mortgage Loan; (iv)
have a Margin that is not less than the Margin of the Defective Mortgage Loan
and not more than 100 basis points higher than the Margin for the Defective
Mortgage Loan; (v) have a mortgage of the same or higher level of priority as
the mortgage relating to the Defective Mortgage Loan; (vi) have a remaining
term to maturity not more than six months earlier and not later than the
remaining term to maturity of the Defective Mortgage Loan; (vii) comply with
each representation and warranty as to the Mortgage Loans set forth in the
Purchase Agreement (deemed to be made as of the date of substitution); and
(viii) satisfy certain other conditions specified in the Purchase Agreement.
To the extent the Principal Balance of an Eligible Substitute Mortgage Loan
is less than the Principal Balance of the related Defective Mortgage Loan,
the Seller will be required to make a deposit to the Collection Account equal
to such difference ("Substitution Adjustment Amounts").
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Owner Trustee with respect to each Mortgage Loan (e.g., Cut-Off Date
Principal Balance and the Loan Rate). In addition, the Seller will represent
and warrant, on the Closing Date, that, among other things: (i) at the time
of transfer to the Depositor, the Seller has transferred or assigned all of
its right, title and interest in each Mortgage Loan and the Related
Documents, free of any lien (subject to certain exceptions); and (ii) each
Mortgage Loan was generated under a Credit Line Agreement that complied, at
the time of origination, in all material respects with applicable state and
federal laws. Upon discovery of a breach of any such representation and
warranty which materially and adversely affects the interests of the Holders
in the Related Mortgage Loan and Related Documents, the Seller will have a
period of 60 days after discovery or notice of the breach to effect a cure.
If the breach cannot be cured within the 60-day period, the Seller will be
obligated to repurchase or substitute the Defective Mortgage Loan from the
Trust. The same procedure and limitations that are set forth above for the
repurchase or substitution of Defective Mortgage Loans will apply to the
transfer of a Mortgage Loan that is required to be repurchased or substituted
because of a breach of a representation or warranty in the Purchase Agreement
that materially and adversely affects the interests of the Holders.
Mortgage Loans required to be transferred to the Seller as described in
the preceding paragraphs are referred to as "Defective Mortgage Loans."
DESCRIPTION OF THE SERVICING AGREEMENT
The Servicer shall establish and maintain on behalf of the Owner Trustee
an account (the "Collection Account") for the benefit of the Holders. The
Collection Account will be an Eligible Account (as defined herein). Subject
to the investment provision described in the following paragraphs, upon
receipt by the Servicer of amounts in respect of the Mortgage Loans
(excluding amounts representing administrative charges, annual fees, taxes,
assessments, credit insurance charges, insurance proceeds to be applied to
the restoration or repair of a Mortgaged Property or similar items), the
Servicer will deposit such amounts in the Collection Account. Amounts so
deposited may be invested in Eligible Investments (as described in the
Servicing Agreement) maturing no later than one Business Day prior to the
date on which the amount on deposit therein is required to be deposited in
the Distribution Account or on such Distribution Date if approved by the
Rating Agencies. Not later than the fifth Business Day prior to each
Distribution Date (the "Determination Date"), the Servicer will notify the
Owner Trustee and the Indenture Trustee of the amount of such deposit to be
included in funds available for the related Distribution Date.
The Owner Trustee and the Indenture Trustee will establish one or more
accounts (the "Security Account") into which will be deposited amounts
withdrawn from the Collection Account for distribution to Holders on a
Distribution Date. The Security Account will be an Eligible Account.
Amounts on deposit therein will be invested in Eligible Investments maturing
on or before the Business Day prior to the related Distribution Date.
An "Eligible Account" is an account that is (i) maintained with a
depository institution whose debt obligations at the time of any deposit
therein have the highest short-term debt rating by the Rating Agencies, (ii)
one or more accounts with a depository institution which accounts are fully
insured by either the Savings Association Insurance Fund ("SAIF") or the Bank
Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation
established by such fund with a minimum long-term unsecured debt rating of
____, (iii) a segregated trust account maintained with the Owner Trustee or
an Affiliate of the Owner Trustee in its fiduciary capacity or (iv) otherwise
acceptable to each Rating Agency as evidenced by a letter from each Rating
Agency to the Owner Trustee, without reduction or withdrawal of their then
current ratings of the Securities.
Eligible Investments are specified in the Servicing Agreement and are
limited to investments which meet the criteria of the Rating Agencies from
time to time as being consistent with their then current ratings of the
Securities.
ALLOCATIONS AND COLLECTIONS
All collections on the Mortgage Loans will generally be allocated in
accordance with the Credit Line Agreements between amounts collected in
respect of interest and amounts collected in respect of principal. As to any
Distribution Date, "Interest Collections" will be equal to the aggregate of
the amounts collected during the related Collection Period, including Net
Liquidation Proceeds (as defined below), allocated to interest pursuant to
the terms of the Credit Line Agreements.
As to any Distribution Date, "Principal Collections" will be equal to
the sum of (i) the amounts collected during the related Collection Period,
including Net Liquidation Proceeds, and allocated to principal pursuant to
the terms of the Credit Line Agreements and (ii) any Substitution Adjustment
Amounts. "Net Liquidation Proceeds" with respect to a Mortgage Loan are
equal to the aggregate of all amounts received upon liquidation of such
Mortgage Loan, including, without limitation, insurance proceeds, reduced by
related expenses, but not including the portion, if any, of such amount that
exceeds the Principal Balance of the Mortgage Loan at the end of the
Collection Period immediately preceding the Collection Period in which such
Mortgage Loan became a Liquidated Mortgage Loan plus accrued and unpaid
interest thereon through the date of liquidation.
With respect to any date, the "Pool Balance" will be equal to the
aggregate of the Principal Balances of all Mortgage Loans as of such date.
The Principal Balance of a Mortgage Loan (other than a Liquidated Mortgage
Loan) on any day is equal to the Cut-Off Date Principal Balance thereof, plus
(i) any Additional Balances in respect of such Mortgage Loan minus (ii) all
collections credited against the Principal Balance of such Mortgage Loan in
accordance with the related Credit Line Agreement prior to such day. The
Principal Balance of a Liquidated Mortgage Loan after final recovery of
related Liquidation Proceeds shall be zero.
HAZARD INSURANCE
The Servicing Agreement provides that the Servicer maintain certain
hazard insurance on the Mortgaged Properties relating to the Mortgage Loans.
While the terms of the related Credit Line Agreements generally require
borrowers to maintain certain hazard insurance, the Servicer will not monitor
the maintenance of such insurance.
The Servicing Agreement requires the Servicer to maintain for any
Mortgaged Property relating to a Mortgage Loan acquired upon foreclosure of a
Mortgage Loan, or by deed in lieu of such foreclosure, hazard insurance with
extended coverage in an amount equal to the lesser of (a) the maximum
insurable value of such Mortgaged Property or (b) the outstanding balance of
such Mortgage Loan plus the outstanding balance on any mortgage loan senior
to such Mortgage Loan at the time of foreclosure or deed in lieu of
foreclosure, plus accrued interest and the Servicer's good faith estimate of
the related liquidation expenses to be incurred in connection therewith. The
Servicing Agreement provides that the Servicer may satisfy its obligation to
cause hazard policies to be maintained by maintaining a blanket policy
insuring against losses on such Mortgaged Properties. If such blanket policy
contains a deductible clause, the Servicer will be obligated to deposit in
the Collection Account the sums which would have been deposited therein but
for such clause. The Servicer will initially satisfy these requirements by
maintaining a blanket policy. As set forth above, all amounts collected by
the Servicer (net of any reimbursements to the Servicer) under any hazard
policy (except for amounts to be applied to the restoration or repair of the
Mortgaged Property) will ultimately be deposited in the Collection Account.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property
by fire, lightning, explosion, smoke, windstorm and hail, and the like,
strike and civil commotion, subject to the conditions and exclusions
specified in each policy. Although the policies relating to the Mortgage
Loans will be underwritten by different insurers and therefore will not
contain identical terms and conditions, the basic terms thereof are dictated
by state laws and most of such policies typically do not cover any physical
damage resulting from the following: war, revolution, governmental actions,
floods and other water-related causes, earth movement (including earthquakes,
landslides and mudflows), nuclear reactions, wet or dry rot, vermin, rodents,
insects or domestic animals, theft and, in certain cases vandalism. The
foregoing list is merely indicative of certain kinds of uninsured risks and
is not intended to be all-inclusive or an exact description of the insurance
policies relating to the Mortgaged Properties.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come
into default when in accordance with applicable servicing procedures under
the Servicing Agreement, no satisfactory arrangements can be made for the
collection of delinquent payments. In connection with such foreclosure or
other conversion, the Servicer will follow such practices as it deems
necessary or advisable and as are in keeping with its general subordinate
mortgage servicing activities, provided the Servicer will not be required to
expend its own funds in connection with foreclosure or other conversion,
correction of default on a related senior mortgage loan or restoration of any
property unless, in its sole judgment, such foreclosure, correction or
restoration will increase net Liquidation Proceeds. The Servicer will be
reimbursed out of Liquidation Proceeds for advances of its own funds as
liquidation expenses before any Net Liquidation Proceeds are distributed to
Holders or the (Transferor)(Seller). "Net Liquidation Proceeds" with respect
to a Mortgage Loan is the amount received upon liquidation of such Mortgage
Loan reduced by related expenses, which may include the amount advanced in
respect of a senior mortgage, up to the unpaid Principal Balance of the
Mortgage Loan plus accrued and unpaid interest thereon.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Collection Period, other than the first Collection
Period, the Servicer will receive from interest collections in respect of the
Mortgage Loan a portion of such interest collections as a monthly Servicing
Fee in the amount equal to ___% per annum ("Servicing Fee Rate") on the
aggregate Principal Balances of the Mortgage Loans as of the first day of
each such Collection Period. All assumption fees, late payment charges and
other fees and charges, to the extent collected from borrowers, will be
retained by the Servicer as additional servicing compensation.
The Servicer will pay certain ongoing expenses associated with the Trust
and incurred by it in connection with its responsibilities under the
Servicing Agreement, including, without limitation, payment of the fees and
disbursements of the Trustee, any custodian appointed by the Trustee, the
Registrar and any paying agent. In addition, the Servicer will be entitled
to reimbursement for certain expenses incurred by it in connection with
defaulted Mortgage Loans and in connection with the restoration of Mortgaged
Properties, such right of reimbursement being prior to the rights of Holders
to receive any related Net Liquidation Proceeds.
DESCRIPTION OF THE SECURITIES
GENERAL
The Notes will be issued pursuant to the Indenture dated as of
___________, 199_, between the Trust and _______________, as Indenture
Trustee. The Certificates will be issued pursuant to the Trust Agreement
dated as of ______________, 199_, among the Depositor, __________, and
______________, as Owner Trustee. The following summaries describe certain
provisions of the Securities, Indenture and Trust Agreement. The summaries
do not purport to be complete and are subject to, and qualified in their
entirety by reference to, the provisions of the applicable agreement. As
used herein, "Agreement" shall mean either the Trust Agreement or the
Indenture, as the context requires.
The Securities will be issued in fully registered, certificated form
only. The Securities will be freely transferrable and exchangeable at the
corporate trust office of the Owner Trustee, with respect to the Certificates
or the Indenture Trustee with respect to the Notes.
BOOK-ENTRY SECURITIES
The Senior Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the
Senior Certificates ("Certificate Owners") will hold their Certificates
through the Depository Trust Company ("DTC") in the United States(, or CEDEL
or Euroclear (in Europe)) if they are participants of such systems, or
indirectly through organizations which are participants in such systems. The
Book-Entry Certificates will be issued in one or more certificates which
equal the aggregate principal balance of the Certificates and will initially
be registered in the name of Cede & Co., the nominee of DTC. (CEDEL and
Euroclear will hold omnibus positions on behalf of their participants through
customers' securities accounts in CEDEL's and Euroclear's names on the books
of their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of
DTC. Citibank N.A. will act as depositary for CEDEL and the Brussels,
Belgium Branch of Morgan Guarantee Trust Company of New York will act as
depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively the "European Depositaries").) Investors may
hold such beneficial interests in the Book-Entry Certificates in minimum
denominations representing Certificate Principal Balances of $1,000 and in
integral multiples of $1 in excess thereof. Except as described below, no
person acquiring a Book-Entry Certificate (each, a "beneficial owner") will
be entitled to receive a physical certificate representing such Certificate
(a "Definitive Certificate"). Unless and until Definitive Certificates are
issued, it is anticipated that the only "Certificateholder" of the
Certificates will be Cede & Co., as nominee of DTC. Certificate Owners will
not be Certificateholders as that term is used in the Pooling and Servicing
Agreement. Certificate Owners are only permitted to exercise their rights
indirectly through Participants and DTC.
DISTRIBUTIONS
On each Distribution Date, collections on the Mortgage Loans will be
applied in the following order of priority:
(i) to the Servicer, the Servicing Fee;
(ii) as payment for the accrued interest due and any overdue
accrued interest on the respective Security Principal Balance of the
Notes and the Certificates;
(iii) as principal on the Securities, the excess of Principal
Collections over Additional Balances created during the preceding
Collection Period, such amount to be allocated between the Notes and
Certificates pro rata, based on their respective Security Principal
Balances;
(iv) as principal on the Securities, as payment for any Liquidation
Loss Amounts on the Mortgage Loans;
(v) as payment for the premium for the (Letter of Credit)(Surety
Bond);
(vi) to reimburse prior draws made on the (Letter of Credit)(Surety
Bond); and
(vii) any remaining amounts to the Depositor.
As to any Distribution Date, the "Collection Period" is the calendar
month preceding the month of such Distribution Date.
"Liquidation Loss Amount" means with respect to any Liquidated Mortgage
Loan, the unrecovered Principal Balance thereof at the end of the Collection
Period in which such Mortgage Loan became a Liquidated Mortgage Loan after
giving effect to the Net Liquidation Proceeds in connection therewith.
INTEREST
Note Rate. Interest will accrue on the unpaid Security Principal
Balance of the Notes at the per annum rate (the "Note Rate") equal to __%
per annum from the Closing Date to the first Distribution Date and thereafter
interest will accrue on the Notes from and including the preceding
Distribution Date to but excluding such current Distribution Date (each, an
"Interest Accrual Period") at (a floating rate equal to LIBOR (as defined
herein) plus __%) (__%). (Interest will be calculated on the basis of the
actual number of days in each Interest Accrual Period by 360.) A failure to
pay interest on any Notes on any Distribution Date that continues for five
days constitutes an Event of Default under the Indenture.
Pass-Through Rate. Interest will accrue on the unpaid Security
Principal Balance of the Certificates at the per annum rate (the
"Pass-Through Rate") equal to __% per annum from the Closing Date to the
first Distribution Date and thereafter interest will accrue on the
Certificates for each Interest Accrual Period at (a floating rate equal to
LIBOR (as defined herein) plus __%) (__%). (Interest will be calculated on
the basis of the actual number of days in each Interest Accrual Period
divided by 360.) A failure to pay interest on any Certificates on any
Distribution Date that continues for five days constitutes an Event of
Default under the Trust Agreement.
OPTIONAL TERMINATION
The Trust will terminate on the Distribution Date following the earlier
of (i) _________________________ and (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust. The Mortgage Loans will
be subject to optional repurchase by the Servicer on any Distribution Date
after the Principal Balance is reduced to an amount less than or equal to
$ ((5)% of the initial Principal Balance). The repurchase price will
be equal to the sum of the outstanding Principal Balance and accrued and
unpaid interest thereon at the weighted average of the Loan Rates through the
day preceding the final Distribution Date.
THE DEPOSITOR
Financial Asset Securities Corp., the Depositor, is a Delaware
corporation organized on August 2, 1995 for the limited purpose of acquiring,
owning and transferring Mortgage Assets and selling interests therein or
bonds secured thereby. It is an indirect limited purpose finance subsidiary
of National Westminster Plc and an affiliate of Greenwich Capital Markets,
Inc. Greenwich Capital Markets, Inc. is a registered broker dealer engaged
in the United States government securities and related capital markets
business. The Depositor maintains its principal office at 600 Steamboat
Road, Greenwich, Connecticut 06830. Its telephone number is (203) 625-2700.
THE INDENTURE
The following summary describes certain terms of the Indenture. The
summary does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the provisions of the Indenture. Whenever
particular sections or defined terms of the Indenture are referred to, such
sections or defined terms are thereby incorporated herein by reference. See
"DESCRIPTION OF THE NOTES" herein for a summary of certain additional terms
of the Indenture.
REPORTS TO NOTEHOLDERS
The Indenture Trustee will mail to each Noteholder, at such Noteholder's
request, at its address listed on the Note Register maintained with the
Indenture Trustee a report setting forth certain amounts relating to the
Notes.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
With respect to the Notes, "Events of Default" under the Indenture will
consist of: (i) a default for five days or more in the payment of any
interest on any Note; (ii) a default in the payment of the principal of or
any installment of the principal of any Note when the same becomes due and
payable; (iii) a default in the observance or performance of any covenant or
agreement of the Trust made in the Indenture and the continuation of any such
default for a period of 30 days after notice thereof is given to the Trust by
the Indenture Trustee or to the Trust and the Indenture Trustee by the
holders of at least 25% in principal amount of the Notes then outstanding;
(iv) any representation or warranty made by the Trust in the Indenture or in
any certificate delivered pursuant thereto or in connection therewith having
been incorrect in a material respect as of the time made, and such breach not
having been cured within 30 days after notice thereof is given to the Trust
by the Indenture Trustee or to the Trust and the Indenture Trustee by the
holders of at least 25% in principal amount of Notes then outstanding; or (v)
certain events of bankruptcy, insolvency, receivership or liquidation of the
Trust. (The amount of principal required to be paid to Noteholders under the
Indenture will generally be limited to amounts available to be deposited in
the Collection Account. Therefore, the failure to pay principal on the Notes
generally will not result in the occurrence of an Event of Default until the
final scheduled Distribution Date for such Notes.) If there is an Event of
Default with respect to a Note due to late payment or nonpayment of interest
due on a Note, additional interest will accrue on such unpaid interest at the
interest rate on the Note (to the extent lawful) until such interest is paid.
Such additional interest on unpaid interest shall be due at the time such
interest is paid. If there is an Event of Default due to late payment or
nonpayment of principal on a Note, interest will continue to accrue on such
principal at the interest rate on the Note until such principal is paid. If
an Event of Default should occur and be continuing with respect to the Notes,
the Indenture Trustee or holders of a majority in principal amount of Notes
then outstanding may declare the principal of such Notes to be immediately
due and payable. Such declaration may, under certain circumstances, be
rescinded by the holders of a majority in principal amount of the Notes then
outstanding. If the Notes are due and payable following an Event of Default
with respect thereto, the Indenture Trustee may institute proceedings to
collect amounts due or foreclose on Trust property or exercise remedies as a
secured party. If an Event of Default occurs and is continuing with respect
to the Notes, the Indenture Trustee will be under no obligation to exercise
any of the rights or powers under the Indenture at the request or direction
of any of the holders of the Notes, if the Indenture Trustee reasonably
believes it will not be adequately indemnified against the costs, expenses
and liabilities which might be incurred by it in complying with such request.
Subject to the provisions for indemnification and certain limitations
contained in the Indenture, the holders of a majority in principal amount of
the outstanding Notes will have the right to direct the time, method and
place of conducting any proceeding or any remedy available to the Indenture
Trustee, and the holders of a majority in principal amount of the Notes then
outstanding may, in certain cases, waive any default with respect thereto,
except a default in the payment of principal or interest or a default in
respect of a covenant or provision of the Indenture that cannot be modified
without the waiver or consent of all the holders of the outstanding Notes.
No holder of a Note will have the right to institute any proceeding with
respect to the Indenture, unless (i) such holder previously has given the
Indenture Trustee written notice of a continuing Event of Default, (ii) the
holders of not less than 25% in principal amount of the outstanding Notes
have made written request to the Indenture Trustee to institute such
proceeding in its own name as Indenture Trustee, (iii) such holder or holders
have offered the Indenture Trustee reasonable indemnity, (iv) the Indenture
Trustee has for 60 days failed to institute such proceeding and (v) no
direction inconsistent with such written request has been given to the
Indenture Trustee during the 60-day period by the holders of a majority in
principal amount of the Notes. In addition, the Indenture Trustee and the
Noteholders, by accepting the Notes, will covenant that they will not at any
time institute against the Trust any bankruptcy, reorganization or other
proceeding under any federal or state bankruptcy or similar law. With
respect to the Trust, neither the Indenture Trustee nor the Owner Trustee in
its individual capacity, nor any holder of a Certificate representing an
ownership interest in the Trust nor any of their respective owners,
beneficiaries, agents, officers, directors, employees, affiliates, successors
or assigns will, in the absence of an express agreement to the contrary, be
personally liable for the payment of the principal of or interest on the
Notes or for the agreements of the Trust contained in the Indenture.
CERTAIN COVENANTS
The Indenture will provide that the Trust may not consolidate with or
merge into any other entity, unless (i) the entity formed by or surviving
such consolidation or merger is organized under the laws of the United
States, any state or the District of Columbia, (ii) such entity expressly
assumes the Trust's obligation to make due and punctual payments upon the
Notes and the performance or observance of any agreement and covenant of the
Trust under the Indenture, (iii) no Event of Default shall have occurred and
be continuing immediately after such merger or consolidation, (iv) the Trust
has been advised that the ratings of the Securities then in effect would not
be reduced or withdrawn by any Rating Agency as a result of such merger or
consolidation and (v) the Trust has received an opinion of counsel to the
effect that such consolidation or merger would have no material adverse tax
consequence to the Trust or to any Noteholder or Certificateholder. The
Trust will not, among other things, (i) except as expressly permitted by the
Indenture, sell, transfer, exchange or otherwise dispose of any of the assets
of the Trust, (ii) claim any credit on or make any deduction from the
principal and interest payable in respect of the Notes (other than amounts
withheld under the Code or applicable state law) or assert any claim against
any present or former holder of Notes because of the payment of taxes levied
or assessed upon the Trust, (iii) dissolve or liquidate in whole or in part,
(iv) permit the validity or effectiveness of the Indenture to be impaired or
permit any person to be released from any covenants or obligations with
respect to the Notes under the Indenture except as may be expressly permitted
thereby or (v) permit any lien, charge excise, claim, security interest,
mortgage or other encumbrance to be created on or extend to or otherwise
arise upon or burden the assets of the Trust or any part thereof, or any
interest therein or the proceeds thereof. The Trust may not engage in any
activity other than as specified under "The Trust" herein. The Trust will
not incur, assume or guarantee any indebtedness other than indebtedness
incurred pursuant to the Notes and the Indenture.
ANNUAL COMPLIANCE STATEMENT
The Trust will be required to file annually with the Indenture Trustee a
written statement as to the fulfillment of its obligations under the
Indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT
The Indenture Trustee will be required to mail each year to all
Noteholders a report relating to any change in its eligibility and
qualification to continue as Indenture Trustee under the Indenture, any
amounts advanced by it under the Indenture, the amount, interest rate and
maturity date of any indebtedness owing by the Trust to the Indenture Trustee
in its individual capacity, any change in the property and funds physically
held by the Indenture Trustee as such and any action taken by it that
materially affects the Notes and that has not been previously reported, but
if no such changes have occurred, then no report shall be required.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the collateral securing
the Notes upon the delivery to the Indenture Trustee for cancellation of all
the Notes or, with certain limitations, upon deposit with the Indenture
Trustee of funds sufficient for the payment in full of all the Notes.
MODIFICATION OF INDENTURE
With the consent of the holders of a majority in principal amount of the
Notes then outstanding, the Trust and the Indenture Trustee may execute a
supplemental indenture to add provisions to, change in any manner or
eliminate any provisions of, the Indenture, or modify (except as provided
below) in any manner the rights of the Noteholders. Without the consent of
the holder of each outstanding Note affected thereby, however, no
supplemental indenture will: (i) change the due date of any installment of
principal of or interest on any Note or reduce the principal amount thereof,
the interest rate specified thereon or the redemption price with respect
thereto or change any place of payment where or the coin or currency in which
any Note or any interest thereon is payable; (ii) impair the right to
institute suit for the enforcement of certain provisions of the Indenture
regarding payment; (iii) reduce the percentage of the aggregate amount of the
outstanding Notes, the consent of the holders of which is required for any
supplemental indenture or the consent of the holders of which is required for
any waiver of compliance with certain provisions of the Indenture or of
certain defaults thereunder and their consequences as provided for in the
Indenture; (iv) modify or alter the provisions of the Indenture regarding the
voting of Notes held by the Trust, the Depositor or an affiliate of any of
them; (v) decrease the percentage of the aggregate principal amount of Notes
required to amend the sections of the Indenture which specify the applicable
percentage of aggregate principal amount of the Notes necessary to amend the
Indenture or certain other related agreements; or (vi) permit the creation of
any lien ranking prior to or on a parity with the lien of the Indenture with
respect to any of the collateral for the Notes or, except as otherwise
permitted or contemplated in the Indenture, terminate the lien of the
Indenture on any such collateral or deprive the holder of any Note of the
security afforded by the lien of the Indenture. The Trust and the Indenture
Trustee may also enter into supplemental indentures, without obtaining the
consent of the Noteholders, for the purpose of, among other things, adding
any provisions to or changing in any manner or eliminating any of the
provisions of the Indenture or of modifying in any manner the rights of the
Noteholders; provided that such action will not materially and adversely
affect the interest of any Noteholder.
VOTING RIGHTS
At all times, the voting rights of Noteholders under the Indenture will
be allocated among the Notes pro rata in accordance with their outstanding
principal balances.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE DEPOSITOR
Neither the Depositor, the Indenture Trustee nor any director, officer
or employee of the Depositor or the Indenture Trustee will be under any
liability to the Trust or the related Noteholders for any action taken or for
refraining from the taking of any action in good faith pursuant to the
Indenture or for errors in judgment; provided, however, that none of the
Indenture Trustee, the Depositor and any director, officer or employee
thereof will be protected against any liability which would otherwise be
imposed by reason of willful malfeasance, bad faith or negligence in the
performance of duties or by reason of reckless disregard of obligations and
duties under the Indenture. Subject to certain limitations set forth in the
Indenture, the Indenture Trustee and any director, officer, employee or agent
of the Indenture Trustee shall be indemnified by the Trust and held harmless
against any loss, liability or expense incurred in connection with
investigating, preparing to defend or defending any legal action, commenced
or threatened, relating to the Indenture other than any loss, liability or
expense incurred by reason of willful malfeasance, bad faith or gross
negligence in the performance of its duties under such Indenture or by reason
of reckless disregard of its obligations and duties under the Indenture. Any
such indemnification by the Trust will reduce the amount distributable to the
Noteholders. All persons into which the Indenture Trustee may be merged or
with which it may be consolidated or any person resulting from such merger or
consolidation shall be the successor of the Indenture Trustee under each
Indenture.
THE TRUST AGREEMENT
The following summary describes certain terms of the Trust Agreement.
The summary does not purport to be complete and is subject to, and qualified
in its entirety by reference to, the provisions of the Trust Agreement.
Whenever particular sections or defined terms of the Trust Agreement are
referred to, such sections or defined terms are thereby incorporated herein
by reference. See "DESCRIPTION OF THE SECURITIES" herein for a summary of
certain additional terms of the Trust Agreement.
REPORTS TO HOLDERS
Concurrently with each distribution to the Holders of the Certificates,
the Servicer will forward to the Owner Trustee for mailing to such Holder a
statement setting forth other items:
(i) the amount of interest included in such distribution and the
related Certificate Rate;
(ii) the amount, if any, of overdue accrued interest included in
such distribution (and the amount of interest thereon);
(iii) the amount, if any, of the remaining overdue accrued
interest after giving effect to such distribution;
(iv) the amount, if any, of principal included in such
distribution;
(v) the amount, if any, of the reimbursement of previous
Liquidation Loss Amounts included in such distribution;
(vi) the amount, if any, of the aggregate unreimbursed
Liquidation Loss Amounts after giving effect to such distribution;
(vii) the Servicing Fee for such Distribution Date;
(viii) the Pool Balance as of the end of the preceding Collection
Period;
(ix) the number and aggregate Principal Balances of the Mortgage
Loans as to which the minimum monthly payment is delinquent for 30-59
days, 60-89 days and 90 or more days, respectively, as of the end of the
preceding Collection Period; and
(x) the book value of any real estate which is acquired by the
Trust through foreclosure or grant of deed in lieu of foreclosure.
In the case of information furnished pursuant to clauses (iii), (iv) and
(v) above, the amounts shall be expressed as a dollar amount per Security
with a $1,000 denomination.
Within 60 days after the end of each calendar year, the Servicer will be
required to forward to the Owner Trustee a statement containing the
information set forth in clauses (iii) and (viii) above aggregated for such
calendar year.
AMENDMENT
The Trust Agreement may be amended by the Depositor and the Owner
Trustee, without consent of the Holders, to cure any ambiguity, to correct or
supplement any provision or for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions thereof or of
modifying in any manner the rights of such Holders; provided, however, that
such action will not, as evidenced by an opinion of counsel satisfactory to
the Owner Trustee, adversely affect in any material respect the interests of
any Holders. The Trust Agreement may also be amended by the Depositor and
the Owner Trustee with the consent of the holders of Certificates evidencing
at least a majority in principal amount of then outstanding Certificates and
Holders owning Voting Interests (as herein defined) aggregating not less than
a majority of the aggregate Voting Interests for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions
of the Trust Agreement or modifying in any manner the rights of the Holders.
INSOLVENCY EVENT
"Insolvency Event" means, with respect to any Person, any of the
following events or actions; certain events of insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings with
respect to such Person and certain actions by such Person indicating its
insolvency, reorganization pursuant to bankruptcy proceedings or inability to
pay its obligations. Upon termination of the Trust, the Owner Trustee shall
direct the Indenture Trustee promptly to sell the assets of the Trust (other
than the Collection Account) in a commercially reasonable manner and on
commercially reasonable terms. The proceeds from any such sale, disposition
or liquidation of the Mortgage Loans will be treated as collections on the
Mortgage Loans and deposited in the Collection Account. The Trust Agreement
will provide that the Owner Trustee does not have the power to commence a
voluntary proceeding in bankruptcy with respect to the Trust without the
unanimous prior approval of all Holders (including the Depositor) of the
Trust and the delivery to the Owner Trustee by each Holder (including the
Depositor) of a certificate certifying that the Holder reasonably believes
that the Trust is insolvent.
LIABILITY OF THE DEPOSITOR
Under the Trust Agreement, the Depositor will agree to be liable
directly to an injured party for the entire amount of any losses, claims,
damages or liabilities (other than those incurred by a Noteholder or a Holder
in the capacity of an investor with respect to the Trust) arising out of or
based on the arrangement created by the Trust Agreement.
VOTING INTERESTS
As of any date, the aggregate principal balance of all Certificates
outstanding will constitute the voting interest of the Issuer (the "Voting
Interests"), except that, for purposes of determining Voting Interests,
Certificates owned by the Issuer or its affiliates (other than the Depositor)
will be disregarded and deemed not to be outstanding, and except that, in
determining whether the Owner Trustee is protected in relying upon any such
request, demand, authorization, direction, notice, consent or waiver, only
Certificates that the Owner Trustee knows to be so owned will be so
disregarded. Certificates so owned that have been pledged in good faith may
be regarded as outstanding if the pledgee establishes to the satisfaction of
the Owner Trustee the pledgor's right so to act with respect to such
Certificates and that the pledgee is not the Issuer or its affiliates.
CERTAIN MATTERS REGARDING THE OWNER TRUSTEE AND THE DEPOSITOR
Neither the Depositor, the Owner Trustee nor any director, officer or
employee of the Depositor or the Owner Trustee will be under any liability to
the Trust or the related Holders for any action taken or for refraining from
the taking of any action in good faith pursuant to the Trust Agreement or for
errors in judgment; provided, however, that none of the Owner Trustee, the
Depositor and any director, officer or employee thereof will be protected
against any liability which would otherwise be imposed by reason of willful
malfeasance, bad faith or negligence in the performance of duties or by
reason of reckless disregard of obligations and duties under the Trust
Agreement. Subject to certain limitations set forth in the Trust Agreement,
the Owner Trustee and any director, officer, employee or agent of the Owner
Trustee shall be indemnified by the Trust and held harmless against any loss,
liability or expense incurred in connection with investigating, preparing to
defend or defending any legal action, commenced or threatened, relating to
the Trust Agreement other than any loss, liability or expense incurred by
reason of willful malfeasance, bad faith or gross negligence in the
performance of its duties under such Trust Agreement or by reason of reckless
disregard of its obligations and duties under the Trust Agreement. Any such
indemnification by the Trust will reduce the amount distributable to the
Holders. All persons into which the Owner Trustee may be merged or with
which it may be consolidated or any person resulting from such merger or
consolidation shall be the successor of the Owner Trustee under each Trust
Agreement.
ADMINISTRATION AGREEMENT
The _________________, in its capacity as Administrator, will enter into
the Administration Agreement with the Trust and the Owner Trustee pursuant to
which the Administrator will agree, to the extent provided in such
Administration Agreement, to provide notices and perform other administrative
obligations required by the Indenture and the Trust Agreement.
THE INDENTURE TRUSTEE
( ) is the Indenture Trustee under the Indenture. The mailing address
of the Indenture Trustee is ( ), Attention: Corporate Trust Department.
THE OWNER TRUSTEE
( ) is the Owner Trustee under the Trust Agreement. The mailing
address of the Owner Trustee is ( ), Attention: Corporate Trust
Administration.
USE OF PROCEEDS
The net proceeds from the sale of the Securities will be applied by the
Depositor towards the purchase price of the Mortgage Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
On January 27, 1994, the Internal Revenue Service issued final
regulations ("final OID regulations") relating to original issue discount
("OID"). The discussion under "Certain Federal Income Tax Consequences--
Taxation of Debt Securities" in the Prospectus applies with respect to the
final OID regulations.
Prospective purchasers should see "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES" in the Prospectus for a discussion of the application of
certain federal income and state tax laws to the Trust Fund and the
Securities.
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences" herein, potential investors should consider
the state income tax consequences of the acquisition, ownership, and
disposition of the Securities offered hereunder. State income tax law may
differ substantially from the corresponding federal tax law, and this
discussion does not purport to describe any aspect of the income tax laws of
any state. Therefore, potential investors should consult their own tax
advisors with respect to the various tax consequences of investments in the
Securities offered hereunder.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended
("ERISA") and Section 4975 of the Code impose certain restrictions on
employee benefit plans subject to ERISA or plans or arrangements subject to
Section 4975 of the Code ("Plans") and on persons who are parties in interest
or disqualified persons ("parties in interest") with respect to such Plans.
Certain employee benefit plans, such as governmental plans and church plans
(if no election has been made under section 410(d) of the Code), are not
subject to the restrictions of ERISA, and assets of such plans may be
invested in the Securities without regard to the ERISA considerations
described below, subject to other applicable federal and state law. However,
any such governmental or church plan which is qualified under section 401(a)
of the Code and exempt from taxation under section 501(a) of the Code is
subject to the prohibited transaction rules set forth in section 503 of the
Code. Any Plan fiduciary which proposes to cause a Plan to acquire any of
the Securities should consult with its counsel with respect to the potential
consequences under ERISA, and the Code, of the Plan's acquisition and
ownership of the Securities. See "ERISA CONSIDERATIONS" in the Prospectus.
Investments by Plans are also subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
PROHIBITED TRANSACTIONS
GENERAL
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions (including loans) involving a Plan
and its assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes certain excise taxes (or, in
some cases, a civil penalty may be assessed pursuant to section 502(i) of
ERISA) on parties in interest which engage in non-exempt prohibited
transactions.
PLAN ASSET REGULATION
The United States Department of Labor ("Labor") has issued final
regulations concerning the definition of what constitutes the assets of a
Plan for purposes of ERISA and the prohibited transaction provisions of the
Code (the "Plan Asset Regulation"). The Plan Asset Regulation describes the
circumstances under which the assets of an entity in which a Plan invests
will be considered to be "plan assets" such that any person who exercises
control over such assets would be subject to ERISA's fiduciary standards.
Under the Plan Asset Regulation, generally when a Plan invests in another
entity, the Plan's assets do not include, solely by reason of such
investment, any of the underlying assets of the entity. However, the Plan
Asset Regulation provides that, if a Plan acquires an "equity interest" in an
entity that is neither a "publicly-offered security" (as defined therein) nor
a security issued by an investment company registered under the Investment
Company Act of 1940, the assets of the entity will be treated as assets of
the Plan investor unless certain exceptions apply. If the
(Notes/Certificates) were deemed to be equity interests and no statutory,
regulatory or administrative exemption applies, the Trust could be considered
to hold plan assets by reason of a Plan's investment in the Notes. Such plan
assets would include an undivided interest in any assets held by the Trust.
In such an event, the Trustee and other persons, in providing services with
respect to the Trust's assets, may be parties in interest with respect to
such Plans, subject to the fiduciary responsibility provisions of Title I of
ERISA, including the prohibited transaction provisions of Section 406 of
ERISA, and Section 4975 of the Code with respect to transactions involving
the Trust's assets. (Under the Plan Asset Regulation, the term "equity
interest" is defined as any interest in an entity other than an instrument
that is treated as indebtedness under "applicable local law" and which has no
"substantial equity features." Although the Plan Assets Regulation is silent
with respect to the question of which law constitutes "applicable local law"
for this purpose, Labor has stated that these determinations should be made
under the state law governing interpretation of the instrument in question.
In the preamble to the Plan Assets Regulation, Labor declined to provide a
precise definition of what features are equity features or the circumstances
under which such features would be considered "substantial," noting that the
question of whether a plan's interest has substantial equity features is an
inherently factual one, but that in making a determination it would be
appropriate to take into account whether the equity features are such that a
Plan's investment would be a practical vehicle for the indirect provision of
investment management services. Brown & Wood ("ERISA Counsel") has rendered
its opinion that the Notes will be classified as indebtedness without
substantial equity features for ERISA purposes. ERISA Counsel's opinion is
based upon the terms of the Notes, the opinion of Tax Counsel that the Notes
will be classified as debt instruments for federal income tax purposes and
the ratings which have been assigned to the Notes. However, if contrary to
ERISA Counsel's opinion the Notes are deemed to be equity interests in the
Trust and no statutory, regulatory or administrative exemption applies, the
Trust could be considered to hold plan assets by reason of a Plan's
investment in the Notes.)
THE UNDERWRITER'S EXEMPTION
Labor has granted to Greenwich Capital Markets, Inc. (the "Underwriter")
an administrative exemption (Prohibited Transaction Exemption 90-59 (the
"Exemption")) which exempts from the application of the prohibited
transaction rules of ERISA and the related excise tax provisions of Section
4975 of the Code transactions relating to: (i) the acquisition, sale and
holding by Plans of certificates representing an undivided interest in
certain asset backed pass-through trusts with respect to which the
Underwriter or any of its affiliates is the sole underwriter or the manager
or co-manager of the underwriting syndicate; and (ii) the servicing,
operation and management of such asset backed pass-through trusts, provided
that the general conditions and certain other conditions set forth in the
Exemption are satisfied. The Exemption will apply to the acquisition,
holding and resale of the (Notes/Certificates) by a Plan provided that
certain conditions (some of which are described below) are met.
Among the conditions that must be satisfied for the Exemption to apply
are the following:
(1) the acquisition of the (Notes/Certificates) by a Plan is on
terms (including the price for the (Notes/Certificates)) that are at
least as favorable to the Plan as they would be in an arm's length
transaction with an unrelated party;
(2) the rights and interest evidenced by the (Notes/Certificates)
acquired by the Plan are not subordinated to the rights and interests
evidenced by other (Notes/Certificates) of the trust;
(3) the (Notes/Certificates) acquired by the Plan have received a
rating at the time of such acquisition that is one of the three highest
generic rating categories from either Standard & Poor's Corporation,
Moody's Investors Service, Inc, Duff & Phelps Inc. or Fitch Investors
Service, Inc.;
(4) the trustee must not be an affiliate of the Underwriter, the
Trustee, any Servicer, any obligor with respect to assets held in the
Trust Fund constituting more than five percent of the aggregate
unamortized principal balance of the assets in the Trust;
(5) the sum of all payments made to and retained by the
Underwriters in connection with the distribution of the
(Notes/Certificates) represents not more than reasonable compensation
for underwriting the (Notes/Certificates); the sum of all payments made
to and retain by the Issuer pursuant to the assignment of the Mortgage
Loans to the Trust Fund represents not more than the fair market value
of such Mortgage Loans; the sum of all payments made to and retained by
the servicer represents not more than reasonable compensation for such
person's services under a pooling and servicing agreement and
reimbursements of such person's reasonable expenses in connection
therewith; and
(6) the Plan investing in the (Notes/Certificates) is an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of
the Securities and Exchange Commission under the Securities Act of 1933.
The Underwriter believes that the Exemption will apply to the
acquisition and holding of the (Notes/Certificates) by Plans and that all
conditions of the Exemption other than those within the control of the
investors will be met.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any
(Notes/Certificates) on behalf of a Plan should consult with its counsel
regarding the applicability of the fiduciary responsibility and prohibited
transaction provisions of ERISA and the Code to such investment. Among other
things, before purchasing any (Notes/Certificates), a fiduciary of a Plan
should make its own determination as to whether the Trust, as obligor on the
(Notes/Certificates), is a party in interest with respect to the Plan, the
availability of the exemptive relief provided in the Plan Asset Regulations
and the availability of any other prohibited transaction exemptions.
Purchasers should analyze whether the decision may have an impact with
respect to purchases of the (Notes/Certificates).
LEGAL INVESTMENT CONSIDERATIONS
The appropriate characterization of the Securities under various legal
investment restrictions, and thus the ability of investors subject to these
restrictions to purchase Securities, may be subject to significant
interpretive uncertainties. All investors whose investment authority is
subject to legal restrictions should consult their own legal advisors to
determine whether, and to what extent, the Securities will constitute legal
investments for them. The Depositor makes no representation as to the proper
characterization of the Securities for legal investment or financial
institution regulatory purposes, or as to the ability of particular investors
to purchase Securities under applicable legal investment restrictions. The
uncertainties described above (and any unfavorable future determinations
concerning legal investment or financial institution regulatory
characteristics of the Securities) may adversely affect the liquidity of the
Securities.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Depositor has agreed to sell to Greenwich Capital Markets,
Inc. (the "Underwriter"), and the Underwriter has agreed to purchase from the
Depositor, the Securities. The Underwriter is obligated to purchase all the
Securities offered hereby if any are purchased. Distribution of the
Securities will be made by the Underwriter from time to time in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. Proceeds to the Depositor are expected to be $________________ from
the sale of the Notes and $___________ from the sale of the Certificates,
before deducting expenses payable by the Depositor of $_________. In
connection with the purchase and sale of the Securities, the Underwriter may
be deemed to have received compensation from the Depositor in the form of
underwriting discounts, concessions or commissions.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, or contribute payments the Underwriter may be
required to make in respect thereof. The Depositor is an affiliate of the
Underwriter. The Underwriter is an affiliate of the Depositor.
LEGAL MATTERS
Certain legal matters with respect to the Securities will be passed upon
for the Depositor by Brown & Wood LLP, New York, New York and for the
Underwriter by Brown & Wood LLP, New York, New York.
RATINGS
It is a condition to issuance that each Class of the Notes be rated be
rated not lower than "_________" by ( ) and _______ by ( ). It is
a condition to issuance that the Certificates be rated at least "___" by
( ) and "___" by ( ). A securities rating addresses the likelihood of
the receipt by Certificateholders and Noteholders of distributions on the
Mortgage Loans. The rating takes into consideration the structural, legal
and tax aspects associated with the Certificates and Notes. The ratings on
the Securities do not, however, constitute statements regarding the
possibility that Certificateholders or Noteholders might realize a lower than
anticipated yield. A securities rating is not a recommendation to buy, sell
or hold securities and may be subject to revision or withdrawal at any time
by the assigning rating organization. Each securities rating should be
evaluated independently of similar ratings on different securities.
The ratings assigned by Duff & Phelps Credit Rating Co. ("D&P") to
securities address the likelihood of the receipt by the holders of such
securities of all distributions to which they are entitled under the
transaction structure. D&P's ratings reflect its analysis of the riskiness
of the mortgages and its analysis of the structure of the transaction as set
forth in the operative documents. D&P's ratings do not address the effect on
yield on the securities attributable to prepayments or recoveries on the
underlying assets.
The ratings assigned by Fitch Investors Service, L.P. ("Fitch") to
securities address the likelihood of the receipt of all distributions on the
assets by the related holders of securities under the agreements pursuant to
which such securities are issued. Fitch's ratings take into consideration
the credit quality of the related pool, including any credit support
providers, structural and legal aspects associated with such securities, and
the extent to which the payment stream on the pool is adequate to make the
payments required by such securities. Fitch ratings on such securities do
not, however, constitute a statement regarding frequency of prepayments of
the assets.
The ratings assigned by Moody's Investors Service, Inc. ("Moody's") to
securities address the likelihood of the receipt by holders of securities of
all distributions to which such holders of securities are entitled. Moody's
ratings on securities do not represent any assessment of the likelihood or
rate of principal prepayments. The ratings do not address the possibility
that holders of securities might suffer a lower than anticipated yield as a
result of prepayments.
The ratings assigned by Standard & Poor's Ratings Services, a Division
of The McGraw-Hill Companies, Inc. ("Standard & Poor's"), to securities
address the likelihood of the receipt of all distributions on the assets by
the related holders of securities under the agreements pursuant to which such
securities are issued. Standard & Poor's ratings take into consideration the
credit quality of the related pool, including any credit support providers,
structural and legal aspects associated with such securities, and the extent
to which the payment stream on such pool is adequate to make payments
required by such securities. Standard & Poor's ratings on such certificates
do not, however, constitute a statement regarding frequency of prepayments on
the related assets. The letter "r" attached to a Standard & Poor's rating
highlights derivative, hybrid and certain other types of securities that
Standard & Poor's believes may experience high volatility or high variability
in expected returns due to non-credit risks. The absence of an "r" symbol in
the rating of a class of securities should not be taken as an indication that
such securities will exhibit no volatility or variability in total return.
<TABLE>
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE DEPOSITOR OR THE
UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER OF ANY $__,___,___,___
SECURITIES OTHER THAN THOSE TO WHICH THEY RELATE OR AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY,
TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER
OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME HOME EQUITY LOAN TRUST 199___
SUBSEQUENT TO THEIR RESPECTIVE DATES. $______ (FIXED) (FLOATING) RATE
ASSET BACKED NOTES
$______ (FIXED) (FLOATING) RATE
ASSET BACKED CERTIFICATES,
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
Summary S-3
Risk Factors S-11
The Trust S-12
The (Letter of Credit)(Surety Bond) Issuer S-13
The Home Equity Lending Program S-13
Servicing of the Mortgage Loans S-15 FINANCIAL ASSET SECURITIES CORP.
Description of the Mortgage Loans S-16 (DEPOSITOR)
Description of the Servicing Agreement S-18
Description of the Securities S-21
The Depositor S-22
The Indenture S-22 ---------------------------
The Trust Agreement S-25
Administration Agreement S-27
The Indenture Trustee S-28
The Owner Trustee S-28
Use of Proceeds S-28
Certain Federal Income Tax Consequences S-28
State Tax Consequences S-28
ERISA Considerations S-28
Legal Investment Considerations S-30
Underwriting S-31
Legal Matters S-31
Ratings S-31
PROSPECTUS PROSPECTUS SUPPLEMENT
Prospectus Supplement or Current
Report on Form 8-K 2 ( , 199 )
Incorporation of Certain Documents by Reference 2 ---------------------------
Available Information 2
Reports to Securityholders 3
Summary of Terms 4
Risk Factors 12 GREENWICH CAPITAL MARKETS, INC.
The Trust Fund 17
Use of Proceeds 22
The Depositor 22
Loan Program 22
Description of the Securities 24
Credit Enhancement 33
Yield and Prepayment Considerations 38
The Agreements 41
Certain Legal Aspects of the Loans 54
Certain Federal Income Tax Considerations 66
State Tax Considerations 85
ERISA Considerations 85
Legal Investment 88
Method of Distribution 89
Legal Matters 90
Financial Information 90
Rating 90
</TABLE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there by any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION, DATED JUNE 17, 1997
PROSPECTUS SUPPLEMENT
(To Prospectus dated ___________, 1997)
HOME EQUITY LOAN ASSET BACKED CERTIFICATES, SERIES 199__-__
FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
( __________________________ )
TRANSFEROR AND SERVICER
The Home Equity Loan Asset Backed Certificates, Series 199__-__ (the
"Certificates") will evidence in the aggregate the entire beneficial interest
in the Home Equity Loan Trust 199__-__ (the "Trust") to be formed pursuant to
a Pooling and Servicing Agreement among Financial Asset Securities Corp., as
Depositor, ( ), as Transferor and Servicer, and (
-----------------------
), as Trustee. The property of the Trust will include
(i) certain home equity revolving credit line loans (the "Mortgage Loans")
secured by (first or)(second) (deeds of trust) (mortgages) on residential
properties that are primarily one- to four-family properties, the collections
in respect of such Mortgage Loans, and certain other property relating to
such Mortgage Loans(, including the benefit of a (Letter of Credit) (Surety
Bond) as described more fully herein) and (ii) certain pass-through
certificates (the "Private Securities") representing fractional, undivided
interests in the Mortgage Loans. The Servicer will service the Mortgage
Loans, and the Transferor will own the undivided interest in the Trust not
represented by the Certificates.
All of the Mortgage Loans will be acquired by Financial Asset Securities
Corp. (the "Depositor") from ( ). The aggregate undivided
interest in the Trust represented by the Certificates will initially be equal
to $__________, which as of ______, 199_ (the "Cut-Off Date") is
approximately ___% of the outstanding Principal Balances of the Mortgage
Loans.
Distributions of principal and interest on the Certificates will be made
on the ____ day of each month or, if such date is not a Business Day, on the
succeeding Business Day (each, a "Distribution Date"), commencing
_____________. On each Distribution Date holders of the Certificates will be
entitled to receive, from and to the limited extent of funds available in the
Distribution Account (as defined herein), distributions with respect to
interest and principal calculated as set forth herein. The Certificates are
not guaranteed by the Depositor, the Trustee, the Transferor, the Servicer or
any affiliate thereof.
There is currently no market for the Certificates offered hereby and
there can be no assurance that such a market will develop or if it does
develop that it will continue. See "RISK FACTORS" herein.
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
SECURITIES, SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE S-10 AND IN THE
PROSPECTUS ON PAGE 11.
----------------
THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
DEPOSITOR, THE SERVICER, THE TRANSFEROR, THE TRUSTEE OR ANY OF THEIR
RESPECTIVE AFFILIATES, EXCEPT AS SET FORTH HEREIN. NEITHER THE CERTIFICATES
NOR THE MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY
OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Price to Underwriting Proceeds to
Public(1) Discount(2) the Depositor(3)
Per Certificate . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . .
</TABLE>
(1) Plus accrued interest, if any, from _____________________.
(2) The Depositor has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(3) Before deducting expenses, estimated to be $___________.
------------------
The Certificates are offered subject to receipt and acceptance by the
Underwriter, to prior sale and to the Underwriter's right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the Certificates will be made in
book-entry form through the facilities of The Depository Trust Company,(
Cedel Bank, soci t anonyme, and the Euroclear System) on or about
____________, 199__. The Certificates will be offered in (Europe) and the
United States of America.
-----------------
GREENWICH CAPITAL
MARKETS, INC.
____________, 1996
------------------------------
THE CERTIFICATES WILL CONSTITUTE A SEPARATE SERIES OF CERTIFICATES BEING
OFFERED BY THE DEPOSITOR PURSUANT TO ITS PROSPECTUS DATED (_________, 199__),
OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS
PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT INFORMATION
REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN, AND PROSPECTIVE
INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN
FULL.
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Certain capitalized terms used in the Summary are defined elsewhere in the
Prospectus Supplement or in the Prospectus. Reference is made to the Index
of Defined Terms herein and the Index of Defined Terms in the Prospectus for
the definitions of certain capitalized terms.
Trust Home Equity Loan Trust 199__-__ (the "Trust") will
be formed pursuant to a pooling and servicing
agreement (the "Agreement") to be dated as of
_______, 199__ (the "Cut-Off Date") among Financial
Asset Securities Corp., as depositor (the
"Depositor"), (_______________________), as
transferor and servicer (together with any successor
in such capacity, the "Transferor" and "Servicer",
respectively), and (___________________________), as
trustee (the "Trustee"). The property of the Trust
will include: a pool of (adjustable-) (fixed-) rate
home equity loan revolving credit line loans made or
to be made in the future (the "Mortgage Loans"),
under certain home equity revolving credit line loan
agreements (the "Credit Line Agreements") and
secured by (first)(second) (deeds of trust)
(mortgages) on residential properties that are
primarily one- to four-family properties (the
"Mortgaged Properties"); the collections in respect
of the Mortgage Loans received after the Cut-Off
Date; property that secured a Mortgage Loan which
has been acquired by foreclosure or deed in lieu of
foreclosure; (a surety bond or letter of credit);
certain pass-through certificates (the "Private
Securities") representing fractional, undivided
interests in Mortgage Loans; an assignment of the
Depositor's rights under the Purchase Agreement;
rights under certain hazard insurance policies
covering the Mortgaged Properties; and certain other
property, as described more fully herein.
The Trust will include the unpaid principal balance
of each Mortgage Loan as of the Cut-Off Date (the
"Cut-Off Date Principal Balance") plus any additions
thereto as a result of new advances made pursuant to
the applicable Credit Line Agreement (the
"Additional Balances") during the life of the Trust.
With respect to any date, the "Pool Balance" will be
equal to the aggregate of the Principal Balances of
all Mortgage Loans as of such date. The "Principal
Balance" of a Loan (other than a Liquidated Loan) on
any day is equal to its Cut-Off Date Principal
Balance, plus (i) any Additional Balances in respect
of such Mortgage Loan, minus (ii) all collections
credited against the Principal Balance of such
Mortgage Loan in accordance with the related Credit
Line Agreement prior to such day. The Principal
Balance of a Liquidated Loan after the final
recovery of related Liquidation Proceeds shall be
zero.
Securities Offered The Home Equity Loan Asset-Backed Certificates,
Series 199__-__ offered hereby (the "Certificates")
represent the right to receive payments of interest
at the (variable) rate described below (the
"Certificate Rate"), payable monthly, and payments
of principal with respect to the Mortgage Loans, the
Private Securities or, in certain circumstances,
draws on the (Letter of Credit) (Surety Bond) to the
extent provided below. The aggregate undivided
interest (the "Investor Interest") in the Trust
represented by the Certificates as of the Cut-Off
Date will equal $__________ of principal (the
"Original Principal Balance"), which represents
approximately ___% of the aggregate Cut-Off Date
Principal Balance, which will decline as principal
is paid to the Certificateholders during the
Amortization Period, except as otherwise provided
herein. The Transferor will hold the remaining
undivided interest (the "Transferor Interest") in
the Trust not represented by the Certificates. The
Transferor as of any date shall be the holder of the
Transferor Interest which initially will be the
Depositor. The Depositor intends to convey the
Transferor Interest to ( ) on or about the
Closing Date. The Certificates will be issued
pursuant to the Agreement. The principal amount of
the outstanding Certificates (the "Principal
Balance") on any date is equal to the Original
Principal Balance minus the aggregate of amounts
actually distributed as principal to the
Certificateholders. See "DESCRIPTION OF THE
CERTIFICATES" herein.
The Mortgage Loans The Mortgage Loans are secured by (first)(second)
deeds of trust or mortgages on Mortgaged Properties.
The Mortgage Loans were originated by ( ) and on or
prior to the Closing Date, the Transferor will sell
the Mortgage Loans to the Depositor pursuant to a
purchase agreement (the "Purchase Agreement"). The
aggregate Cut-Off Date Principal Balance of the
Mortgage Loans is $___________ (the "Cut-Off Date
Pool Balance").
The combined loan-to-value ratio of each Mortgage
Loan, computed using the maximum amount the borrower
was permitted to draw down under the related Credit
Line Agreement (the "Credit Limit") and taking into
account the amounts of any related senior mortgage
loans (the "Combined Loan-to-Value Ratio") did not
exceed __% as of the Cut-Off Date. The weighted
average Combined Loan-to-Value Ratio of the Mortgage
Loans was ____% as of the Cut-Off Date. See "THE
HOME EQUITY LENDING PROGRAM--Underwriting Procedures
Relating to the Mortgage Loans" herein.
Interest on each Mortgage Loan is payable monthly
and computed on the related average daily
outstanding Principal Balance for each billing cycle
at a variable rate per annum (the "Loan Rate") equal
at any time (subject to minimum and maximum rates,
as described herein under "THE HOME EQUITY LENDING
PROGRAM--Mortgage Loan Terms," and further subject
to applicable usury limitations) to the sum of (i)
(the prime rate published in the "Money Rates"
section of The Wall Street Journal generally on the
Monday of the week in which such Loan Rate adjusts
(or, if no rate is published on such day, then on
the next succeeding calendar day on which a prime
rate is published), rounded to the nearest 1/8 of 1
percent) ( ) and (ii) a margin generally within
the range of ___% to ___%. The Loan Rate is subject
to adjustment ( ). With respect to each
Mortgage Loan, a "billing cycle" is the calendar
month preceding a Due Date. Interest accrued at
such rate will be due on the Due Date in the month
following the close of the billing cycle. (As to
each Mortgage Loan, the Due Date is the ____ day of
the month.) The Cut-Off Date Principal Balances
ranged from zero to $_______ and averaged $_______.
Credit Limits under the Mortgage Loans as of the
Cut-Off ranged from approximately $_____ to $______
and averaged $______. Each Mortgage Loan was
originated in the period from _______ to _________,
and, as of the Cut-Off Date, the weighted average
Credit Limit Utilization Rate (as defined herein)
was approximately ___%. See "THE HOME EQUITY LEND-
ING PROGRAM" and "DESCRIPTION OF THE MORTGAGE LOANS"
herein.
During the term of the Trust, all Additional
Balances will be property of the Trust. The
aggregate amount of the loan balances at any time
(the "Pool Balance") will fluctuate from day to day
because the amount of draws by borrowers and the
amount of principal payments will usually differ on
each day. Because the Transferor Interest
represents the interest in the Trust not represented
by the Certificates, the amount of the Transferor
Interest will fluctuate from day to day as draws are
made and principal is paid under the Mortgage Loans.
The Loan Balance of a Mortgage Loan (other than a
Liquidated Mortgage Loan) on any day is equal to its
principal balance on the Cut-Off Date, plus (i) any
Additional Balances in respect of such Mortgage
Loan, minus (ii) all collections credited against
the principal balance of such Mortgage Loan in
accordance with the related Loan Agreement prior to
such day.
The aggregate undivided interest in the Loan
Balances in the Trust evidenced by the Certificates
will never exceed the Security Principal Balance
regardless of the amount of the Pool Balance at any
time.
The principal amount of the outstanding Certificates
(the "Security Principal Balance") on any date is
equal to the principal balance of the Certificates
on the Closing Date minus the aggregate of amounts
actually distributed as principal to the
Certificateholders.
Private Securities The Private Securities are pass-through certificates
representing beneficial interests in Mortgage Loans.
(The individual Mortgage Loans underlying the
Private Securities are insured or guaranteed by the
United States or an agency or instrumentality
thereof. The Private Securities themselves are not
so insured or guaranteed.) Payments on the Private
Securities will be distributed directly to the
Trustee as the registered owner of such Private
Securities.
Collections All collections on the Mortgage Loans and the
Private Securities will be allocated by the Servicer
in accordance with the Loan Agreements between
amounts collected in respect of interest ("Interest
Collections") and amounts collected in respect of
principal ("Principal Collections" and collectively
with Interest Collections, the "Collections"). The
Servicer will generally deposit Collections
distributable to the Holders in an account
established for such purpose under the Agreement
(the "Collection Account"). See "DESCRIPTION OF THE
CERTIFICATES--Payments on Mortgage Loans; Deposits
to Collection Account and Distribution Account"
herein and "THE AGREEMENTS--Payments on Loans;
Deposits to Security Accounts" and "--Collection
Procedures" in the Prospectus.
Denominations The Certificates will be offered for purchase in
denominations of $(___) and integral multiples
thereof. The interest in the Trust evidenced by a
Certificate (the "Percentage Interest") will be
equal to the percentage derived by dividing the
denomination of such Certificate by the Original
Security Principal Balance.
Registration of
Certificates The Certificates will initially be issued in
book-entry form. Persons acquiring beneficial
ownership interests in the Certificates
("Certificate Owners") will hold such interests
through The Depository Trust Company ("DTC"), in the
United States, or Cedel Bank, soci t anonyme,
("CEDEL") or the Euroclear System ("Euroclear"), in
Europe. Transfers within DTC, CEDEL or Euroclear,
as the case may be, will be in accordance with the
usual rules and operating procedures of the relevant
system. So long as the Certificates are Book-Entry
Certificates (as defined herein), such Certificates
will be evidenced by one or more Certificates
registered in the name of Cede & Co. ("Cede"), as
the nominee of DTC or one of the relevant
depositaries (collectively, the "European
Depositaries"). Cross-market transfers between
persons holding directly or indirectly through DTC,
on the one hand, and counterparties holding directly
or indirectly through CEDEL or Euroclear, on the
other, will be effected in DTC through Citibank,
N.A. ("Citibank") or Morgan Guaranty Trust Company
of New York ("Morgan"), the relevant depositaries of
CEDEL or Euroclear, respectively, and each a
participating member of DTC. The interests of such
Certificateholders will be represented by
book-entries on the records of DTC and participating
members thereof. No Certificate Owner will be
entitled to receive a definitive certificate
representing such person's interest, except in the
event that Definitive Certificates (as defined
herein) are issued under the limited circumstances
described herein. All references in this Prospectus
Supplement to any Certificates reflect the rights of
Certificate Owners only as such rights may be
exercised through DTC and its participating
organizations for so long as such Certificates are
held by DTC. See "RISK FACTORS--Book-Entry
Certificates", "DESCRIPTION OF THE CERTIFICATES--
Book-Entry Certificates" and "ANNEX I" hereto.
Depositor The Depositor of (the Mortgage Loans) (and the
Private Securities) will be Financial Asset
Securities Corp. The principal executive offices of
the Depositor are located at 600 Steamboat Road,
Greenwich, Connecticut 06830 (telephone (203) 625-
2700). See "THE DEPOSITOR" in the Prospectus.
Servicer The Servicer of the Mortgage Loans and the Private
Securities will be ( ) (the "Servicer"). The
principal executive offices of the Servicer are
located ____________ (telephone (___) _______). See
"SERVICING OF THE MORTGAGE LOANS" herein.
Certificate Rate The "Certificate Rate" applicable to any
Distribution Date will generally equal the sum of
((a) the London Interbank offered rate for one-month
Eurodollar deposits ("LIBOR") appearing on the
Telerate Screen Page 3750, as of the second LIBOR
Business Day (as defined herein) prior to the first
day of the related Interest Period (or as of two
LIBOR Business Days prior to the Closing Date, in
the case of the first Interest Period) and (b)
____%). Notwithstanding the foregoing, in no event
will the amount of interest required to be
distributed in respect of the Certificates on any
Distribution Date exceed a rate equal to
(____________________). Interest on the
Certificates will accrue as described below.
Interest Interest will be distributed monthly on the __ day
of each month or, if such day is not a business day,
on the next succeeding business day (each, a
"Distribution Date"), commencing on _______, at the
Certificate Rate for the related Interest Accrual
Period (as defined below). The Certificate Rate for
a Distribution Date will equal (the arithmetic mean
of London Interbank offered quotations for one-month
United States deposits ("LIBOR") determined as
specified herein, as of the second LIBOR Business
Day prior to the immediately preceding Distribution
Date (or as of ___________, 199_, in the case of the
first Distribution Date) plus ( ) of 1%, subject
to a maximum rate described under "DESCRIPTION OF
THE CERTIFICATES--Distributions on the Certificates"
herein) (___% per annum). Interest on the
Certificates in respect of any Distribution Date
will accrue from the preceding Distribution Date (or
in the case of the first Distribution Date, from the
date of the initial issuance of the Certificates
(the "Closing Date") through the day preceding such
Distribution Date (each such period, an "Interest
Accrual Period") on the basis of the (actual number
of days in the Interest Period and a 360-day year).
Interest payments will be funded from the portion of
the Interest Collections collected during the
immediately preceding calendar month (or, in the
case of the initial Distribution Date, the period
from _____, 199_ through the last day of the
calendar month immediately preceding such
Distribution Date) (the "Collection Period")
allocable to the Investor Interest( and, if
necessary, from draws on the (Letter of Credit)
(Surety Bond)). See "DESCRIPTION OF THE
CERTIFICATES" herein and "RISK FACTORS--Credit
Enhancement" and "CREDIT ENHANCEMENT" in the
Prospectus.
Revolving Period In order to maintain the Security Principal Balance
at $_______(except in certain limited circumstances)
for a period of approximately ______months from the
first day of the month in which the Certificates are
issued or for such shorter period as may result from
the occurrence of an Early Amortization Event, as
described herein (the "Revolving Period"), Principal
Collections allocable to the Investor Interest will
be paid to the Transferor rather than the
Certificateholders so that the Certificateholders
maintain the same Investor Interest in the Trust.
Unless earlier terminated by the occurrence of an
Early Amortization Event, the Revolving Period will
end on _______. See "DESCRIPTION OF THE
CERTIFICATES" herein.
Principal Payments;
Amortization Period Unless an Early Amortization Event shall have
earlier occurred, during the period beginning
_____________ and ending when the Security Principal
Balance has been reduced to zero or when the Trust
otherwise terminates (the "Amortization Period"),
Principal Collections allocated to the Investor
Interest will no longer be paid to the Transferor
but instead will be distributed monthly to the
Certificateholders as provided herein on each
Distribution Date beginning with the Distribution
Date in the month following the month in which the
Amortization Period commences. See "DESCRIPTION OF
THE CERTIFICATES--Early Amortization Events" herein
for a discussion of the events which might lead to
the early commencement of the Amortization Period.
During the Amortization Period, the amount of
Principal Collections allocable to the Investor
Interest (the "Principal Allocation") will equal the
ratio of the Security Principal Balance to the Pool
Balance, in each case as of the end of the last day
of the Revolving Period (the "Investor Percentage"
for such period) multiplied by the Principal
Collections received during the related Collection
Period.
Allocations based upon the Investor Percentage
during the Amortization Period may result in
distributions of principal with respect to any
Collection Period to Certificateholders in amounts
that are greater relative to the declining balance
of the Security Principal Balance than would be the
case if no fixed Investor Percentage were used to
determine the percentage of Principal Collections
distributed in respect of the Investor Interest.
See "DESCRIPTION OF THE CERTIFICATES--Payments on
Mortgage Loans; Deposits to Collection Account and
Distribution Account" herein.
((Letter of Credit)
(Surety Bond)
Issuer _________________ (the "(Letter of Credit) (Surety
Bond) Issuer"). See "THE (LETTER OF CREDIT) (SURETY
BOND) ISSUER" herein.)
((Letter of Credit)
(Surety Bond) On the Closing Date, the (Letter of Credit) (Surety
Bond) Issuer will issue a (letter of credit) (surety
bond) (the "(Letter of Credit) (Surety Bond)") in
favor of the Trustee on behalf of the Trust. In the
event that, on any Distribution Date, available
amounts on deposit in the Collection Account with
respect to the preceding Collection Period are
insufficient to provide for the payment of the
amount required to be distributed to the
Certificateholders and the Servicer on such
Distribution Date, the Trustee will draw on the
(Letter of Credit) (Surety Bond), to the extent of
the (Letter of Credit) (Surety Bond) Amount for such
Distribution Date, in an amount equal to such
deficiency. See "DESCRIPTION OF THE CERTIFICATES--
The (Letter of Credit) (Surety Bond) and "--
Distributions on the Certificates" herein and
"CREDIT ENHANCEMENT" in the Prospectus.)
((Letter of Credit)
(Surety Bond)
Amount The amount available under the (Letter of Credit)
(Surety Bond) (the "(Letter of Credit) (Surety Bond)
Amount") for the initial Distribution Date will be
$ . For each Distribution Date thereafter,
the (Letter of Credit) (Surety Bond) Amount will
equal the lesser of (i) % of the Pool Balance as
of the first day of the preceding Collection Period
(after giving effect to any amounts distributed with
respect to principal of the Mortgage Loans on the
Distribution Date occurring in such preceding
Collection Period) and (ii) the (Letter of Credit)
(Surety Bond) Amount as of the first day of the
preceding Collection Period, minus any amounts drawn
under the (Letter of Credit) (Surety Bond) during
such preceding Collection Period, plus any amounts
paid to the (Letter of Credit) (Surety Bond) Issuer
on the Distribution Date occurring in such preceding
Collection Period up to the amount of any previous
draws on the (Letter of Credit) (Surety Bond).)
Record Date The last day (of the month) preceding a Distribution
Date.
Servicing The Servicer will be responsible for servicing,
managing and making collections on the Mortgage
Loans. The Servicer will deposit all collections in
respect of the Mortgage Loans into the Collection
Account as described herein. Not later than the
_______ Business Day prior to each Distribution Date
(the "Determination Date"), the Trustee will
calculate the amounts to be paid, as described
herein, to the Certificateholders on such
Distribution Date. See "DESCRIPTION OF THE
CERTIFICATES--Distributions on the Certificates."
With respect to each Collection Period, other than
the first Collection Period, the Servicer will
receive from payments in respect of interest on the
Mortgage Loans, on behalf of itself, a portion of
such payments as a monthly servicing fee (the
"Servicing Fee") in the amount of ____% per annum
(the "Servicing Fee Rate") on the Principal Balance
of each Mortgage Loan as of the first day of each
such Collection Period as to which such a payment
was made. With respect to the first Collection
Period, the Servicer will receive from such
collections ______ of the amount calculated in the
preceding sentence. See "DESCRIPTION OF THE
CERTIFICATES--Servicing Compensation and Payment of
Expenses" herein. In certain limited circumstances,
the Servicer may resign or be removed, in which
event either the Trustee or a third-party servicer
will be appointed as a successor Servicer. See
"DESCRIPTION OF THE CERTIFICATES--Certain Matters
Regarding the Servicer" herein.
Trustee ( ) (the "Trustee"),
will act as Trustee on behalf of the
Certificateholders.
Final Payment of
Principal;
Termination The Trust will terminate on the Distribution Date
following the earlier of (i) the reduction of the
Security Principal Balance to zero and after which
there is no unreimbursed Security Principal Balance
Loss Deduction Amount and (ii) the final payment or
other liquidation of the last Mortgage Loan and
Private Security in the Trust. The Investor
Interest will be subject to optional retransfer to
the Transferor on any Distribution Date after the
Security Principal Balance is reduced to an amount
less than or equal to $ __________________ ((___)%
of the initial Security Principal Balance). The
retransfer price will be equal to the sum of the
outstanding Security Principal Balance and accrued
and unpaid interest thereon at the Certificate Rate
through the day preceding the final Distribution
Date. See "DESCRIPTION OF THE CERTIFICATES--
Termination; Retirement of the Certificates" herein
and "THE AGREEMENTS--Terminations; Optional
Termination" in the Prospectus.
Mandatory Retransfer
of Certain Mortgage
Loans and
Private Securities The Depositor will make certain representations and
warranties in the Agreement with respect to the
Mortgage Loans and Private Securities in its
capacity as Depositor. If the Transferor breaches
certain of its representations and warranties with
respect to any Mortgage Loan or Private Security and
such breach, materially and adversely affects the
interests of the Trust(,) (or) the
Certificateholders (or the (Letter of Credit)
(Surety Bond) Issuer) and is not cured within the
specified period, the Mortgage Loan or Private
Security will be removed from the Trust after the
expiration of a specified period from the date on
which the Transferor becomes aware or receives
notice of such breach and will be reassigned to the
Transferor. SEE "DESCRIPTION OF THE CERTIFICATES--
Assignment of Mortgage Loans" herein.
Certain Federal Tax
Considerations (Special tax counsel to the Transferor is of the
opinion that, under existing law, the Certificates
are properly characterized as debt for Federal
income tax purposes. Under the Agreement, the
Transferor and the Certificateholders will agree to
treat the Certificates as indebtedness for Federal,
state and local income and franchise tax purposes.
See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" in
the Prospectus for additional information concerning
the application of Federal income tax laws.)
ERISA Considerations The acquisition of a Certificate by a pension or
other employee benefit plan (a "Plan") subject to
the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), could, in some instances,
result in a "prohibited transaction" or other
violation of the fiduciary responsibility provisions
of ERISA and Code Section 4975. Certain exemptions
from the prohibited transaction rules could be
applicable to the acquisition of such Certificates.
Any Plan fiduciary considering whether to purchase
any Certificate on behalf of a Plan should consult
with its counsel regarding the applicability of the
provisions of ERISA and the Code. See "ERISA
CONSIDERATIONS" herein and in the Prospectus.
Legal Investment
Considerations The Certificates will not constitute "mortgage
related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA"),
because some of the Mortgages securing the Mortgage
Loans are not first mortgages. Accordingly, many
institutions with legal authority to invest in
comparably rated securities based solely on first
mortgages may not be legally authorized to invest in
the Certificates. See "LEGAL INVESTMENT
CONSIDERATIONS" herein and "LEGAL INVESTMENT" in the
Prospectus.
Certificate Rating It is a condition to the issuance of the
Certificates that they be rated in the ___________
by at least two nationally recognized statistical
rating organizations (each a "Rating Agency"). In
general, ratings address credit risk and do not
address the likelihood of prepayments. See
"RATINGS" herein and "RISK FACTORS--Rating of the
Securities" in the Prospectus.
RISK FACTORS
PREPAYMENT CONSIDERATIONS
All of the Mortgage Loans may be prepaid in whole or in part at any time
without penalty. Home equity loans, such as the Mortgage Loans, have been
originated in significant volume only during the past few years and neither
the Depositor nor the Servicer is aware of any publicly available studies or
statistics on the rate of prepayment of such loans. Generally, home equity
loans are not viewed by borrowers as permanent financing. Accordingly, the
Mortgage Loans may experience a higher rate of prepayment than traditional
loans. The Trust's prepayment experience may be affected by a wide variety
of factors, including general economic conditions, interest rates, the
availability of alternative financing and homeowner mobility. In addition,
substantially all of the Mortgage Loans contain due-on-sale provisions and
the Servicer intends to enforce such provisions unless (i) such enforcement
is not permitted by applicable law or (ii) the Servicer, in a manner
consistent with reasonable commercial practice, permits the purchaser of the
related Mortgaged Property to assume the Mortgage Loan. To the extent
permitted by applicable law, such assumption will not release the original
borrower from its obligation under any such Mortgage Loan. See "CERTAIN
LEGAL ASPECTS OF THE LOANS--`Due-on-Sale' Clauses" in the Prospectus.
(LEGAL CONSIDERATIONS
The Mortgage Loans are secured by first and second mortgages
(representing approximately ____% and ____% of the Pool Balance as of the
Cut-Off Date, respectively). With respect to Mortgage Loans that are junior
in priority to liens having a first priority with respect to the related
Mortgaged Property ("First Liens"), the Servicer has the power under certain
circumstances to consent to a new mortgage lien on such Mortgaged Property
having priority over such Mortgage Loan in connection with the refinancing of
such First Lien. Mortgage Loans secured by second mortgages are entitled to
proceeds that remain from the sale of the related Mortgaged Property after
any related senior mortgage loan and prior statutory liens have been
satisfied. In the event that such proceeds are insufficient to satisfy such
loans and prior liens in the aggregate, the Trust and, accordingly, the
Certificateholders, bear (i) the risk of delay in distributions while a
deficiency judgment against the borrower is obtained and (ii) the risk of
loss if the deficiency judgment cannot be obtained or is not realized upon.
See "CERTAIN LEGAL ASPECTS OF THE LOANS" in the Prospectus.
The sale of the Mortgage Loans from the Transferor to the Depositor
pursuant to the Purchase Agreement will be treated by the Transferor and the
Depositor as a sale of the Mortgage Loans for all purposes other than
federal, state or local income or franchise tax purposes. The Transferor
will warrant that such transfer is a sale of its interest in the Mortgage
Loans or a grant of a first priority perfected security interest therein. In
the event of an insolvency of the Transferor, the receiver of the Transferor
may attempt to recharacterize the sale of the Mortgage Loans as a borrowing
by the Transferor secured by a pledge of the Mortgage Loans. If the receiver
decided to challenge such transfer, delays in payments of the Certificates
and possible reductions in the amount thereof could occur. The Depositor
will warrant in the Agreement that the transfer of the Mortgage Loans to the
Trust is a valid transfer and assignment of such interest.)
(SERVICER'S ABILITY TO CHANGE THE TERMS OF THE MORTGAGE LOANS
The Servicer may permit an increase in the Credit Limit under a Mortgage
Loan if the new Credit Limit under the Mortgage Loan, plus the outstanding
principal balance of any related senior loans, does not exceed (i) __% (__%
for a condominium, townhouse, duplex, or vacation condo/house), if the market
value of the Mortgaged Property is $ _____ or less, or __% (__% for a
condominium, townhouse, duplex, or vacation condo/house), and if the market
value of the Mortgage Property exceeds $ _________, based upon an appraisal
or the tax assessed value of the Mortgaged Property at the time the increase
was requested. An increase in the Credit Limit under a Mortgage Loan in
accordance with the previous sentence may be made without the consent of the
Trustee. Additional Balances arising under a Mortgage Loan as a result of an
increase in the Credit Limit will be treated the same as Additional Balances
arising under a Mortgage Loan for which there has been no increase in the
Credit Limit. In addition to such changes, the Servicer may agree to other
changes in the terms of a Loan Agreement, provided that such changes (i) do
not materially adversely affect the interest of the Certificateholders, (ii)
are consistent with prudent business practice, (iii) are also being applied
to the comparable segment of home equity credit lines being held for the
Servicer's own account, and (iv) do not change the terms of the Mortgage Loan
so as to change the terms for the amortization of principal. There can be no
assurance that changes in applicable law or the marketplace for home equity
loans or prudent business practice will not result in changes in the terms of
the Credit Line. The Servicer may also extend the period during which draws
under the Mortgage Loans may be made.)
(DELINQUENT MORTGAGE LOANS
The Trust will include Mortgage Loans which are ___ days or fewer
delinquent. As of the Cut-Off Date, the aggregate Loan Balance of such
delinquent Mortgage Loans was $ ____. (In addition, the Mortgage Loans in
all likelihood include obligations of borrowers who are or are about to
become bankrupt or insolvent.) If there are not sufficient funds from
Interest Collections allocated to the Investor Interest to cover the
Liquidation Loss Amount for any Collection Period and the (Letter of Credit)
(Surety Bond) Amount has been reduced to zero, the Security Principal Balance
will be reduced, which (unless otherwise later reimbursed) would result in a
reduction in the aggregate amount of principal returned to the
Certificateholders and in the amount of Interest Collections allocable to the
Investor Interest and available to provide protection against defaults in
subsequent Collection Periods.)
(THE (LETTER OF CREDIT)(SURETY BOND) ISSUER
The following information with respect to _________ ("_______") has been
furnished by __________.
(Description of Letter of Credit/Surety Issuer))
THE HOME EQUITY LENDING PROGRAM
The information set forth below concerning (_______) and its
underwriting policies has been provided by (_______). The Depositor does not
make any representation as to the accuracy or completeness of such
information.
GENERAL
All of the Mortgage Loans were originated by
(_____________________________), (the "Transferor" or the "Servicer") under
its home equity lending program. The Transferor first offered adjustable-
rate home equity revolving credit line loans ("home equity loans") in 19__.
As of (_____________), (____________) owned and serviced approximately
$__________ aggregate principal amount of outstanding home equity loans
secured by properties located in __________ under home equity credit lines
(the "Transferor Portfolio").
UNDERWRITING PROCEDURES RELATING TO THE MORTGAGE LOANS
(Each home equity loan was originated after a review by the Transferor
in accordance with its established underwriting procedures, which were
intended to assess the applicant's ability to assume and repay such home
equity loans and the adequacy of the real property which serves as collateral
for such home equity loans. The maximum Credit Limit for a home equity loan
provided by the Transferor was $__________.
Each applicant for a home equity loan was required to complete an
application which listed the applicant's assets, liabilities, income, credit
and employment history and other demographic and personal information. If
information in the loan application demonstrated that there was sufficient
income and equity to justify making a home equity loan and the Transferor (a)
received a satisfactory independent credit bureau report on the credit
history of the borrower and (b) obtained, in the case of all home equity
loans originated prior to __________, a drive-by appraisal of the related
Mortgaged Property, or for all home equity loans originated as of __________,
a satisfactory appraisal completed on forms approved by FNMA, and if such
information met the Transferor's underwriting standards, the Transferor
issued a commitment subject to satisfaction of certain other conditions.
These conditions included: (i) obtaining and reviewing pay stubs, income tax
returns or a verification of employment from the applicant's employer; (ii)
obtaining and reviewing a verification of deposit; and (iii) obtaining and
reviewing a verification of the loan in the first lien position when the home
equity loan was to be in a second lien position.
Appraisals of the Mortgaged Properties were performed by a qualified
appraiser or an independent third-party, fee-based appraiser who had been
previously approved for such assignment by the Transferor.
It is the Transferor's policy to require a title policy insuring title
mortgage in accordance with the intended lien position. Regardless of
Combined Loan-to-Value Ratios, it is the Transferor's policy not to accept a
position junior to any mortgage lien other than a first mortgage.
Generally, a home equity loan needed a Combined Loan-to-Value Ratio of
__% for loans for which the Transferor obtained full documentary support and
__% for loans for which limited documentary support was obtained.
After obtaining all applicable employment, credit and property
information, the Transferor determined whether sufficient unencumbered equity
in the property existed and whether the prospective borrower had sufficient
monthly income available to support the payments of interest at the current
prime rate plus the applicable margin based on the credit limit in addition
to any senior mortgage loan payments (including any escrows for property
taxes and hazard insurance premiums) and other monthly credit obligations
based on the prospective borrower's Debt-to-Gross Income Ratio. The
"Debt-to-Gross Income Ratio" is the ratio of (a) certain of the borrower's
debt obligations which include: (i) the monthly first mortgage payment plus
taxes; (ii) monthly installment debt payments with a term of more than ten
months; (iii) five percent of the total revolving obligations; (iv) monthly
alimony and child support obligations; and (v) the payment on the home equity
loan calculated at the Credit Limit and current prime rate plus margin for
such home equity loan to (b) the borrower's gross verifiable monthly income.
The Debt-to-Gross Income Ratio generally did not exceed (________%).
When the commitment conditions had been satisfied, the home equity loan
was completed by signing a Credit Line Agreement, rescission statement, and
mortgage which secured the repayment of principal of and interest on the
related home equity loan. The original mortgage was then recorded in the
appropriate county government office.
MORTGAGE LOAN TERMS
(A borrower may access a home equity loan by writing a check. On all
home equity loans, there is (a ten-year) draw down period as long as the
borrower is not in default under the loan agreement. Home equity loans bear
interest at a (fixed rate)(variable rate which may change bi-weekly). Home
equity loans may be subject to a maximum per annum interest rate (the
"Maximum Rate") of % per annum and in all cases, are subject to
applicable usury limitations. See "CERTAIN LEGAL ASPECTS OF LOANS--
Applicability of Usury Laws" in the Prospectus. The daily periodic rate on
the home equity loans (the "Loan Rate") is the sum of the Index Rate (as
defined herein) plus a spread (the "Margin") which generally ranges between
____% and ____%, divided by 365 days or 366 days, as applicable.
The "Index Rate" is based on (the "prime rate" published in The Wall
Street Journal every second Monday rounded to the nearest one-eighth of one
percent or if not published on any such date, as next published in the Wall
Street Journal) (__________). The annual percentage rate for any bi-weekly
period will be based on the Prime Rate in effect the Monday on which the
rate may change. (If a prime rate range is published in The Wall Street
Journal, then the midpoint (average) of that range will be used.) There are
no limitations on increases or decreases (except for those home equity loans
which have Maximum Rates). Only the home equity loans that have Maximum
Rates of ____% also have annual adjustment caps of __% as to both
increases and decreases in their Loan Rates.
Billing statements are mailed monthly. The statement details all debits
and credits and specifies the minimum payment due and the available credit
line. Notice of changes in the applicable Loan Rate are provided by the
Transferor to the Borrower with such statements. All payments are due by the
( ) day after the date the billing statement is issued.
The Credit Line Agreements further provide that if publication of the
Index Rate is discontinued, the Index Rate will be changed upon notification
in accordance with such Credit Line Agreements.
The right to obtain additional credit may be suspended or terminated or
the borrower may be required to pay the entire balance due plus all other
accrued but unpaid charges immediately, if the borrower fails to make any
required payment by the due date, if the total outstanding principal balance
including all charges payable exceeds the Credit Limit, if the borrower made
any statement or signature on any document which is fraudulent or contained a
material misrepresentation, if the borrower dies or becomes incompetent, if
the borrower becomes bankrupt or insolvent, if the borrower becomes subject
to any judgment, lien, attachment or execution which is issued against the
Mortgaged Property, if the borrower fails to obtain and maintain required
property insurance or if the borrower sells or transfers the Mortgaged
Property or does not maintain the Mortgaged Property. In addition, the right
to obtain additional credit may be suspended or a borrower's Credit Limit may
be reduced, if the value of the Mortgaged Property decreases for any reason
to less than 80% of the original appraised value, if the borrower is in
default under the home equity loan, if government action impairs the
Transferor's lien priority or if a regulatory agency has notified the
Transferor that continued advances would constitute an unsafe and unsound
practice.)
DELINQUENCY AND LOSS EXPERIENCE OF THE SERVICER'S PORTFOLIO
The following tables set forth the delinquency and loss experience for
each of the periods shown for the home equity loans indicated on the table.
The Servicer believes that there have been no material trends or anomalies in
the historical delinquency and loss experience as represented in the
following tables. The data presented in the following tables are for
illustrative purposes only, and there is no assurance that the delinquency
and loss experience of the Mortgage Loans will be similar to that set forth
below.
DELINQUENCY EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C> <C>
As of _________
_____
Number of
Loans Amount
Amount Outstanding at
Period End . . . . . . . . . . . . .
Delinquency
30-59 Days . . . . . . . . . . . . . $
60-89 Days . . . . . . . . . . . . .
90 or More Days . . . . . . . . . . .
Foreclosures and Bankruptcies . . . . _________
Total Delinquencies . . . . . . . . . . $_________
30-59 Days Percentage . . . . . . . . . %
60-89 Days Percentage . . . . . . . . . %
90 or More Days Percentage . . . . . . %
Foreclosures and Bankruptcies . . . . .
</TABLE>
LOSS EXPERIENCE
(DOLLARS IN THOUSANDS
<TABLE>
<CAPTION>
<S> <C>
For the Year
Ending ________
Average Amount
Outstanding . . . . . . . . . . . . . . . . . . . . $
Gross Charge-Offs . . . . . . . . . . . . . . . . . . $
Recoveries . . . . . . . . . . . . . . . . . . . . . $
Net Losses as a Percentage
of Average Amount Outstanding . . . . . . . . . . . %
</TABLE>
SERVICING OF THE MORTGAGE LOANS
The information set forth below concerning the Servicer and its
servicing policies has been provided by the Servicer. The Depositor does not
make any representation as to the accuracy or completeness of such
information.
SERVICING OF MORTGAGE LOANS
The Servicer will be responsible for servicing the Mortgage Loans as
agent for the Trust in accordance with the Servicer's policies and procedures
for servicing home equity loans and in accordance with the terms of the
Agreement.
With respect to real estate secured revolving credit line loans, the
general policy of the Servicer is to initiate foreclosure on the underlying
property (i) after such loan is 90 days or more delinquent; (ii) if a notice
of default on a senior lien is received by the Servicer; or (iii) if
circumstances are discovered by the Servicer which would indicate that a
potential for loss exists. Foreclosure proceedings may be terminated if the
delinquency is cured. However, under certain circumstances, the Servicer may
elect not to commence foreclosure or stay the foreclosure proceeding if the
borrower's default is due to special circumstances which are temporary and
are not expected to last beyond a specified period. The loans to borrowers
in bankruptcy proceedings will be restructured in accordance with law and
with a view to maximizing recovery of such home equity loans, including any
deficiencies. Additionally, any time during foreclosure, a forbearance,
short sale, deed-in-lieu or a payment plan can be authorized.
After foreclosure, if the home equity loan is secured by a first
mortgage lien, title to the related Mortgaged Property will pass to the
Servicer, or a wholly-owned subsidiary of the Servicer, who will liquidate
the Mortgaged Property and charge-off the balance of the home equity loan
balance which was not recovered by the liquidation proceeds. If the
Mortgaged Property was subject to a senior lien position, the Servicer will
either satisfy such lien at the time of the foreclosure sale or take other
action as deemed necessary to protect the Servicer's interest in the
Mortgaged Property. If in the judgment of the Servicer, the cost of
maintaining or purchasing the senior lien position exceeds the economic
benefit of such action, the Servicer will generally charge-off the entire
home equity loan, seek a money judgment against the borrower or will not
pursue any recovery.
Servicing and charge-off policies and collection practices may change
over time in accordance with the Servicer's business judgment, changes in the
Servicer's real estate secured revolving credit line loans and applicable
laws and regulations, and other considerations.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Collection Period, other than the first Collection
Period, the servicing compensation to be paid to the Servicer in respect of
its servicing activities relating to the Mortgage Loans will be paid to it
from interest collections in respect of the Mortgage Loans and will be equal
to ____% per annum (the "Servicing Fee Rate") on the aggregate Principal
Balances of the Mortgage Loans as of the first day of each such Collection
Period (the "Servicing Fee"). With respect to the first Collection Period,
the Servicer will receive from such collections ___% of the amount calculated
in the preceding sentence. All assumption fees, late payment charges and
other fees and charges, to the extent collected from borrowers, will be
retained by the Servicer as additional servicing compensation.
The Servicer will pay certain ongoing expenses associated with the Trust
and incurred by it in connection with its responsibilities under the
Agreement, including, without limitation, payment of the fees and
disbursements of the Trustee, any custodian appointed by the Trustee, the
Registrar and any paying agent. In addition, the Servicer will be entitled
to reimbursement for certain expenses incurred by it in connection with
defaulted Mortgage Loans and in connection with the restoration of Mortgaged
Properties related thereto, such right of reimbursement being prior to the
rights of Certificateholders to receive any related Liquidation Proceeds.
DESCRIPTION OF THE MORTGAGE LOANS
MORTGAGE LOANS
The Mortgage Loans were originated pursuant to loan agreements and
disclosure statements (the "Credit Line Agreements") and are secured by
mortgages or deeds of trust, most of which are second mortgages or second
deeds of trust, on Mortgaged Properties. The Mortgaged Properties securing
the Mortgage Loans consist primarily of residential properties that are one-
to four-family properties. (___ of the Mortgaged Properties are owner-
occupied.) See"--Mortgage Loan Pool Statistics" below.
The Cut-Off Date Pool Balance is $___________, which is equal to the
aggregate Principal Balances of the Mortgage Loans as of ______, 199_ (the
"Cut-Off Date"). As of the _______, the Mortgage Loans were not more than 89
days delinquent and had a Loan Rate of at least ____% per annum. The average
Cut-Off Date Principal Balance was $_______, the minimum Mortgage Cut-Off
Date Principal Balance was zero, the maximum Cut-Off Date Principal Balance
was $_________, the minimum Loan Rate and the maximum Loan Rate on the Cut-
Off Date were ____% and ____% per annum, respectively, and the weighted
average Loan Rate on the Cut-Off Date was ____% per annum. As of the Cut-Off
Date, the weighted average Credit Limit Utilization Rate was ____%, the
minimum Credit Limit Utilization Rate was zero and the maximum Credit Limit
Utilization Rate was ______%. The "Credit Limit Utilization Rate" is
determined by dividing the Cut-Off Date Principal Balance of a Mortgage Loan
by the Credit Limit of the related Credit Line Agreement. The weighted
average Combined Loan-to-Value Ratio of the Mortgage Loans was ____% as of
the Cut-Off Date.
MORTGAGE LOAN POOL STATISTICS
The Depositor has compiled the following additional information as of
the Cut-Off Date with respect to the Mortgage Loans to be included in the
Trust.
(TABULAR INFORMATION)
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of principal payments on the Certificates, the aggregate amount
of distributions on the Certificates and the yield to maturity of the
Certificates will be related to the rate and timing of payments of principal
on the Mortgage Loans. The rate of principal payments on the Mortgage Loans
will in turn be affected by the amortization schedules (which will change
periodically to accommodate adjustments to the Loan Rates) of the Mortgage
Loans and by the rate of principal prepayments (including for this purpose
prepayments resulting from refinancing, liquidations of the Mortgage Loans
due to defaults, casualties, condemnations and repurchases by the Transferor
or Servicer). The Mortgage Loans may be prepaid by the Mortgagors at any
time without a prepayment penalty. See "The Mortgage Pool" herein.
Prepayments, liquidations and purchases of the Mortgage Loans (including
any optional purchase by the Servicer of a defaulted Mortgage Loan and any
optional repurchase of the remaining Mortgage Loans in connection with the
termination of the Trust, in each case as described herein) will result in
distributions on the Certificates of principal amounts which would otherwise
be distributed over the remaining terms of the Mortgage Loans. Since the
rate of payment of principal of the Mortgage Loans will depend on future
events and a variety of factors, no assurance can be given as to such rate or
the rate of principal prepayments. The extent to which the yield to maturity
of a Certificate may vary from the anticipated yield will depend upon the
degree to which such Certificate is purchased at a discount or premium, and
the degree to which the timing of payments thereon is sensitive to
prepayments, liquidations and purchases of the Mortgage Loans.
The rate of prepayment on the Mortgage Loans cannot be predicted. Home
equity loans such as the Mortgage Loans have been originated in significant
volume only during the past few years and neither the Depositor nor the
Servicer is aware of any publicly available studies or statistics on the rate
of prepayment of such Mortgage Loans. Generally, home equity loans are not
viewed by borrowers as permanent financing. Accordingly, the Mortgage Loans
may experience a higher rate of prepayment than traditional first mortgage
loans. The prepayment experience of the Trust with respect to the Mortgage
Loans may be affected by a wide variety of factors, including economic
conditions, prevailing interest rate levels, the availability of alternative
financing and homeowner mobility and changes affecting the deductibility for
Federal income tax purposes of interest payments on home equity loans.
Substantially all of the Mortgage Loans contain "due-on-sale" provisions,
and, with respect to the Mortgage Loans, the Servicer is required by the
Agreement to enforce such provisions, unless such enforcement is not
permitted by applicable law. The enforcement of a "due-on-sale" provision
will have the same effect as a prepayment of the related Mortgage Loan. See
"CERTAIN LEGAL ASPECTS OF LOANS--`Due-on-Sale' Clauses" in the Prospectus.
No assurance can be given as to the level of prepayments that will be
experienced by the Trust and it can be expected that a portion of borrowers
will not prepay their Mortgage Loans to any significant degree. See
"DESCRIPTION OF THE CERTIFICATES--Weighted Average Life of the Certificates"
in the Prospectus.
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement. The form of
the Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus Supplement and the Prospectus is a part. The following
summaries describe certain provisions of the Agreement. The summaries do not
purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the Agreement. Wherever
particular sections or defined terms of the Agreement are referred to, such
sections or defined terms are hereby incorporated herein by reference.
GENERAL
The Certificates will be issued in denominations of $(1,000) and
integral multiples thereof (except that one Certificate may be issued in a
denomination that is not an integral multiple of $1000) and will evidence
specified undivided interests in the Trust. (Section 6.01) The property of
the Trust will consist of, to the extent provided in the Agreement: a pool
of (adjustable) (fixed) rate home equity loan revolving credit line loans
made or to be made in the future (the "Mortgage Loans"), under certain home
equity revolving credit line loan agreements (the "Credit Line Agreements")
and secured (primarily) by second (deeds of trust) (mortgages) on residential
properties that are primarily one- to four-family properties (the "Mortgaged
Properties"); the collections in respect of the Mortgage Loans received after
the Cut-Off Date; property that secured a Mortgage Loan which has been
acquired by foreclosure or deed in lieu of foreclosure; (a surety bond or
letter of credit); certain pass-through certificates (the "Private
Securities") representing fractional, undivided interests in the Mortgage
Loans, an assignment of the Depositor's rights under the Purchase Agreement;
rights under certain hazard insurance policies covering the Mortgaged
Properties; and certain other property, as described more fully herein. The
Trust will include the unpaid principal balance of each Mortgage Loan as of
the Cut-Off Date (the "Cut-Off Date Principal Balance") plus any additions
thereto as a result of new advances made pursuant to the applicable Credit
Line Agreement (the "Additional Balances") during the life of the Trust.
Definitive Certificates (as defined below), if issued, will be transferable
and exchangeable at the corporate trust office of the Trustee, which will
initially act as Certificate Registrar. See "--Book-Entry Certificates"
below. No service charge will be made for any registration of exchange or
transfer of Certificates, but the Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge. (Section 6.02)
The aggregate undivided interest in the Trust Fund represented by the
Certificates as of the Closing Date will equal $__________ of principal (the
"Original Principal Balance"), which represents approximately ___% of the
aggregate Cut-Off Date Principal Balance. The principal amount of the
outstanding Certificates (the "Certificate Principal Balance") on any
Distribution Date is equal to the Original Principal Balance minus the
aggregate of amounts actually distributed as principal to the
Certificateholders. See "--Distributions on the Certificates" below. Each
Certificate represents the right to receive payments of interest at the
Certificate Rate and payments of principal as described below.
The Transferor will own the interest (the "Transferor Interest") not
represented by the Certificates. The Transferor Interest will represent an
undivided interest in the Trust, including the right to receive certain
percentages (the "Transferor Percentages") of Interest Collections and
Principal Collections. The initial amount of the Transferor Interest was
determined, among other factors, to be able to absorb reductions in the
aggregate amount of Loan Balances in the Trust without causing an Early
Amortization Event, which would result in the early commencement of the
Amortization Period. There can be no assurance that the Transferor Interest
will be sufficient for such purpose. While the Transferor is obligated
(subject to certain conditions and limitations) to transfer Eligible
Additional Mortgage Loans (to the extent available) to the Trust, there can
be no assurance that sufficient Eligible Additional Mortgage Loans will be
available.
During the Revolving Period, the Security Principal Balance will remain
constant except in certain limited circumstances. See "--Distributions on
the Certificates" below. The Pool Balance, however, will vary each day as
principal is paid on the Mortgage Loans, liquidation losses are incurred,
Additional Balances are drawn down by borrowers under the Mortgage Loans,
Mortgage Loans are retransferred to the Transferor or Eligible Additional
Mortgage Loans are transferred to the Trust. Consequently, the amount of the
Transferor Interest will fluctuate each day to reflect the changes in the
Pool Balance. During the Amortization Period, the Security Principal Balance
will decline as the Investor Percentage of Principal Collections is
distributed to the Certificateholders. As a result, during the Amortization
Period, the Transferor Interest may increase each month to reflect the
reductions in the Security Principal Balance but may change each day to
reflect the variations in the Pool Balance.
The holder of a Certificate is referred to herein as a
"Certificateholder."
BOOK-ENTRY CERTIFICATES
The Senior Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the
Senior Certificates ("Certificate Owners") will hold their Certificates
through the Depository Trust Company ("DTC") in the United States(, or CEDEL
or Euroclear (in Europe)) if they are participants of such systems, or
indirectly through organizations which are participants in such systems. The
Book-Entry Certificates will be issued in one or more certificates which
equal the aggregate principal balance of the Certificates and will initially
be registered in the name of Cede & Co., the nominee of DTC. (CEDEL and
Euroclear will hold omnibus positions on behalf of their participants through
customers' securities accounts in CEDEL's and Euroclear's names on the books
of their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of
DTC. Citibank N.A. will act as depositary for CEDEL and the Brussels,
Belgium Branch of Morgan Guarantee Trust Company of New York will act as
depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively the "European Depositaries").) Investors may
hold such beneficial interests in the Book-Entry Certificates in minimum
denominations representing Certificate Principal Balances of $1,000 and in
integral multiples in excess thereof. Except as described below, no person
acquiring a Book-Entry Certificate (each, a "beneficial owner") will be
entitled to receive a physical certificate representing such Certificate (a
"Definitive Certificate"). Unless and until Definitive Certificates are
issued, it is anticipated that the only "Certificateholder" of the
Certificates will be Cede & Co., as nominee of DTC. Certificate Owners will
not be Certificateholders as that term is used in the Pooling and Servicing
Agreement. Certificate Owners are only permitted to exercise their rights
indirectly through Participants and DTC.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the Certificates, the Depositor will transfer
to the Trust all of its right, title and interest in and to each Mortgage
Loan (including Additional Balances arising in the future), the related
mortgage note, mortgages and other related documents (collectively, the
"Related Documents"), including all payments received on or with respect to
each such Mortgage Loan on or after the Cut-Off Date. (Section 2.01) The
Trustee, concurrently with such transfer, will deliver the Certificates and
the Transferor Interest to the Depositor. (Section 2.07) Each Mortgage Loan
transferred to the Trust will be identified on a schedule (the "Mortgage Loan
Schedule") delivered to the Trustee pursuant to the Agreement. Such schedule
will include information as to the Cut-Off Date Principal Balance of each
Mortgage Loan, as well as information with respect to the Loan Rate.
(Article I).
The Agreement will require that, within the time period specified
therein, the Depositor will deliver or cause to be delivered to the Trustee
(or a custodian, as the Trustee's agent for such purpose) the Mortgage Loans
endorsed to the Trustee and the Related Documents. In lieu of delivery of
original mortgages, the Depositor may deliver or cause to be delivered true
and correct copies thereof which have been certified as to authenticity by
the appropriate county recording office where such mortgage is recorded.
Under the terms of the Agreement, the Transferor, acting at the
Depositor's request, will have ____ days after the Closing Date to prepare
and record assignments of the mortgages related to each Mortgage Loan in
favor of the Trustee (unless opinions of counsel satisfactory to the Rating
Agencies and the Certificate Insurer are delivered to the Trustee and the
Certificate Insurer to the effect that recordation of such assignments is not
required in the relevant jurisdictions to protect the interests of the
Trustee in the Mortgage Loans). If the recording information with respect to
any assignment of Mortgage is unavailable within ____ days of the Closing
Date, such assignment will be prepared and recorded promptly after receipt of
such information, but in no event later than one year after the Closing Date.
Within ____ days of the Closing Date, the Trustee will review the
Mortgage Loans and the Related Documents pursuant to the Agreement and if any
Mortgage Loan or Related Document is found to be defective in any material
respect and such defect is not cured within 90 days following notification
thereof to the Transferor and the Depositor by the Trustee, the Transferor
will be obligated to either (i) substitute for such Mortgage Loan an Eligible
Substitute Mortgage Loan; or (ii) purchase such Mortgage Loan at a price (the
"Purchase Price") equal to the outstanding Principal Balance of such Mortgage
Loan as of the date of purchase, plus the greater of (i) all accrued and
unpaid interest thereon and (ii) 30 days' interest thereon, computed at the
Loan Rate, net of the Servicing Fee if the Transferor is the Servicer, plus
the amount of any unreimbursed Servicing Advances made by the Servicer. The
Purchase Price will be deposited in the Collection Account on or prior to the
next succeeding Determination Date after such obligation arises. The
obligation of the Transferor to repurchase or substitute for a Defective
Mortgage Loan is the sole remedy regarding any defects in the Mortgage Loans
and Related Documents available to the Trustee or the Certificateholders.
(Section 2.02)
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the Transferor will be required to deposit in the Collection Account on
or prior to the next succeeding Determination Date after such obligation
arises an amount (the "Substitution Adjustment") equal to the excess of the
Principal Balance of the related Defective Mortgage Loan, together with the
greater of (x) all accrued and unpaid interest thereon and (y) 30 days'
interest thereon, computed at the Loan Rate, net of the Servicing Fee if the
Transferor is the Servicer, plus the amount of any unreimbursed Servicing
Advances made by the Servicer with respect to such Defective Mortgage Loan,
over the Principal Balance of such Eligible Substitute Mortgage Loan.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted by
the Transferor for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or, in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance), not in excess of, and not more than 5% less
than, the Principal Balance of the Defective Mortgage Loan; (ii) have a Loan
Rate not less than the Loan Rate of the Defective Mortgage Loan and not more
than 1% in excess of the Loan Rate of such Defective Mortgage Loan; (iii)
have a Loan Rate based on the Prime Rate with adjustments to such Loan Rate
made on the same Adjustment Date as that of the Defective Mortgage Loan; (iv)
have a Margin that is not less than the Margin of the Defective Mortgage Loan
and not more than 100 basis points higher than the Margin for the Defective
Mortgage Loan; (v) have a mortgage of the same or higher level of priority as
the mortgage relating to the Defective Mortgage Loan; (vi) have a remaining
term to maturity not more than six months earlier and not later than the
remaining term to maturity of the Defective Mortgage Loan; (vii) comply with
each representation and warranty as to the Mortgage Loans set forth in the
Agreement (deemed to be made as of the date of substitution); and (viii)
satisfy certain other conditions specified in the Agreement.
The Transferor will make certain representations and warranties as to
the accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., Cut-Off Date Principal
Balance and the Loan Rate). In addition, the Transferor will represent and
warrant, on the Closing Date, that, among other things: (i) at the time of
transfer to the Depositor, the Transferor has transferred or assigned all of
its right, title and interest in each Mortgage Loan and the Related
Documents, free of any lien (subject to certain exceptions); and (ii) each
Mortgage Loan complied, at the time of origination, in all material respects
with applicable state and federal laws. Upon discovery of a breach of any
such representation and warranty which materially and adversely affects the
interests of the Certificateholders in the related Mortgage Loan and Related
Documents, the Transferor will have a period of ____ days after discovery or
notice of the breach to effect a cure. If the breach cannot be cured within
the ____-day period, the Transferor will be obligated to (i) substitute for
such Defective Mortgage Loan an Eligible Substitute Mortgage Loan or (ii)
purchase such Defective Mortgage Loan from the Trust. The same procedure and
limitations that are set forth above for the substitution or purchase of
Defective Mortgage Loans as a result of deficient documentation relating
thereto will apply to the substitution or purchase of a Defective Mortgage
Loan as a result of a breach of a representation or warranty in the Agreement
that materially and adversely affects the interests of the
Certificateholders. (Section 2.04)
Mortgage Loans required to be transferred to the Transferor as described
in the preceding paragraphs are referred to as "Defective Mortgage Loans."
Pursuant to the Agreement, the Servicer will service and administer the
Mortgage Loans as more fully set forth above.
(TRANSFERS OF ELIGIBLE ADDITIONAL MORTGAGE LOANS TO THE TRUST
If, for each of ( ) consecutive business days during the Revolving
Period, the Transferor Interest for each such date is less than ( )% of the
Pool Balance, then not later than the ( ) business day of the calendar
month beginning at least ( ) business days after such ( ) business day
thereafter the Transferor will be obligated to transfer to the Trust Eligible
Additional Mortgage Loans (but only to the extent available in the
(Transferor's) (Seller's) portfolio), which may be generated under home
equity credit lines in any billing cycle, so that, after giving effect to
such transfer, the Transferor Interest will equal at least ( )% of the
Pool Balance on such date. An "Eligible Additional Mortgage Loan" is a home
equity loan that, as of the date of notice by the Transferor to the Trustee,
the Servicer and the (Letter of Credit) (Surety Bond) Issuer of its transfer
to the Trust (the "Notice Date"), was an Eligible Mortgage Loan and that, as
of the Notice Date, complies with the representations and warranties
described under "Assignment of Mortgage Loans" above. The Transferor must
satisfy the following conditions, among others, in order to transfer Eligible
Additional Mortgage Loans to the Trust: (i) the Pool Balance, after giving
effect to such transfer, will not exceed $ ; (ii) the Mortgage Files for
such Eligible Additional Mortgage Loans shall have been delivered to the
Trustee (or a custodian on its behalf); and (iii) the Transferor shall have
given notice of the proposed transfer to each Rating Agency and no Rating
Agency has notified the Transferor in writing prior to the transfer date that
such transfer will result in a reduction or withdrawal of its then-current
rating for the Certificates.
In addition, the Transferor may, at its election, transfer Eligible
Additional Mortgage Loans subject to satisfaction of the conditions described
above.)
(OPTIONAL RETRANSFERS OF MORTGAGE LOANS TO THE TRANSFEROR
Subject to the conditions specified in the Agreement, the Transferor
may, at its option, require the retransfer of one or more Mortgage Loans from
the Trust to it on the last day of any Collection Period. The Pool Balance
after giving effect to such retransfer must not be less than the Pool Balance
on the Closing Date. The Transferor will be required to satisfy the
following conditions, among others: (i) the Transferor shall reasonably
believe that such retransfer will not cause an Early Amortization Event to
occur; (ii) as of the ( ) business day prior to the proposed transfer,
not more than ( )% (based on Loan Balances) of the Mortgage Loans (after
giving effect to the proposed transfer) are delinquent more than 30 days and
the weighted average delinquency of all of the Mortgage Loans (before and
after giving effect to the proposed transfer) is not more than 60 days; (iii)
the Depositor shall have represented that no selection procedures reasonably
believed by the Depositor to be adverse to the interests of the
Certificateholders or the (Letter of Credit) (Surety Bond) Issuer were used
to select the Mortgage Loans to be removed; (iv) the Transferor shall have
received evidence satisfactory to it that the reassignment will not, as of
the date thereof, prevent the transfer of the Mortgage Loans (including any
Additional Balances) to the Trust from being recognized as a sale under
generally accepted accounting principles and shall have received no evidence
that such reassignment will, as of the date thereof, prevent such transfer
from being recognized as a sale for regulatory purposes; and (v) each Rating
Agency shall have been notified of the proposed retransfer and prior to the
date of retransfer no Rating Agency has notified the Depositor in writing
that such retransfer would result in a reduction or withdrawal of its then-
current rating of the Certificates.)
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Trustee shall establish and maintain on behalf of the Servicer an
account (the "Collection Account") for the benefit of the Certificateholders.
The Collection Account will be an Eligible Account (as defined herein).
Subject to the investment provision described in the following paragraphs,
upon receipt by the Servicer of amounts in respect of the Mortgage Loans
(excluding amounts representing the Servicing Fee, administrative charges,
taxes, assessments, credit insurance charges, insurance proceeds to be
applied to the restoration or repair of a Mortgaged Property or similar
items), the Servicer will deposit such amounts in the Collection Account.
Amounts so deposited may be invested in Eligible Investments (as described in
the Agreement) maturing no later than one Business Day prior to the date on
which the amount on deposit therein is required to be deposited in the
Distribution Account or on such Distribution Date if approved by the Rating
Agencies and the Certificate Insurer.
The Trustee will establish an account (the "Security Account") into
which will be deposited amounts withdrawn from the Collection Account for
distribution to Certificateholders on a Distribution Date. The Security
Account will be an Eligible Account. Amounts on deposit therein may be
invested in Eligible Investments maturing on or before the Business Day prior
to the related Distribution Date.
An "Eligible Account" is an account that is (i) maintained with a
depository institution whose debt obligations at the time of any deposit
therein have the highest short-term debt rating by the Rating Agencies, (ii)
one or more accounts with a depository institution which accounts are fully
insured by either the Savings Association Insurance Fund ("SAIF") or the Bank
Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation with a
minimum long-term unsecured debt rating of ( ), (iii) a segregated trust
account maintained with the Trustee or an affiliate of the Trustee in its
fiduciary capacity or (iv) otherwise acceptable to each Rating Agency as
evidenced by a letter from each Rating Agency to the Trustee, without
reduction or withdrawal of their then current ratings of the Certificates.
Eligible Investments are specified in the Agreement and are limited to
investments which meet the criteria of the Rating Agencies from time to time
as being consistent with their then current ratings of the Certificates.
Investor Percentage and Transferor Percentage. Pursuant to the
Agreement, the Servicer will allocate between the Investor Interest and the
Transferor Interest all amounts (including any Net Liquidation Proceeds)
collected under the Mortgage Loans on account of interest ("Interest
Collections"), all amounts (including Net Liquidation Proceeds) collected
under the Mortgage Loans on account of principal ("Principal Collections")
and the amount of the unrecovered Loan Balance of any Defaulted Mortgage Loan
at the end of the Collection Period in which such Defaulted Mortgage Loan
became a Defaulted Mortgage Loan (the "Liquidation Loss Amount"). A
"Defaulted Mortgage Loan" is a Mortgage Loan that has been written off as
uncollectible by the Servicer. The Collection Period for a Distribution Date
is the calendar month preceding such Distribution Date or, in the case of the
first Distribution Date, the period from the Cut-Off Date through the last
day of the calendar month preceding the month in which such Distribution Date
occurs. The Servicer will make each allocation by reference to the Investor
Percentage and the Transferor Percentage applicable in each case during a
Collection Period.
For convenience, this Prospectus Supplement refers to the Investor
Percentage with respect to Interest Collections, Principal Collections and
Liquidation Loss Amounts as if the Investor Percentage were the same
percentage at all times in each case. The Investor Percentage may be a
different percentage for each Collection Period, and will vary primarily as a
result of changes in the Pool Balance.
The Investor Percentage will be calculated as follows:
Interest Collections and Liquidation Loss Amounts. When used with
respect to Interest Collections and Liquidation Loss Amounts at any time,
"Investor Percentage" means the percentage equivalent of a fraction the
numerator of which is the Security Principal Balance and the denominator of
which is the Pool Balance, in each case as of the end of the immediately
preceding Collection Period (or, in the case of the first Collection Period,
as of the Closing Date).
Principal Collections during the Revolving Period. When used with
respect to Principal Collections during the Revolving Period, "Investor
Percentage" means the percentage equivalent of a fraction the numerator of
which is the amount of the Security Principal Balance and the denominator of
which is the Pool Balance, in each case as of the end of the immediately
preceding Collection Period (or, in the case of the first Collection Period,
as of the Closing Date).
Principal Collections during the Amortization Period. When used with
respect to Principal Collections during the Amortization Period, "Investor
Percentage" means the percentage equivalent of a fraction the numerator of
which is the amount of the Security Principal Balance and the denominator of
which is the Pool Balance, in each case as of the end of the Revolving
Period.
The Transferor Percentage will, in all cases, be equal to 100% minus the
applicable Investor Percentage.
As a result of the calculations described above, Interest Collections in
each Collection Period will be allocated to the Certificateholders based on
the relationship of the Security Principal Balance to the Pool Balance (which
may fluctuate from month to month). As described above, the Investor
Percentage applied when allocating Principal Collections is expected to vary
from month to month during the Revolving Period, because the Security
Principal Balance as a percentage of the Pool Balance will fluctuate from
month to month. During the Amortization Period, however, the amount of
Principal Collections allocated to the Investor Interest will be determined
by reference to a fixed percentage which will be equal to the Investor
Percentage with respect to Principal Collections on the last day of the
Revolving Period.
Deposits in the Collection Account and Payments to the Depositor. On
the Closing Date, the Servicer will deposit in the Collection Account funds
in the amount of the Investor Percentage of Interest Collections on the
Mortgage Loans received during the period from the Cut-Off Date to the second
business day preceding the Closing Date, but not in excess of the amount
needed to distribute the required interest on the Certificates and the
Servicing Fee to be distributed on the initial Distribution Date. On and
after the Closing Date, the Servicer will, subject to the following
paragraph, deposit on a daily basis within two business days following
receipt thereof (i) during each Collection Period in the Revolving Period,
the Investor Percentage of Interest Collections and (ii) during each
Collection Period in the Amortization Period, the Investor Percentage of all
Interest Collections and Principal Collections. The Servicer will pay to the
Transferor within two business days of its receipt thereof (i) during each
Collection Period in the Revolving Period, the Transferor Percentage of all
Interest Collections and, if the Transferor Interest (after giving effect to
any transfers of Additional Balances or Eligible Additional Mortgage Loans to
the Trust on such day) is equal to or greater than zero, the Transferor
Percentage of all Principal Collections and the Investor Percentage of all
Principal Collections and (ii) during each Collection Period in the
Amortization Period, the Transferor Percentage of Interest Collections and,
if the Transferor Interest (after giving effect to any transfers of
Additional Balances or Eligible Additional Mortgage Loans to the Trust on
such day) is greater than zero, the Transferor Percentage of all Principal
Collections.
The Trustee will deposit in the Security Account any amounts drawn on
the (Letter of Credit) (Surety Bond) as described below.
Any Principal Collections not paid to the Transferor because of the
limitations described above ("Unallocated Principal Collections"), will be
deposited and retained in the Collection Account for payment to the
Transferor, during the Revolving Period, if and when the Transferor Interest
is greater than zero and, during the Amortization Period, to the
Certificateholders.
DISTRIBUTIONS ON THE CERTIFICATES
On the (___) day preceding each Distribution Date, the Trustee shall
transfer funds from the Collection Account to the Distribution Account for
the distributions described below. Beginning with the Distribution Date
occurring on ______________, distributions on the Certificates will be made
by the Trustee out of amounts on deposit in the Security Account on each
Distribution Date to the persons in whose names such Certificates are
registered at the close of business on the (day prior to each Distribution
Date) (the "Record Date"), except as provided in "Registration of
Certificates" below. The term "Distribution Date" means the ____ day of
each month (or if such ___ day is not a business day the next succeeding
business day). Distributions will be made by check mailed (or upon the
request of a Certificateholder owning Certificates having denominations
aggregating at least $__________, by wire transfer or otherwise) to the address
of the person entitled thereto ((which, in the case of Book-Entry Certificates,
will be DTC or its nominee)) as it appears on the Certificate Register in
amounts calculated as described herein on the ______ business day (but no
later than the _______ calendar day) of the month in which the related
Distribution Date occurs (the "Determination Date"). However, the final
distribution in respect of the Certificates will be made only upon
presentation and surrender thereof at the office or the agency of the Trustee
specified in the notice to Certificateholders of such final distribution.
Distributions of Interest Collections and Required Amounts. On each
Distribution Date, the Trustee, on behalf of the Trust, shall pay the
following amounts in the following order of priority to the following persons
from the Investor Interest of all Interest Collections collected during the
related Collection Period, together with the Required Amount, if any, drawn
on the (Letter of Credit) (Surety Bond) for such Distribution Date.
((i) to the Certificateholders, interest at the Certificate Rate for
the Interest Accrual Period preceding such Distribution Date on the Security
Principal Balance outstanding immediately prior to such Distribution Date;
(ii) to the Certificateholders, any interest on the Certificates
accrued in accordance with clause (i) that has not been previously
distributed to Certificateholders plus, to the extent legally permissible,
interest thereon at the Certificate Rate applicable from time to time (an
"Unpaid Interest Shortfall");
(iii) to the Servicer, the Investor Servicing Fee for the related
Interest Accrual Period and all accrued and unpaid Investor Servicing Fees
for previous Interest Periods;
(iv) if such Distribution Date is in the Revolving Period, to the
Transferor, the Investor Percentage of the aggregate of all Liquidation Loss
amounts incurred in the preceding Collection Period; provided that the
Transferor Interest (after giving effect to any transfers of Additional
Balances and Eligible Additional Mortgage Loans on such date and to the
distribution of such Liquidation Loss Amount) is equal to or greater than
zero;
(v) if such Distribution Date is in the Amortization Period, to the
Certificateholders, the Investor Percentage of the aggregate of all
Liquidation Loss Amounts incurred in the preceding Collection Period;
(vi) to the Certificateholders, the aggregate of the amounts allocable
pursuant to clause (v) that were not previously distributed pursuant to such
clause (each such undistributed amount being referred to herein as a
"Security Principal Balance Loss Deduction Amount"); and
(vii) to the Certificateholders, accrued and unpaid interest on each
unreimbursed Security Principal Balance Loss Deduction Amount (such interest
being calculated at the Certificate Rate for each Interest Accrual Period
during which such unreimbursed amount was outstanding.)
A Security Principal Balance Loss Deduction Amount represents a loss of
principal in respect of Defaulted Mortgage Loans allocable to the Investor
Interest and will arise when the Investor Percentage of Interest Collections
and the Required Amount are not sufficient to cover such loss, in accordance
with the priority of distributions described above. As described under
"General" above, any Security Principal Balance Loss Deduction Amounts which
have not been reimbursed, as provided herein, will reduce the Security
Principal Balance.
The Required Amount for each Distribution Date will be the lesser of (i)
the (Letter of Credit) (Surety Bond) Amount and (ii) the amount, if any, by
which (a) the full amount distributable on such Distribution Date pursuant to
clauses (i) through (vii) above exceeds (b) the Investor Percentage of the
Interest Collections for the related Collection Period. The Required Amount
will be drawn on the (Letter of Credit) (Surety Bond).
Distributions of Principal. On each Distribution Date after the first
Collection Period in the Amortization Period, the Trustee will distribute to
the Certificateholders the Investor Percentage of Principal Collections
received in the preceding Collection Period. In addition, the Trustee will
distribute to Certificateholders on any Distribution Date during the
Amortization Period any Retransfer Deposit Amount (or drawn on the (Letter of
Credit) (Surety Bond) in respect thereof) received in the preceding
Collection Period and any Unallocated Principal Collections then on deposit
in the Distribution Account. The aggregate distributions of principal to the
Certificateholders will not exceed the Initial Security Principal Balance.
CERTIFICATE RATE
(The "Certificate Rate" for a Distribution Date will generally equal the
sum of (a) LIBOR and (b) ____% per annum. Notwithstanding the foregoing, in
no event will the amount of interest required to be distributed in respect of
the Certificates on any Distribution Date exceed a rate equal to the average
of the Loan Rates (net of the Servicing Fee Rate) as of the first day of the
month preceding the month of such Distribution Date, weighted on the basis of
the Principal Balance of each Mortgage Loan as of such date (adjusted to an
effective rate reflecting accrued interest calculated on the basis of a
360-day year consisting of twelve 30-day months).)
Interest on the Certificates in respect of any Distribution Date will
accrue on the Principal Balance from the preceding Distribution Date (or in
the case of the first Distribution Date, from the Closing Date) through the
day preceding such Distribution Date (each such period, an "Interest Accrual
Period") on the basis of a 360-day year consisting of twelve 30-day months.
(Calculation of LIBOR. "LIBOR" with respect to any Distribution Date
will be determined by the Trustee and will be equal to the offered rates for
deposits in United States dollars having a maturity of one month (the "Index
Maturity") commencing on the second LIBOR Business Day (as defined below)
prior to the previous Distribution Date, which appear on the Reuters Screen
LIBO Page as of approximately 11:00 A.M., London time, on such date of
calculation. If at least two such offered rates appear on the Reuters Screen
LIBO Page, LIBOR will be the arithmetic mean (rounded upwards, if necessary,
to the nearest one-sixteenth of a percent) of such offered rates. If fewer
than two such quotations appear, LIBOR with respect to such Distribution Date
will be determined at approximately 11:00 A.M., London time, on such
determination date on the basis of the rate at which deposits in United
States dollars having the Index Maturity are offered to prime banks in the
London interbank market by four major banks in the London interbank market
selected by the Trustee and in a principal amount equal to an amount of not
less than U.S. $1,000,000 and that is representative for a single transaction
in such market at such time. The Trustee will request the principal London
office of each of such banks to provide a quotation of its rate. If at least
two such quotations are provided, LIBOR will be the arithmetic mean (rounded
upwards as aforesaid) of such quotations. If fewer than two quotations are
provided, LIBOR with respect to such Distribution Date will be the arithmetic
mean (rounded upwards as aforesaid) of the rates quoted at approximately
11:00 A.M., New York City time, on such determination date by three major
banks in New York, New York selected by the Trustee for loans in United
States dollars to leading European banks having the Index Maturity and in a
principal amount equal to an amount of not less than U.S. $1,000,000 and that
is representative for a single transaction in such market at such time;
provided, however, that if the banks selected as aforesaid by the Bank are
not quoting as mentioned in this sentence, LIBOR in effect for the applicable
period will be LIBOR in effect for the previous period.)
(For purposes of calculating LIBOR, a "LIBOR Business Day" will be any
Business Day on which dealings in deposits in United States dollars are
transacted in the London interbank market and "Reuters Screen LIBO Page" will
be the display designated as page "LIBO" on the Reuters Monitor Money Rates
Service (or such other page as may replace the LIBO page on that service for
the purpose of displaying London interbank offered rates of major banks).)
THE (LETTER OF CREDIT) (SURETY BOND)
On the Closing Date, the (Letter of Credit) (Surety Bond) Issuer will
issue the (Letter of Credit) (Surety Bond) in favor of the Trustee on behalf
of the Trust to support payments on the Certificates. On each Determination
Date, the Servicer will determine the amounts required to be drawn on the
(Letter of Credit) (Surety Bond), up to the (Letter of Credit) (Surety Bond)
Amount, on the related Distribution Date. See "Distributions on
Certificates" above.
The amount available under the (Letter of Credit) (Surety Bond) (the
"(Letter of Credit) (Surety Bond) Amount") for the initial Distribution Date
will be $__________. For each Distribution Date thereafter, the (Letter of
Credit) (Surety Bond) Amount will equal the lesser of (i) ___% of the Pool
Balance as of the first day of the preceding Collection Period (after giving
effect to any amounts distributed with respect to principal of the Mortgage
Loans on the Distribution Date occurring in such preceding Collection Period)
and (ii) the (Letter of Credit) (Surety Bond) Amount as of the first day of
the preceding Collection Period, minus any amounts drawn under the (Letter of
Credit) (Surety Bond) during such preceding Collection Period, plus any
amounts paid to the (Letter of Credit) (Surety Bond) Issuer on the
Distribution Date occurring in such preceding Collection Period up to the
amount of any previous draws on the (Letter of Credit) (Surety Bond).
EARLY AMORTIZATION EVENTS
As described above, the Revolving Period will continue until the close
of business on the last day of __________ unless an Early Amortization Event
occurs prior thereto. The term "Early Amortization Event" refers to any of
the following events:
((a) failure on the part of the Servicer or the Depositor (i) to
make any payment or deposit on the date required under the Agreement
within five business days after such payment or deposit is required to
be made, (ii) to observe or perform in any material respect certain
covenants of the Servicer or the Depositor or (iii) to observe or
perform in any material respect any other covenants or agreements of the
Servicer or the Depositor set forth in the Agreement, which failure, in
each case, materially and adversely affects the interests of the
Certificateholders and which, in the case of clause (iii), continues
unremedied for a period of 60 days after written notice and continues to
materially and adversely affect the interests of the Certificateholders
for such period;
(b) any representation or warranty made by the Servicer or the
Depositor in the Agreement proves to have been incorrect in any material
respect when made, as a result of which the interests of the
Certificateholders are materially and adversely affected, which
continues to be incorrect in any material respect for a period of 60
days after written notice and which continues to materially and
adversely affect the interests of the Certificateholders for such
period; provided, however, that an Early Amortization Event shall not be
deemed to occur thereunder if the Depositor has accepted retransfer of
the related Mortgage Loan or all such Mortgage Loans, if applicable,
during such period (or such longer period (not to exceed an additional
60 days) as the Trustee may specify) in accordance with the provisions
of the Agreement;
(c) the Trust becomes subject to registration as an investment
company under the Investment Company Act of 1940, as amended;
(d) if the Depositor fails to transfer to the Trust Eligible
Additional Mortgage Loans by the time it is required to do so;
(e) an Event of Default under the Agreement (as described in the
Prospectus under "THE AGREEMENTS--Events of Default") occurs;
(f) the (Letter of Credit) (Surety Bond) Amount is less than %
of the Security Principal Balance; or
(g) if the average of the Investor Percentage of Interest
Collections for any three consecutive Collection Periods is less than
the amounts to be distributed to Certificateholders as set forth in
subsections (i) through (vii) under "Distributions on the Certificates--
Distributions of Interest Collections and Required Amounts" above for
the three Distribution Dates relating to such Collection Periods.)
(In the case of any event described in clauses (a) or (b), an Early
Amortization Event will be deemed to have occurred only if, after the
expiration of the applicable grace period, if any, described in such clauses,
either the Trustee or holders of Certificates evidencing Percentage Interests
aggregating more than 51% or the (Letter of Credit) (Surety Bond) Issuer (but
only if the (Letter of Credit) (Surety Bond) is outstanding or the (Letter of
Credit) (Surety Bond) Issuer has not been fully reimbursed for all amounts
paid to the Trust by the (Letter of Credit) (Surety Bond) Issuer), by written
notice to the Depositor and the Servicer (and to the Trustee if given by the
Certificateholders or the (Letter of Credit) (Surety Bond) Issuer) declare
that an Early Amortization Event has occurred as of the date of such notice.
In the case of any event described in clauses (c), (d), (e) or (f), an Early
Amortization Event will be deemed to have occurred without any notice or
other action on the part of the Trustee or the Certificateholders or the
(Letter of Credit) (Surety Bond) Issuer immediately upon the occurrence of
such event. On the date on which an Early Amortization Event is deemed to
have occurred, the Amortization Period will commence. In such event,
distributions of principal to the Certificateholders will begin on the first
Distribution Date following the month in which the Early Amortization Event
occurs. If, because of the occurrence of an Early Amortization Event, the
Amortization Period begins earlier than __________, the date on which the
Amortization Period is scheduled to commence, Certificateholders will begin
receiving distributions of principal earlier than they would otherwise have
under the Agreement, which may shorten the final maturity of the
Certificates.)
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to the Certificateholders, the
Trustee will forward to each Certificateholder a statement setting forth
among other items:
(i) the amount of interest included in such distribution and the
related Certificate Rate;
(ii) the amount, if any, of overdue accrued interest included in
such distribution (and the amount of interest thereon);
(iii) the amount, if any, of the remaining overdue accrued
interest after giving effect to such distribution;
(iv) the amount, if any, of principal included in such
distribution;
(v) the amount, if any, of the reimbursement of previous
Liquidation Loss Amounts included in such distribution;
(vi) the amount, if any, of the aggregate unreimbursed
Liquidation Loss Amounts after giving effect to such distribution;
(vii) the Servicing Fee for such Distribution Date;
(viii) the Pool Balance as of the end of the preceding Collection
Period;
(ix) the number and aggregate Principal Balances of the Mortgage
Loans as to which the minimum monthly payment is delinquent for 30-59
days, 60-89 days and 90 or more days, respectively, as of the end of the
preceding Collection Period; and
(x) the book value of any real estate which is acquired by the
Trust through foreclosure or grant of deed in lieu of foreclosure.
In the case of information furnished pursuant to clauses (iii), (iv) and
(v) above, the amounts shall be expressed as a dollar amount per Security
with a $1,000 denomination. Within 60 days after the end of each calendar
year, the Trustee will forward to each Person, if requested in writing by
such Person, who was a Certificateholder during the prior calendar year
COLLECTION AND OTHER SERVICING PROCEDURES ON MORTGAGE LOANS
The Servicer will make reasonable efforts to collect all payments called
for under the Mortgage Loans and will, consistent with the Agreement, follow
such collection procedures as it follows from time to time with respect to
the home equity loans in its servicing portfolio comparable to the Mortgage
Loans. Consistent with the above, the Servicer may in its discretion waive
any late payment charge or any assumption or other fee or charge that may be
collected in the ordinary course of servicing the Mortgage Loans. (Section
3.02)
With respect to the Mortgage Loans, the Servicer may arrange with a
borrower a schedule for the payment of interest due and unpaid for a period,
provided that any such arrangement is consistent with the Servicer's policies
with respect to the home equity mortgage loans it owns or services. With
respect to Mortgage Loans that are junior in priority to a First Lien on a
Mortgaged Property, the Servicer has the power under certain circumstances to
consent to a new mortgage lien on such Mortgaged Property having priority
over such Mortgage Loan in connection with the refinancing of such First
Lien.
HAZARD INSURANCE
The Servicer will cause to be maintained fire and hazard insurance with
extended coverage customary in the area where the Mortgaged Property is
located, in an amount which is at least equal to the lesser of (i) the
outstanding Principal Balance on the Mortgage Loan and any related senior
lien(s), (ii) the full insurable value of the premises securing the Mortgage
Loan and (iii) the minimum amount required to compensate for damage or loss
on a replacement cost basis in each case in an amount not less than such
amount as is necessary to avoid the application of any co-insurance clause
contained in the related hazard insurance policy. Generally, if the
Mortgaged Property is in an area identified in the Federal Register by the
Flood Emergency Management Agency as FLOOD ZONE "A", such flood insurance has
been made available and the Servicer determines that such insurance is
necessary in accordance with accepted second mortgage servicing practices of
prudent lending institutions, the Servicer will cause to be purchased a flood
insurance policy with a generally acceptable insurance carrier, in an amount
representing coverage not less than the least of (a) the outstanding
Principal Balance of the Mortgage Loan and the first lien, (b) the full
insurable value of the Mortgaged Property, or (c) the maximum amount of
insurance available under the National Flood Insurance Act of 1968, as
amended. The Servicer will also maintain on REO Property, to the extent such
insurance is available, fire and hazard insurance in the applicable amounts
described above, liability insurance and, to the extent required and
available under the National Flood Insurance Act of 1968, as amended, and the
Servicer determines that such insurance is necessary in accordance with
accepted second mortgage servicing practices of prudent lending institutions,
flood insurance in an amount equal to that required above. Any amounts
collected by the Servicer under any such policies (other than amounts to be
applied to the restoration or repair of the Mortgaged Property, or to be
released to the Mortgagor in accordance with customary second mortgage
servicing procedures) will be deposited in the Collection Account, subject to
retention by the Servicer to the extent such amounts constitute servicing
compensation or to withdrawal pursuant to the Agreement.
In the event that the Servicer obtains and maintains a blanket policy as
provided in the Agreement insuring against fire and hazards of extended
coverage on all of the Mortgage Loans, then, to the extent such policy names
the Servicer as loss payee and provides coverage in an amount equal to the
aggregate unpaid principal balance of the Mortgage Loans without coinsurance;
and otherwise complies with the requirements of the first paragraph of this
subsection, the Servicer will be deemed conclusively to have satisfied its
obligations with respect to fire and hazard insurance coverage.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come
into default when, in accordance with applicable servicing procedures under
the Agreement, no satisfactory arrangements can be made for the collection of
delinquent payments. In connection with such foreclosure or other
conversion, the Servicer will follow such practices as it deems necessary or
advisable and as are in keeping with its general subordinate mortgage
servicing activities, provided the Servicer will not be required to expend
its own funds in connection with foreclosure or other conversion, correction
of default on a related senior mortgage loan or restoration of any property
unless, in its sole judgment, such foreclosure, correction or restoration
will increase Net Liquidation Proceeds. (Section 3.06) The Servicer will be
reimbursed out of Liquidation Proceeds for advances of its own funds as
liquidation expenses before any Net Liquidation Proceeds are distributed to
Certificateholders.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Due Period, other than the first Due Period, the
Servicer will receive from interest payments in respect of the Mortgage Loans
a portion of such interest payments as a monthly Servicing Fee in the amount
equal to ____% per annum ("Servicing Fee Rate") on the Principal Balance of
each Mortgage Loan as of the first day of each such Due Period as to which
such payment was made. All assumption fees, late payment charges and other
fees and charges, to the extent collected from borrowers, will be retained by
the Servicer as additional servicing compensation.
The Servicer will pay certain ongoing expenses associated with the Trust
and incurred by it in connection with its responsibilities under the
Agreement, including, without limitation, payment of the fees and
disbursements of the Trustee, any custodian appointed by the Trustee, the
Certificate Registrar and any paying agent.
The Servicer's right to reimbursement for unreimbursed Servicing
Advances is limited to late collections on the related Mortgage Loan,
including Liquidation Proceeds, released mortgaged property proceeds,
Insurance Proceeds and such other amounts as may be collected by the Servicer
from the related Mortgagor or otherwise relating to the Mortgage Loan in
respect of which such unreimbursed amounts are owed. The Servicer's right to
reimbursement for unreimbursed Monthly Advances shall be limited to late
collections of interest on any Mortgage Loan and to Liquidation Proceeds and
Insurance Proceeds on the related Mortgage Loan. The Servicer's right to
such reimbursements is prior to the rights of Certificateholders.
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery on or before the last day of the
fifth month following the end of the Servicer's fiscal year, beginning in
199_, to the Trustee, the Certificate Insurer and the Rating Agencies of an
annual statement signed by an officer of the Servicer to the effect that the
Servicer has fulfilled its material obligations under the Agreement
throughout the preceding fiscal year, except as specified in such statement.
(Section 3.10)
On or before the last day of the fifth month following the end of the
Servicer's fiscal year, beginning in 199_, the Servicer will furnish a report
prepared by a firm of nationally recognized independent public accountants
(who may also render other services to the Servicer or the Depositor) to the
Trustee, the Certificate Insurer and the Rating Agencies to the effect that
such firm has examined certain documents and the records relating to
servicing of the Mortgage Loans under the Uniform Single Audit Program for
Mortgage Bankers and such firm's conclusion with respect thereto. (Section
3.11)
The Servicer's fiscal year is the calendar year.
CERTAIN MATTERS REGARDING THE SERVICER
The Agreement provides that the Servicer may not resign from its
obligations and duties thereunder, except in connection with a permitted
transfer of servicing, unless (i) such duties and obligations are no longer
permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently
carried on by it or its affiliate or (ii) upon the satisfaction of the
following conditions: (a) the Servicer has proposed a successor servicer to
the Trustee in writing and such proposed successor servicer is reasonably
acceptable to the Trustee; (b) the Rating Agencies have confirmed to the
Trustee that the appointment of such proposed successor servicer as the
Servicer will not result in the reduction or withdrawal of the then current
rating of the Certificates; and (c) such proposed successor servicer is
reasonably acceptable to the Certificate Insurer. No such resignation will
become effective until the Trustee or a successor servicer has assumed the
Servicer's obligations and duties under the Agreement. (Section 7.04)
The Servicer may perform any of its duties and obligations under the
Agreement through one or more subservicers or delegates, which may be
affiliates of the Servicer. Notwithstanding any such arrangement, the
Servicer will remain liable and obligated to the Trustee and the
Certificateholders for the Servicer's duties and obligations under the
Agreement, without any diminution of such duties and obligations and as if
the Servicer itself were performing such duties and obligations. (Section
7.05)
The Agreement provides that the Servicer will indemnify the Trust Fund
and the Trustee from and against any loss, liability, expense, damage or
injury suffered or sustained as a result of the Servicer's actions or
omissions in connection with the servicing and administration of the Mortgage
Loans which are not in accordance with the provisions of the Agreement. The
Agreement provides that neither the Depositor nor the Servicer nor their
directors, officers, employees or agents will be under any other liability to
the Trust, the Trustee, the Certificateholders or any other person for any
action taken or for refraining from taking any action pursuant to the
Agreement. However, neither the Depositor nor the Servicer will be protected
against any liability which would otherwise be imposed by reason of willful
misconduct, bad faith or gross negligence of the Depositor or the Servicer in
the performance of its duties under the Agreement or by reason of reckless
disregard of its obligations thereunder. In addition, the Agreement provides
that the Servicer will not be under any obligation to appear in, prosecute or
defend any legal action which is not incidental to its servicing
responsibilities under the Agreement. The Servicer may, in its sole
discretion, undertake any such legal action which it may deem necessary or
desirable with respect to the Agreement and the rights and duties of the
parties thereto and the interest of the Certificateholders thereunder.
(Sections 7.03, 7.05, 7.06 and 8.02)
Any corporation into which the Servicer may be merged or consolidated,
or any corporation resulting from any merger, conversion or consolidation to
which the Servicer shall be a party, or any corporation succeeding to the
business of the Servicer shall be the successor of the Servicer hereunder,
without the execution or filing of any paper or any further act on the part
of any of the parties hereto, anything in the Agreement to the contrary
notwithstanding. (Section 7.02)
EVENTS OF SERVICING TERMINATION
"Events of Servicing Termination" will consist of: (i) (A) any failure
by the Servicer to make any required Monthly Advance or (B) any other failure
of the Servicer to deposit in the Collection Account any deposit required to
be made under the Agreement, which failure continues unremedied for one
Business Day after the giving of written notice of such failure to the
Servicer by the Trustee, or to the Servicer and the Trustee by the
Certificateholders evidencing an aggregate, undivided interest in the Trust
Fund of at least 25% of the Certificate Principal Balance; (ii) any failure
by the Servicer duly to observe or perform in any material respect any other
of its covenants or agreements in the Agreement which, in each case,
materially and adversely affects the interests of the Certificateholders and
continues unremedied for 60 days after the giving of written notice of such
failure to the Servicer by the Trustee, or to the Servicer and the Trustee by
the Certificateholders evidencing an aggregate, undivided interest in the
Trust of at least 25% of the Certificate Principal Balance; (iii) any failure
by the Servicer to make any required Servicing Advance, which failure
continues unremedied for a period of 30 days after the giving of written
notice of such failure to the Servicer by the Trustee, or to the Servicer and
the Trustee by the Certificateholders evidencing an aggregate, undivided
interest in the Trust of at least 25% of the Certificate Principal Balance;
or (iv) certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings relating to the Servicer and
certain actions by the Servicer indicating insolvency, reorganization or
inability to pay its obligations (an "Insolvency Event").
Upon the occurrence and continuation beyond the applicable grace period
of the event described in clause (i) (A) above, if any Monthly Advance is not
made by 12:00 Noon New York Time on the second Business Day prior to the
applicable Distribution Date, the Trustee or a successor Servicer will
immediately assume the duties of the Servicer.
Upon removal or resignation of the Servicer, the Trustee will be the
Successor Servicer (the "Successor Servicer"). The Trustee, as Successor
Servicer, will be obligated to make Monthly Advances and Servicing Advances
and certain other advances unless it determines reasonably and in good faith
that such advances would not be recoverable. If, however, the Trustee is
unwilling or unable to act as Successor Servicer, or if the majority of
Certificateholders so requests, the Trustee may appoint, or petition a court
of competent jurisdiction to appoint any established mortgage loan servicing
institution having a net worth of not less than $15,000,000 as the Successor
Servicer in the assumption of all or any part of the responsibilities, duties
or liabilities of the Servicer.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (i) above for a period of ten Business Days or
referred to under clause (ii) above for a period of 30 Business Days, shall
not constitute an Event of Servicing Termination if such delay or failure
could not be prevented by the exercise of reasonable diligence by the
Servicer and such delay or failure was caused by an act of God or other
similar occurrence. Upon the occurrence of any such event the Servicer shall
not be relieved from using its best efforts to perform its obligations in a
timely manner in accordance with the terms of the Agreement and the Servicer
shall provide the Trustee, the Depositor, and the Certificateholders prompt
notice of such failure or delay by it, together with a description of its
efforts to so perform its obligations.
RIGHTS UPON AN EVENT OF SERVICING TERMINATION
So long as an Event of Servicing Termination remains unremedied, either
the Trustee, or Certificateholders evidencing an aggregate, undivided
interest in the Trust of at least 51 % of the Certificate Principal Balance
may terminate all of the rights and obligations of the Servicer under the
Agreement and in and to the Mortgage Loans, whereupon the Trustee will
succeed to all the responsibilities, duties and liabilities of the Servicer
under the Agreement and will be entitled to similar compensation
arrangements. In the event that the Trustee would be obligated to succeed
the Servicer but is unwilling or unable so to act, it may appoint, or
petition a court of competent jurisdiction for the appointment of, a housing
and home finance institution or other mortgage loan or home equity loan
servicer with all licenses and permits required to perform its obligations
under the Agreement and having a net worth of at least $25,000,000 to act as
successor to the Servicer under the Agreement. Pending such appointment, the
Trustee will be obligated to act in such capacity unless prohibited by law.
Such successor will be entitled to receive the same compensation that the
Servicer would otherwise have received (or such lesser compensation as the
Trustee and such successor may agree). (Sections 8.01 and 8.02) A receiver
or conservator for the Servicer may be empowered to prevent the termination
and replacement of the Servicer if the only Event of Servicing Termination
that has occurred is an Insolvency Event.
AMENDMENT
The Agreement may be amended from time to time by the Transferor, the
Servicer, the Depositor and the Trustee, but without the consent of the
Certificateholders, to cure any ambiguity, to correct or supplement any
provisions therein which may be inconsistent with any other provisions of the
Agreement, to add to the duties of the Depositor or the Servicer to comply
with any requirements imposed by the Internal Revenue Code or any regulation
thereunder, or to add or amend any provisions of the Agreement as required by
the Rating Agencies in order to maintain or improve any rating of the
Certificates (it being understood that, after obtaining the ratings in effect
on the Closing Date, neither the Depositor, the Trustee nor the Servicer is
obligated to obtain, maintain, or improve any such rating) or to add any
other provisions with respect to matters or questions arising under the
Agreement which shall not be inconsistent with the provisions of the
Agreement, provided that such action will not, as evidenced by an opinion of
counsel, materially and adversely affect the interests of any
Certificateholder; provided, that any such amendment will not be deemed to
materially and adversely affect the Certificateholders and no such opinion
will be required to be delivered if the person requesting such amendment
obtains a letter from each Rating Agency stating that such amendment would
not result in a downgrading of the then current rating of the Certificates.
The Agreement may also be amended from time to time by the Transferor, the
Servicer, the Depositor, and the Trustee, with the consent of
Certificateholders evidencing an aggregate, undivided interest in the Trust
of at least 51% of the Certificate Principal Balance for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Agreement or of modifying in any manner the rights of the
Certificateholders, provided that no such amendment will (i) reduce in any
manner the amount of, or delay the timing of, collections of payments on the
Certificates or distributions or payments under the Policy which are required
to be made on any Certificate without the consent of the Certificateholder or
(ii) reduce the aforesaid percentage required to consent to any such
amendment, without the consent of the holders of all Certificates then
outstanding. (Section 11.01)
TERMINATION; RETIREMENT OF THE CERTIFICATES
The Trust will terminate on the Distribution Date following the later of
(A) payment in full of all amounts owing to the Certificate Insurer and (B)
the earliest of (i) the Distribution Date on which the Security Principal
Balance has been reduced to zero, (ii) the final payment or other liquidation
of the last Mortgage Loan in the Trust, (iii) the optional transfer to the
Servicer of the Mortgage Loans, as described below and (iv) the Distribution
Date in (____________), on which date the Policy will be available to pay the
outstanding Class A Principal Balance.
The Servicer will have the right to repurchase all remaining Mortgage
Loans and REO Properties in the Trust and thereby effect early retirement of
the Certificates, subject to the Pool Balance of such Mortgage Loans and REO
Properties at the time of repurchase being less than or equal to (5%) of the
Pool Balance as of the Cut-Off Date. In the event the Servicer exercises
such option, the purchase price distributed with respect to each Certificate
will be 100% of its then outstanding principal balance (subject to reduction
as provided in the Agreement if the purchase price is based in part on the
appraised value of any REO Properties and such appraised value is less than
the Principal Balance of the related Mortgage Loans plus (y) the greater of
(i) the aggregate amount of accrued and unpaid interest on the Mortgage Loans
through the related Due Period and (ii) 30 days' accrued interest thereon at
the Loan Rate, in each case net of the Servicing Fee plus (z) any
unreimbursed amounts due to the Certificate Insurer under the Agreement and I
and I Payments.
The termination of the Trust will be effected in a manner consistent
with applicable federal income tax regulations and the status of the Trust as
a REMIC.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
Any affiliate of the Transferor has the option to purchase from the
Trust Fund any Mortgage Loan 90 days or more delinquent at a purchase price
equal to the outstanding principal balance of such Mortgage Loan as of the
date of purchase, plus the greater of (i) all accrued and unpaid interest on
such principal balance and (ii) 30 days' interest on such principal balance,
computed at the Loan Rate.
Notwithstanding the foregoing, any such affiliate of the Transferor may
only exercise its option with respect to the Mortgage Loan or Mortgage Loans
that have been delinquent for the longest period at the time of such
repurchase.
THE TRUSTEE
( ) with its principal place
of business in ( ), has been named Trustee pursuant to the
Agreement.
The commercial bank or trust company serving as Trustee may have normal
banking relationships with the Depositor and the Servicer.
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee, (as approved by the (Letter of
Credit) (Surety Bond) Provider). The Depositor may also remove the Trustee
if the Trustee ceases to be eligible to continue as such under the Agreement
or if the Trustee becomes insolvent. Upon becoming aware of such
circumstances, the Depositor will be obligated to appoint a successor
Trustee(, as approved by the (Letter of Credit) (Surety Bond) Provider). Any
resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the
successor Trustee. (Section 9.07)
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless such holder
previously has given to the Trustee written notice of default and unless
Certificateholders evidencing an aggregate, undivided interest in the Trust
of at least 51% of the Certificate Principal Balance have made written
requests upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity and
the Trustee for 60 days has neglected or refused to institute any such
proceeding. (Section 11.03) The Trustee will be under no obligation to
exercise any of the trusts or powers vested in it by the Agreement or to make
any investigation of matters arising thereunder or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order
or direction of any of the Certificateholders, unless such Certificateholders
have offered to the Trustee reasonable security or indemnity against the
cost, expenses and liabilities which may be incurred therein or thereby.
(Sections 9.01 and 9.02)
CERTAIN ACTIVITIES
The Trust Fund will not: (i) borrow money; (ii) make loans; (iii) invest
in securities for the purpose of exercising control; (iv) underwrite
securities; (v) except as provided in the Agreement, engage in the purchase
and sale (or turnover) of investments; (vi) offer securities in exchange for
property (except Certificates for the Mortgage Loans); or (vii) repurchase or
otherwise reacquire its securities. See "--Evidence as to Compliance" above
for information regarding reports as to the compliance by the Servicer with
the terms of the Agreement.
DESCRIPTION OF THE PURCHASE AGREEMENT
The Mortgage Loans to be transferred to the Trust by the Depositor will
be purchased by the Depositor from __________________________________ (the
"Transferor") pursuant to the Purchase Agreement to be entered into between
the Depositor, as purchaser of the Mortgage Loans, and the Transferor, as
seller of the Mortgage Loans. Under the Purchase Agreement, the Transferor
will agree to transfer the Mortgage Loans to the Depositor. Pursuant to the
Agreement, the Mortgage Loans will be immediately transferred by the
Depositor to the Trust, and the Depositor will assign its rights in, to and
under the Purchase Agreement, to the Trust. The following summary describes
certain terms of the form of the Purchase Agreement and is qualified in its
entirety by reference to the form of Purchase Agreement.
TRANSFER OF MORTGAGE LOANS
Pursuant to the Purchase Agreement, the Transferor will transfer and
assign to the Depositor all of its right, title and interest in and to the
Mortgage Loans and the Related Documents. The purchase price of the Mortgage
Loans is a specified percentage of the face amount thereof as of the time of
transfer and is payable by the Depositor, as applicable, in cash.
REPRESENTATIONS AND WARRANTIES
The Transferor will represent and warrant to the Depositor that, among
other things, as of the Closing Date, it is duly organized and in good
standing and that it has the authority to consummate the transactions
contemplated by the Purchase Agreement.
The Transferor will also represent and warrant to the Depositor, that,
among other things, (a) the information with respect to the applicable
Mortgage Loan set forth in the schedule attached to the Purchase Agreement is
true and correct in all material respects and (b) immediately prior to the
sale of the Mortgage Loans to the Depositor, the Transferor was the sole
owner and holder of the Mortgage Loans free and clear of any and all liens
and security interests. The Transferor will make similar representations and
warranties in the Agreement. The Transferor will also represent and warrant
to the Depositor, that, among other things, as of the Closing Date, the
Purchase Agreement constitutes a legal, valid and binding obligation of the
Transferor. In the event of a breach of any such representations and
warranties which has a material adverse effect on the interests of the
Certificateholders or the Certificate Insurer, the Transferor will repurchase
or substitute for the Mortgage Loans as described herein under "DESCRIPTION
OF THE CERTIFICATES--Assignment of Mortgage Loans."
The Transferor has also agreed to indemnify the Depositor and the Trust
from and against certain losses, liabilities and expenses (including
reasonable attorneys' fees) suffered or sustained pursuant to the Purchase
Agreement.
ASSIGNMENT TO THE TRUST
The Transferor expressly acknowledges and consents to the Depositor's
transfer of its rights relating to the Mortgage Loans under the Purchase
Agreement to the Trust. The Transferor also agrees to perform its
obligations under the Purchase Agreement for the benefit of the Trust.
TERMINATION
The Purchase Agreement will terminate upon the termination of the Trust.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will
be applied by the Depositor towards the purchase of the (Mortgage Loans)
(Private Securities). The (Mortgage Loans) (Private Securities) will have
been acquired by the Depositor from the Transferor.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion, which summarizes certain U.S. federal income
tax aspects of the purchase, ownership and disposition of the Certificates,
is based on the provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), the Treasury Regulations thereunder, and published rulings and
court decisions in effect as of the date hereof, all of which are subject to
change, possibly retroactively. This discussion does not address every
aspect of the U.S. federal income tax laws which may be relevant to
Certificate Owners in light of their personal investment circumstances or to
certain types of Certificate Owners subject to special treatment under the
U.S. federal income tax laws (for example, banks and life insurance
companies). Accordingly, investors should consult their tax advisors
regarding U.S. federal, state, local, foreign and any other tax consequences
to them of investing in the Certificates.
CHARACTERIZATION OF THE CERTIFICATES AS INDEBTEDNESS
Based on the application of existing law to the facts as set forth in
the Agreement and other relevant documents and assuming compliance with the
terms of the Agreement as in effect on the date of issuance of the
Certificates, Brown & Wood LLP, special tax counsel to the Depositor ("Tax
Counsel"), is of the opinion that the Certificates will be treated as debt
instruments for Federal income tax purposes as of such date. Accordingly,
upon issuance, the Certificates will be treated as "Debt Securities" as
described in the Prospectus. See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS"
in the Prospectus.
The Transferor and the Certificateholders express in the Agreement their
intent that, for applicable tax purposes, the Certificates will be
indebtedness secured by the Mortgage Loans. The Transferor, the Depositor
and the Certificateholders, by accepting the Certificates, and each
Certificate Owner by its acquisition of a beneficial interest in a
Certificate, have agreed to treat the Certificates as indebtedness for U.S.
federal income tax purposes. However, because different criteria are used to
determine the non-tax accounting characterization of the transaction, the
Transferor intends to treat this transaction as a sale of an interest in the
Asset Balances of the Mortgage Loans for financial accounting and certain
regulatory purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured
by property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the Internal Revenue Service (the "IRS") and the
courts have set forth several factors to be taken into account in determining
whether the substance of a transaction is a sale of property or a secured
loan, the primary factor in making this determination is whether the
transferee has assumed the risk of loss or other economic burdens relating to
the property and has obtained the benefits of ownership thereof. Tax Counsel
has analyzed and relied on several factors in reaching its opinion that the
weight of the benefits and burdens of ownership of the Mortgage Loans has
been retained by the Transferor and has not been transferred to the
Certificate Owners.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel has advised that the
rationale of those cases will not apply to this transaction, because the form
of the transaction as reflected in the operative provisions of the documents
either accords with the characterization of the Certificates as debt or
otherwise makes the rationale of those cases inapplicable to this situation.
TAXATION OF INTEREST INCOME OF CERTIFICATE OWNERS
Assuming that the Certificate Owners are holders of debt obligations for
U.S. federal income tax purposes, the Certificates generally will be taxable
as Debt Securities. See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" in the
Prospectus.
While it is not anticipated that the Certificates will be issued at a
greater than de minimis discount, under Treasury regulations (the "OID
Regulations") it is possible that the Certificates could nevertheless be
deemed to have been issued with original issue discount ("OID") if the
interest were not treated as "unconditionally payable" under the OID
Regulations. If such regulations were to apply, all of the taxable income to
be recognized with respect to the Certificates would be includible in income
of Certificate Owners as OID, but would not be includible again when the
interest is actually received. See "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS--Taxation of Debt Securities; Interest and Acquisition
Discount" in the Prospectus for a discussion of the application of the OID
rules if the Certificates are in fact issued at a greater than de minimis
discount or are treated as having been issued with OID under the OID
Regulations. For purposes of calculating OID, it is likely that the
Certificates will be treated as Pay-Through Securities.
POSSIBLE CLASSIFICATION OF THE CERTIFICATES AS A PARTNERSHIP OR ASSOCIATION
TAXABLE AS A CORPORATION
The opinion of Tax Counsel is not binding on the courts or the IRS. It
is possible that the IRS could assert that, for purposes of the Code, the
transaction contemplated by this Prospectus with respect to the Certificates
constitutes a sale of the Mortgage Loans (or an interest therein) to the
Certificate Owners and that the proper classification of the legal
relationship between the Transferor and the Certificate Owners resulting from
this transaction is that of a partnership (including a publicly traded
partnership), a publicly traded partnership treated as a corporation, or an
association taxable as a corporation. Since Tax Counsel has advised that the
Certificates will be treated as indebtedness in the hands of the
Certificateholders for U.S. federal income tax purposes, the Transferor will
not attempt to comply with U.S. federal income tax reporting requirements
applicable to partnerships or corporations as such requirements would apply
if the Certificates were treated as indebtedness.
If it were determined that this transaction created an entity classified
as a corporation (including a publicly traded partnership taxable as a
corporation), the Trust would be subject to U.S. federal income tax at
corporate income tax rates on the income it derives from the Mortgage Loans,
which would reduce the amounts available for distribution to the Certificate
Owners. Cash distributions to the Certificate Owners generally would be
treated as dividends for tax purposes to the extent of such corporation's
earnings and profits.
If the transaction were treated as creating a partnership between the
Certificate Owners and the Transferor, the partnership itself would not be
subject to U.S. federal income tax (unless it were to be characterized as a
publicly traded partnership taxable as a corporation); rather, the Transferor
and each Certificate Owner would be taxed individually on their respective
distributive shares of the partnership's income, gain, loss, deductions and
credits. The amount and timing of items of income and deductions of the
Certificate Owner could differ if the Certificates were held to constitute
partnership interests rather than indebtedness.
POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701(i) of the Code provides that any entity
(or a portion of an entity) that is a "taxable mortgage pool" will be
classified as a taxable corporation and will not be permitted to file a
consolidated U.S. federal income tax return with another corporation.
Subject to a grandfather provision for existing entities, any entity (or a
portion of any entity) will be a taxable mortgage pool if (i) substantially
all of its assets consist of debt instruments, more than 50% of which are
real estate mortgages, (ii) the entity is the obligor under debt obligations
with two or more maturities, and (iii) under the terms of the entity's debt
obligations (or an underlying arrangement), payments on such debt obligations
bear a relationship to the debt instruments held by the entity.
Assuming that all of the provisions of the Agreement, as in effect on
the date of issuance, are complied with, Tax Counsel is of the opinion that
the arrangement created by the Agreement will not be a taxable mortgage pool
under Section 7701(i) of the Code because only one class of indebtedness
secured by the Mortgage Loan is being issued.
The opinion of Tax Counsel is not binding on the IRS or the courts. If
the IRS were to contend successfully (or future regulations were to provide)
that the arrangement created by the Agreement is a taxable mortgage pool,
such arrangement would be subject to U.S. federal corporate income tax rate
on its taxable income generated by ownership of the Mortgage Loans. Such a
tax might reduce amounts available for distributions to Certificate Owners.
The amount of such tax would depend upon whether distributions to Certificate
Owners would be deductible as interest expense in computing the taxable
income of such an arrangement as a taxable mortgage pool.
FOREIGN INVESTORS
In general, subject to certain exceptions, interest (including OID) paid
on a Certificate to a nonresident alien individual, foreign corporation or
other non-United States person is not subject to U.S. federal income tax,
provided that such interest is not effectively connected with a trade or
business of the recipient in the United States and the Certificate Owner
provides the required foreign person information certification. See "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS--Tax Treatment of Foreign Investors" in the
Prospectus.
If the interests of the Certificate Owners were deemed to be partnership
interests, the partnership would be required, on a quarterly basis, to pay
withholding tax equal to the product, for each foreign partner, of such
foreign partner's distributive share of "effectively connected" income of the
partnership multiplied by the highest rate of tax applicable to that foreign
partner. In addition, such foreign partner would be subject to branch
profits tax. Each non-foreign partner would be required to certify to the
partnership that it is not a foreign person. The tax withheld from each
foreign partner would be credited against such foreign partner's U.S. income
tax liability.
If the Trust were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced by an
applicable tax treaty.
BACKUP WITHHOLDING
Certain Certificate Owners may be subject to backup withholding at the
rate of 31% with respect to interest paid on the Certificates if the
Certificate Owners, upon issuance, fail to supply the Trustee or his broker
with his taxpayer identification number, furnish an incorrect taxpayer
identification number, fail to report interest, dividends, or other
"reportable payments" (as defined in the Code) properly, or, under certain
circumstances, fail to provide the Trustee or his broker with a certified
statement, under penalty of perjury, that he is not subject to backup
withholding.
The Trustee will be required to report annually to the IRS, and to each
Certificateholder of record, the amount of interest paid (and OID accrued, if
any) on the Certificates (and the amount of interest withheld for U.S.
federal income taxes, if any) for each calendar year, except as to exempt
holders (generally, holders that are corporations, certain tax-exempt
organizations or nonresident aliens who provide certification as to their
status as nonresidents). As long as the only "Certificateholder" of record
is Cede, as nominee for DTC, Certificate Owners and the IRS will receive tax
and other information including the amount of interest paid on the
Certificates owned from Participants and Indirect Participants rather than
from the Trustee. (The Trustee, however, will respond to requests for
necessary information to enable Participants, Indirect Participants and
certain other persons to complete their reports.) Each non-exempt
Certificate Owner will be required to provide, under penalty of perjury, a
certificate on IRS Form W-9 containing his or her name, address, correct
Federal taxpayer identification number and a statement that he or she is not
subject to backup withholding. Should a non-exempt Certificate Owner fail to
provide the required certification, the Participants or Indirect Participants
will be required to withhold 31% of the interest (and principal) otherwise
payable to the holder, and remit the withheld amount to the IRS as a credit
against the holder's Federal income tax liability.
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Certificates under the tax laws of
any state. Investors considering an investment in the Certificates should
consult their own tax advisors regarding such tax consequences.
ALL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE
FEDERAL, STATE, LOCAL OR FOREIGN INCOME TAX CONSEQUENCES OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF THE CERTIFICATES.
ERISA CONSIDERATIONS
Any Plan fiduciary which proposes to cause a Plan to acquire any of the
Certificates should consult with its counsel with respect to the potential
consequences under the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the Code, of the Plans acquisition and ownership of
such Certificates. See "ERISA Considerations" in the Prospectus.
The U.S. Department of Labor has granted to Greenwich Capital Markets,
Inc. ("GCM") Prohibited Transaction Exemption 90-59 (the "Exemption") which
exempts from the application of the prohibited transaction rules transactions
relating to (1) the acquisition, sale and holding by Plans of certain
certificates representing an undivided interest in certain asset-backed
pass-through trusts, with respect to which GCM or any of its affiliates is
the sole underwriter or the manager or co-manager of the underwriting
syndicate; and (2) the servicing, operation and management of such
asset-backed pass-through trusts, provided that the general conditions and
certain other conditions set forth in the Exemption are satisfied. The
Exemption will apply to the acquisition, holding and resale of the
Certificates by a Plan provided that certain conditions (certain of which are
described below) are met.
Among the conditions which must be satisfied for the Exemption to apply
are the following:
(1) The acquisition of the Certificates by a Plan is on terms
(including the price for such Certificates) that are at least as
favorable to the investing Plan as they would be in an arm's-length
transaction with an unrelated party;
(2) The rights and interests evidenced by the Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust;
(3) The Certificates acquired by the Plan have received a rating
at the time of such acquisition that is in one of the three highest
generic rating categories from either Standard & Poor's Ratings
Services, Moody's Investors Service, Inc., Duff & Phelps Credit Rating
Co. or Fitch Investors Service, L.P.;
(4) The sum of all payments made to and retained by the
Underwriter in connection with the distribution of the Certificates
represents not more than reasonable compensation for underwriting such
Certificates; the sum of all payments made to and retained by the
Transferors pursuant to the sale of the Mortgage Loans to the Trust
represents not more than the fair market value of such Mortgage Loans;
the sum of all payments made to and retained by the Servicer represent
not more than reasonable compensation for the Servicers' services under
the Agreement and reimbursement of the Servicer's reasonable expenses in
connection therewith;
(5) The Trustee is not an affiliate of the Underwriter, the
Transferor, the Servicer, the (Letter of Credit) (Surety Bond) provider,
any borrower whose obligations under one or more Mortgage Loans
constitute more than 5% of the aggregate unamortized principal balance
of the assets in the Trust, or any of their respective affiliates (the
"Restricted Group"); and
(6) The Plan investing in the Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933, as amended.
The Underwriter believes that the Exemption will apply to the
acquisition and holding of the Certificates by Plans and that all conditions
of the Exemption other than those within the control of the investors will be
met.
Any Plan fiduciary considering whether to purchase any Certificates on
behalf of a Plan should consult with its counsel regarding the applicability
of the fiduciary responsibility and prohibited transaction provisions of
ERISA and the Code to such investment. Among other things, before purchasing
any Certificates, a fiduciary of a Plan subject to the fiduciary
responsibility provisions of ERISA or an employee benefit plan subject to the
prohibited transaction provisions of the Code should make its own
determination as to the availability of the exemptive relief provided in the
Exemption, and also consider the availability of any other prohibited
transaction exemptions.
Prospective institutional purchasers of the Certificates should consult
with their counsel regarding ERISA considerations associated with such a
purchase. Purchasers should analyze whether the decision may have an impact
with respect to purchases of the Certificates.
LEGAL INVESTMENT CONSIDERATIONS
(Although, as a condition to their issuance, the Certificates will be
rated in the highest rating category of each Rating Agency,) the Certificates
will not constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"), because not all
of the Mortgages securing the Mortgage Loans are first mortgages.
Accordingly, many institutions with legal authority to invest in comparably
rated securities based on first mortgage loans may not be legally authorized
to invest in the Certificates, which because they evidence interests in a
pool that includes junior mortgage loans are not "mortgage related
securities" under SMMEA. See "LEGAL INVESTMENT" in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated _________, 199_ (the "Underwriting Agreement"), among the
Depositor and Greenwich Capital Markets, Inc. (the "Underwriter"), the
Depositor has agreed to sell to the Underwriter and the Underwriter has
agreed to purchase from the Depositor all of the Certificates.
The Depositor has been advised by the Underwriter that it proposes to
initially offer the Certificates to the public at the offering price set
forth herein and to certain dealers at such price less a discount not in
excess of _____% of the Certificate denominations. The Underwriter may allow
and such dealers may reallow a discount not in excess of _____% of the
Certificate denominations to certain other dealers. After the initial public
offering, the public offering price, such concessions and such discounts may
be changed.
The Depositor is an affiliate of the Underwriter.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter against certain civil liabilities, including liabilities
under the Act.
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed
upon for the Depositor by Brown & Wood LLP, New York, New York and for the
Underwriters by Brown & Wood LLP, New York, New York.
RATINGS
It is a condition to issuance that the Certificates be rated at least
( ) by at least two nationally recognized statistical rating
organizations.
A securities rating addresses the likelihood of the receipt by
Certificateholders of distributions on the Mortgage Loans. The rating takes
into consideration the characteristics of the Mortgage Loans and the
structural, legal and tax aspects associated with the Certificates. The
ratings on the Certificates do not, however, constitute statements regarding
the likelihood or frequency of prepayments on the Mortgage Loans or the
possibility that Certificateholders might realize a lower than anticipated
yield.
(The ratings assigned to the Certificates will depend primarily upon the
creditworthiness of the (Letter of Credit) (Surety Bond) provider. Any
reduction in a rating assigned to the claims-paying ability of the (Letter of
Credit) (Surety Bond) provider below the ratings initially assigned to the
Certificates may result in a reduction of one or more of the ratings assigned
to the Certificates.)
The ratings assigned by Duff & Phelps Credit Rating Co. ("D&P") to
securities address the likelihood of the receipt by the certificateholders of
all distributions to which they are entitled under the transaction structure.
D&P's ratings reflect its analysis of the riskiness of the assets and its
analysis of the structure of the transaction as set forth in the operative
documents. D&P's ratings do not address the effect on yield on the
certificates attributable to prepayments or recoveries on the underlying
assets.
The ratings assigned by Fitch Investors Service, L.P. ("Fitch") to
certificates address the likelihood of the receipt of all distributions on
the mortgage loans by the related certificateholders under the agreements
pursuant to which such certificates are issued. Fitch's ratings take into
consideration the credit quality of the related pool, including any credit
support providers, structural and legal aspects associated with such
certificates, and the extent to which the payment stream on the pool is
adequate to make the payments required by such certificates. Fitch ratings
on such certificates do not, however, constitute a statement regarding
frequency of prepayments of the assets.
The ratings assigned by Moody's Investors Service, Inc. ("Moody's") to
certificates address the likelihood of the receipt by certificateholders of
all distributions to which such certificateholders are entitled. Moody's
ratings on certificates do not represent any assessment of the likelihood or
rate of principal prepayments. The ratings do not address the possibility
that certificateholders might suffer a lower than anticipated yield as a
result of prepayments.
The ratings assigned by Standard & Poor's Ratings Services, a Division
of The McGraw-Hill Companies ("Standard & Poor's"), to certificates address
the likelihood of the receipt of all distributions on the assets by the
related certificateholders under the agreements pursuant to which such
certificates are issued. Standard & Poor's ratings take into consideration
the credit quality of the related pool, including any credit support
providers, structural and legal aspects associated with such certificates,
and the extent to which the payment stream on such mortgage pool is adequate
to make payments required by such certificates. Standard & Poor's ratings on
such certificates do not, however, constitute a statement regarding frequency
of prepayments on the related assets. The letter "r" attached to a Standard
& Poor's rating highlights derivative, hybrid and certain other types of
certificates that Standard & Poor's believes may experience high volatility
or high variability in expected returns due to non-credit risks. The absence
of an "r" symbol in the rating of a class of certificates should not be taken
as an indication that such certificates will exhibit no volatility or
variability in total return.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
INDEX OF DEFINED TERMS
---------------------
Terms Page
- ----- ----
Accredited investor . . . . . . . . . . . . . . . . . . . . . . . . . . S-41
accredited investor . . . . . . . . . . . . . . . . . . . . . . . . . . S-41
Additional Balances . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-19
Adjustment Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Amortization Period . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
Assignment of Mortgage Loans . . . . . . . . . . . . . . . . . . . . . S-22
Beneficial owner . . . . . . . . . . . . . . . . . . . . . S-14, S-21, S-20
BIF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-14, S-24
Billing cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
Book-Entry Certificates . . . . . . . . . . . . . . . . . . S-13, S-21, S-20
Cede . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
CEDEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
Certificate Owners . . . . . . . . . . . . . . . . . . S-13, S-21, S-6, S-20
Certificate Principal Balance . . . . . . . . . . . . . . . . . . . . . S-19
Certificate Rate . . . . . . . . . . . . . . . . . . . . . . S-3, S-7, S-27
Certificateholder . . . . . . . . . . . . . . . . . . . . . S-14, S-21, S-20
Certificates . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-3, S-25
Citibank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
Collection Account . . . . . . . . . . . . . . . . . . . . . S-14, S-6, S-23
Collection Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Collections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
Combined Loan-to-Value Ratio . . . . . . . . . . . . . . . . . . . . . . S-4
Credit Limit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
Credit Limit Utilization Rate . . . . . . . . . . . . . . . . . . . . . S-18
Credit Line Agreements . . . . . . . . . . . . . . . . . . . S-3, S-17, S-19
Cut-Off Date . . . . . . . . . . . . . . . . . . . . . . S-1, S-3, S-4, S-18
Cut-Off Date Pool Balance . . . . . . . . . . . . . . . . . . . . . . . . S-4
Cut-Off Date Principal Balance . . . . . . . . . . . . . . . . . . S-3, S-19
D&P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-43
Debt-to-Gross Income Ratio . . . . . . . . . . . . . . . . . . . . . . S-14
Defaulted Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . . S-24
Defective Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . S-22
Definitive Certificate . . . . . . . . . . . . . . . . . . S-14, S-21, S-20
Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-3
Determination Date . . . . . . . . . . . . . . . . . . . . . . . . S-9, S-25
Distribution Account . . . . . . . . . . . . . . . . . . . . . . . . . S-14
Distribution Date . . . . . . . . . . . . . . . . . . . . . . S-1, S-7, S-25
DTC . . . . . . . . . . . . . . . . . . . . . . . . . . S-13, S-21, S-6, S-20
Early Amortization Event . . . . . . . . . . . . . . . . . . . . . . . S-28
Eligible Account . . . . . . . . . . . . . . . . . . . . . . . . S-14, S-23
Eligible Additional Mortgage Loan . . . . . . . . . . . . . . . . . . . S-22
Eligible Substitute Mortgage Loan . . . . . . . . . . . . . . . . . . . S-21
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-11, S-40
Euroclear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
European Depositaries . . . . . . . . . . . . . . . . . S-14, S-21, S-6, S-20
Events of Servicing Termination . . . . . . . . . . . . . . . . . . . . S-33
Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-40
First Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-12
Fitch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-43
GCM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-40
Home equity loans . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
Index Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-27
Index Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-15
Insolvency Event . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
Interest Collections . . . . . . . . . . . . . . . . . . . . . . . S-6, S-24
Interest Period . . . . . . . . . . . . . . . . . . . . . . . . . . S-7, S-27
Investor Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
Investor Percentage . . . . . . . . . . . . . . . . . . . . . . . . S-8, S-24
IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-38
LIBOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7, S-27
LIBOR Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . S-27
Liquidation Loss Amount . . . . . . . . . . . . . . . . . . . . . . . . S-24
Loan Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4, S-15
Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-15
Maximum Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-14
Moody's . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-43
Morgan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
Mortgage Loan Schedule . . . . . . . . . . . . . . . . . . . . . . . . S-21
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . S-1, S-3, S-19
Mortgage related securities . . . . . . . . . . . . . . . . . . . . S-9, S-11
Mortgaged Properties . . . . . . . . . . . . . . . . . . . . . . . S-3, S-19
Notice Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
OID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-38
OID Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-38
Original Principal Balance . . . . . . . . . . . . . . . . . . . . S-4, S-19
Percentage Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-11
Pool Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-5
Prime rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-15
Principal Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
Principal Balance . . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-4
Principal Collections . . . . . . . . . . . . . . . . . . . . . . . S-6, S-24
Private Securities . . . . . . . . . . . . . . . . . . . . . S-1, S-3, S-19
Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
Rating Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-11
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-25
Registration of Certificates . . . . . . . . . . . . . . . . . . . . . S-25
Related Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
Relevant Depositary . . . . . . . . . . . . . . . . . . . . S-14, S-21, S-20
Restricted Group . . . . . . . . . . . . . . . . . . . . . . . . . . . S-41
Reuters Screen LIBO Page . . . . . . . . . . . . . . . . . . . . . . . S-27
Revolving Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
SAIF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-14, S-24
Security Account . . . . . . . . . . . . . . . . . . . . . . . . . . . S-23
Security Principal Balance . . . . . . . . . . . . . . . . . . . . . . . S-5
Security Principal Balance Loss Deduction Amount . . . . . . . . . . . S-26
Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-7, S-13
Servicing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . S-10, S-17
Servicing Fee Rate . . . . . . . . . . . . . . . . . . . . S-10, S-17, S-31
SMMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-9, S-11, S-42
Standard & Poor's . . . . . . . . . . . . . . . . . . . . . . . . . . . S-43
Substitution Adjustment . . . . . . . . . . . . . . . . . . . . . . . . S-21
Successor Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
Tax Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
Transferor . . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-13, S-36
Transferor Interest . . . . . . . . . . . . . . . . . . . . . . . . S-4, S-20
Transferor Percentages . . . . . . . . . . . . . . . . . . . . . . . . S-20
Transferor Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . S-13
Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-3
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-10
Unallocated Principal Collections . . . . . . . . . . . . . . . . . . . S-25
Underwriter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-42
Underwriting Agreement . . . . . . . . . . . . . . . . . . . . . . . . S-42
Unpaid Interest Shortfall . . . . . . . . . . . . . . . . . . . . . . . S-26
(Letter of Credit) (Surety Bond) . . . . . . . . . . . . . . . . . . . . S-9
(Letter of Credit) (Surety Bond) Amount . . . . . . . . . . . . . . S-9, S-28
(Letter of Credit) (Surety Bond) Issuer . . . . . . . . . . . . . . . . . S-9
ANNEX I
<TABLE>
<CAPTION>
<S> <C>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE $(_____________)
UNDERWRITER. NEITHER THE DELIVERY OF THIS (APPROXIMATE)
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HOME EQUITY LOAN
HAS BEEN NO CHANGE SINCE THE DATE HEREOF. THIS ASSET BACKED
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CERTIFICATES, SERIES 199__-__
CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE
PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH SOLICITATION.
_______________
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT FINANCIAL ASSET SECURITIES CORP.
PAGE DEPOSITOR
Summary S-3 (______________________)
Risk Factors S-12 TRANSFEROR AND SERVICER
The Home Equity Lending Program S-13
Servicing of the Mortgage Loans S-16
Description of the Mortgage Loans S-18
Prepayment and Yield Considerations S-18
Description of the Certificates S-19
Description of the Purchase Agreement S-36
Use of Proceeds S-37
ERISA Considerations S-37
Legal Investment Considerations S-42
Underwriting S-42
Legal Matters S-42
Ratings S-42
PROSPECTUS
Prospectus Supplement or Current
Report on Form 8-K 2 PROSPECTUS SUPPLEMENT
Incorporation of Certain Documents by Reference 2 (_________, 199_)
Available Information 2 GREENWICH CAPITAL MARKETS, INC.
Reports to Securityholders 3
Summary of Terms 4
Risk Factors 12
The Trust Fund 17
Use of Proceeds 22
The Depositor 22
Loan Program 22
Description of the Securities 24
Credit Enhancement 33
Yield and Prepayment Considerations 38
The Agreements 41
Certain legal Aspects of the Loans 54
Certain Federal Icnome Tax Considerations 66
State Tax considerations 85
ERISA Considerations 85
Legal Investment 88
Method of Distribution 90
Legal matters 89
Financial Information 90
Rating 90
</TABLE>
SUBJECT TO COMPLETION, DATED JUNE 17, 1997
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 11.
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.
______ 1997
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: Paul D. Stevelman, Assistant Secretary, Financial Asset
Securities Corp., 600 Steamboat Road, Greenwich, Connecticut 06830, telephone
number (203) 625-2756. The Depositor has determined that its financial
statements are not material to the offering of any Securities.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Securities. This Prospectus, which forms a part
of the Registration Statement, and the Prospectus Supplement relating to each
Series of Securities contain summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the Rules and Regulations of
the Commission. For further information, reference is made to such
Registration Statement and the exhibits thereto. Such Registration Statement
and exhibits can be inspected and copied at prescribed rates at the public
reference facilities maintained by the Commission at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional
Offices located as follows: Midwest Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional Office, 7
World Trade Center, Suite 1300, New York, New York 10048. In addition, the
Securities and Exchange Commission (the "Commission") maintains a Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Depositor, that file
electronically with the Commission.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any
Prospectus Supplement with respect hereto and, if given or made, such
information or representations must not be relied upon. This Prospectus and
any Prospectus Supplement with respect hereto do not constitute an offer to
sell or a solicitation of an offer to buy any securities other than the
Securities offered hereby and thereby nor an offer of the Securities to any
person in any state or other jurisdiction in which such offer would be
unlawful. The delivery of this Prospectus at any time does not imply that
information herein is correct as of any time subsequent to its date.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the related Trust Fund for a
Series of Securities are required under an Agreement to be forwarded to
Securityholders. However, such reports will neither be examined nor reported
on by an independent public accountant. See "Description of the Securities--
Reports to Securityholders".
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related
Prospectus Supplement with respect to the Series offered thereby and to the
related Agreement (as such term is defined below) which will be prepared in
connection with each Series of Securities. Unless otherwise specified,
capitalized terms used and not defined in this Summary of Terms have the
meanings given to them in this Prospectus and in the related Prospectus
Supplement.
Title of Securities Asset Backed Certificates (the "Certificates") and
Asset Backed Notes (the "Notes" and, together with
the Certificates, the "Securities"), which are
issuable in Series.
Depositor Financial Asset Securities Corp., a Delaware
corporation, an indirect limited purpose finance
subsidiary of National Westminster Bank Plc and an
affiliate of Greenwich Capital Markets, Inc. See
"The Depositor" herein.
Trustee The trustee (the "Trustee") for each Series of
Securities will be specified in the related
Prospectus Supplement. See "The Agreements" herein
for a description of the Trustee's rights and
obligations.
Master Servicer The entity or entities named as Master Servicer (the
"Master Servicer") will be specified in the related
Prospectus Supplement. See "The Agreements--Certain
Matters Regarding the Master Servicer and the
Depositor".
Trust Fund Assets Assets of the Trust Fund for a Series of Securities
will include certain assets (the "Trust Fund
Assets") which will primarily consist of (a) Loans
or (b) Private Asset Backed Securities, together
with payments in respect of such Trust Fund Assets
and certain other accounts, obligations or
agreements, in each case as specified in the related
Prospectus Supplement. The Loans will be collected
in a pool (each, a "Pool") as of the first day of
the month of the issuance of the related Series of
Securities or such other date specified in the
Prospectus Supplement (the "Cut-off Date"). Trust
Fund assets also may include insurance policies,
cash accounts, reinvestment income, guaranties,
letters of credit or other assets to the extent
described in the related Prospectus Supplement. See
"Credit Enhancement". In addition, if the related
Prospectus Supplement so provides, the related Trust
Funds' assets will include the funds on deposit in
an account (a "Pre-Funding Account") which will be
used to purchase additional Loans during the period
specified in the related Prospectus Supplement. See
"The Agreements--Pre-Funding Accounts".
A. Loans The Loans will consist of (i) closed-end loans (the
"Closed-End Loans") and/or revolving home equity
loans or certain balances therein (the "Revolving
Credit Line Loans", together with the Closed-End
Loans, the "Home Equity Loans"), and (ii) home
improvement installment sales contracts and
installment loan agreements (the "Home Improvement
Contracts"). The Home Equity Loans and the Home
Improvement Contracts are collectively referred to
herein as the "Loans". All Loans will have been
purchased by the Depositor, either directly or
through an affiliate, from one or more Sellers.
As specified in the related Prospectus Supplement,
the Home Equity Loans will, and the Home Improvement
Contracts may, be secured by mortgages or deeds of
trust or other similar security instruments creating
a lien on a mortgaged property (the "Mortgaged
Property"), which may be subordinated to one or more
senior liens on the Mortgaged Property, as described
in the related Prospectus Supplement. As specified
in the related Prospectus Supplement, Home
Improvement Contracts may be unsecured or secured by
purchase money security interests in the Home
Improvements financed thereby. The Mortgaged
Properties and the Home Improvements are
collectively referred to herein as the "Properties".
B. Private Asset-
Backed Securities Private Asset Backed Securities may include (a)
pass-through certificates representing beneficial
interests in certain loans and/or (b) collateralized
obligations secured by such loans. Private Asset
Backed Securities may include stripped securities
representing an undivided interest in all or a part
of either the principal distributions (but not the
interest distributions) or the interest
distributions (but not the principal distributions)
or in some specified portion of the principal and
interest distributions (but not all of such
distributions) on certain loans. Although
individual loans underlying a Private Asset Backed
Security may be insured or guaranteed by the United
States or an agency or instrumentality thereof, they
need not be, and the Private Asset Backed Securities
themselves will not be so insured or guaranteed.
Payments on the Private Asset Backed Securities will
be distributed directly to the Trustee as registered
owner of such Private Asset Backed Securities. See
"The Trust Fund--Private Asset Backed Securities".
Description of
the Securities Each Security will represent a beneficial ownership
interest in, or will be secured by the assets of, a
Trust Fund created by the Depositor pursuant to an
Agreement among the Depositor, the Master Servicer
and the Trustee for the related Series. The
Securities of any Series may be issued in one or
more classes as specified in the related Prospectus
Supplement. A Series of Securities may include one
or more classes of senior Securities (collectively,
the "Senior Securities") and one or more classes of
subordinate Securities (collectively, the
"Subordinated Securities"). Certain Series or
classes of Securities may be covered by insurance
policies or other forms of credit enhancement, in
each case as described herein and in the related
Prospectus Supplement.
One or more classes of Securities of each Series (i)
may be entitled to receive distributions allocable
only to principal, only to interest or to any
combination thereof; (ii) may be entitled to receive
distributions only of prepayments of principal
throughout the lives of the Securities or during
specified periods; (iii) may be subordinated in the
right to receive distributions of scheduled payments
of principal, prepayments of principal, interest or
any combination thereof to one or more other classes
of Securities of such Series throughout the lives of
the Securities or during specified periods; (iv) may
be entitled to receive such distributions only after
the occurrence of events specified in the related
Prospectus Supplement; (v) may be entitled to
receive distributions in accordance with a schedule
or formula or on the basis of collections from
designated portions of the assets in the related
Trust Fund; (vi) as to Securities entitled to
distributions allocable to interest, may be entitled
to receive interest at a fixed rate or a rate that
is subject to change from time to time; and (vii) as
to Securities entitled to distributions allocable to
interest, may be entitled to distributions allocable
to interest only after the occurrence of events
specified in the related Prospectus Supplement and
may accrue interest until such events occur, in each
case as specified in the related Prospectus
Supplement. The timing and amounts of such
distributions may vary among classes, over time, or
otherwise as specified in the related Prospectus
Supplement.
Distributions on
the Securities Distributions on the Securities entitled thereto
will be made monthly or at such other intervals and
on the dates specified in the related Prospectus
Supplement (each, a "Distribution Date") out of the
payments received in respect of the assets of the
related Trust Fund or Funds or other assets pledged
for the benefit of the Securities as specified in
the related Prospectus Supplement. The amount
allocable to payments of principal and interest on
any Distribution Date will be determined as
specified in the related Prospectus Supplement.
Allocations of distributions among Securityholders
of a single class shall be set forth in the related
Prospectus Supplement.
Unless otherwise specified in the related Prospectus
Supplement, the aggregate original principal balance
of the Securities will not exceed the aggregate
distributions allocable to principal that such
Securities will be entitled to receive. If
specified in the related Prospectus Supplement, the
Securities will have an aggregate original principal
balance equal to the aggregate unpaid principal
balance of the Trust Fund Assets as of the first day
of the month of creation of the Trust Fund and will
bear interest in the aggregate at a rate equal to
the interest rate borne by the underlying Loans (the
"Loan Rate") and/or Private Asset Backed Securities,
net of the aggregate servicing fees and any other
amounts specified in the related Prospectus
Supplement (the "Pass-Through Rate"). If specified
in the related Prospectus Supplement, the aggregate
original principal balance of the Securities and
interest rates on the classes of Securities will be
determined based on the cash flow on the Trust Fund
Assets.
The rate at which interest will be passed through to
holders of each class of Securities entitled thereto
may be a fixed rate or a rate that is subject to
change from time to time from the time and for the
periods, in each case as specified in the related
Prospectus Supplement. Any such rate may be
calculated on a loan-by-loan, weighted average,
notional amount or other basis, in each case as
described in the related Prospectus Supplement.
Compensating
Interest If so specified in the related Prospectus
Supplement, the Master Servicer will be required to
remit to the Trustee, with respect to each Loan in
the related Trust Fund as to which a principal
prepayment in full or a principal payment which is
in excess of the scheduled monthly payment and is
not intended to cure a delinquency was received
during any Due Period, an amount, from and to the
extent of amounts otherwise payable to the Master
Servicer as servicing compensation, equal to (i) the
excess, if any, of (a) 30 days' interest on the
principal balance of the related Loan at the Loan
Rate net of the per annum rate at which the Master
Servicer's servicing fee accrues, over (b) the
amount of interest actually received on such Loan
during such Due Period, net of the Master Servicer's
servicing fee or (ii) such other amount as described
in the related Prospectus Supplement. See
"DescriptionoftheSecurities--Compensating Interest".
Credit Enhancement The assets in a Trust Fund or the Securities of one
or more classes in the related Series may have the
benefit of one or more types of credit enhancement
as described in the related Prospectus Supplement.
The protection against losses afforded by any such
credit support may be limited. The type,
characteristics and amount of credit enhancement
will be determined based on the characteristics of
the Loans and/or Private Asset Backed Securities
underlying or comprising the Trust Fund Assets and
other factors and will be established on the basis
of requirements of each Rating Agency rating the
Securities of such Series. See "Credit
Enhancement."
A. Subordination The rights of the holders of the Subordinated
Securities of a Series to receive distributions with
respect to the assets in the related Trust Fund will
be subordinated to such rights of the holders of the
Senior Securities of the same Series to the extent
described in the related Prospectus Supplement.
This subordination is intended to enhance the
likelihood of regular receipt by holders of Senior
Securities of the full amount of monthly payments of
principal and interest due them. The protection
afforded to the holders of Senior Securities of a
Series by means of the subordination feature will be
accomplished by (i) the preferential right of such
holders to receive, prior to any distribution being
made in respect of the related Subordinated
Securities, the amounts of interest and/or principal
due them on each Distribution Date out of the funds
available for distribution on such date in the
related Security Account and, to the extent
described in the related Prospectus Supplement, by
the right of such holders to receive future
distributions on the assets in the related Trust
Fund that would otherwise have been payable to the
holders of Subordinated Securities; (ii) reducing
the ownership interest of the related Subordinated
Securities; (iii) a combination of clauses (i) and
(ii) above; or (iv) as otherwise described in the
related Prospectus Supplement. If so specified in
the related Prospectus Supplement, subordination may
apply only in the event of certain types of losses
not covered by other forms of credit support, such
as hazard losses not covered by standard hazard
insurance policies, losses due to the bankruptcy or
fraud of the borrower. The related Prospectus
Supplement will set forth information concerning,
among other things, the amount of subordination of a
class or classes of Subordinated Securities in a
Series, the circumstances in which such
subordination will be applicable, and the manner, if
any, in which the amount of subordination will
decrease over time.
B. Reserve Account One or more reserve accounts (each, a "Reserve
Account") may be established and maintained for each
Series. The related Prospectus Supplement will
specify whether or not such Reserve Accounts will be
included in the corpus of the Trust Fund for such
Series and will also specify the manner of funding
the related Reserve Accounts and the conditions
under which the amounts in any such Reserve Accounts
will be used to make distributions to holders of
Securities of a particular class or released from
the related Reserve Account.
C. Special Hazard Insurance
Policy Certain classes of Securities may have the benefit
of a Special Hazard Insurance Policy. Certain
physical risks that are not otherwise insured
against by standard hazard insurance policies may be
covered by a Special Hazard Insurance Policy or
Policies. Each Special Hazard Insurance Policy will
be limited in scope and will cover losses pursuant
to the provisions of each such Special Hazard
Insurance Policy as described in the related
Prospectus Supplement.
D. Bankruptcy Bond One or more bankruptcy bonds (each a "Bankruptcy
Bond") may be obtained covering certain losses
resulting from action which may be taken by a
bankruptcy court in connection with a Loan. The
level of coverage and the limitations in scope of
each Bankruptcy Bond will be specified in the
related Prospectus Supplement.
E. Loan Pool
Insurance Policy A mortgage pool insurance policy or policies may be
obtained and maintained for Loans relating to any
Series, which shall be limited in scope, covering
defaults on the related Loans in an initial amount
equal to a specified percentage of the aggregate
principal balance of all Loans included in the Pool
as of the Cut-off Date.
F. FHA Insurance If specified in the related Prospectus Supplement,
(i) all or a portion of the Loans in a Pool may be
insured by the Federal Housing Administration (the
"FHA") and/or (ii) all or a portion of the Loans may
be partially guaranteed by the Department of
Veterans' Affairs (the "VA"). See "Certain Legal
Considerations--Title I Program".
G. Cross-Support If specified in the related Prospectus Supplement,
the beneficial ownership of separate groups of
assets included in a Trust Fund may be evidenced by
separate classes of the related Series of
Securities. In such case, credit support may be
provided by a cross-support feature which requires
that distributions be made with respect to
Securities evidencing beneficial ownership of one or
more asset groups prior to distributions to
Subordinated Securities evidencing a beneficial
ownership interest in, or secured by, other asset
groups within the same Trust Fund.
If specified in the related Prospectus Supplement,
the coverage provided by one or more forms of credit
support may apply concurrently to two or more
separate Trust Funds. If applicable, the related
Prospectus Supplement will identify the Trust Funds
to which such credit support relates and the manner
of determining the amount of the coverage provided
thereby and of the application of such coverage to
the identified Trust Funds.
H. Other Arrangements Other arrangements as described in the related
Prospectus Supplement including, but not limited to,
one or more letters of credit, surety bonds, other
insurance or third-party guarantees may be used to
provide coverage for certain risks of defaults or
various types of losses.
Advances The Master Servicer and, if applicable, each
mortgage servicing institution that services a Loan
in a Pool on behalf of the Master Servicer (a
"Sub-Servicer") may be obligated to advance amounts
(each, an "Advance") corresponding to delinquent
interest and/or principal payments on such Loan
until the date, as specified in the related
Prospectus Supplement, following the date on which
the related Property is sold at a foreclosure sale
or the related Loan is otherwise liquidated. Any
obligation to make Advances may be subject to
limitations as specified in the related Prospectus
Supplement. If so specified in the related
Prospectus Supplement, Advances may be drawn from a
cash account available for such purpose as described
in such Prospectus Supplement.
Any such obligation of the Master Servicer or a
Sub-Servicer to make Advances may be supported by
the delivery to the Trustee of a support letter from
an affiliate of the Master Servicer or such
Sub-Servicer or an unaffiliated third party (a
"Support Servicer") guaranteeing the payment of such
Advances by the Master Servicer or Sub-Servicer, as
the case may be, as specified in the related
Prospectus Supplement.
In the event the Master Servicer, Support Servicer
or Sub-Servicer fails to make a required Advance,
the Trustee may be obligated to advance such amounts
otherwise required to be advanced by the Master
Servicer, Support Servicer or Sub-Servicer. See
"Description of the Securities--Advances."
Optional Termination The Master Servicer or the party specified in the
related Prospectus Supplement, including the holder
of the residual interest in a REMIC, may have the
option to effect early retirement of a Series of
Securities through the purchase of the Trust Fund
Assets and other assets in the related Trust Fund
under the circumstances and in the manner described
in "The Agreements--Termination; Optional
Termination" herein and in the related Prospectus
Supplement.
Legal Investment The Prospectus Supplement for each series of
Securities will specify which, if any, of the
classes of Securities offered thereby constitute
"mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984
("SMMEA"). Classes of Securities that qualify as
"mortgage related securities" will be legal
investments for certain types of institutional
investors to the extent provided in SMMEA, subject,
in any case, to any other regulations which may
govern investments by such institutional investors.
Institutions whose investment activities are subject
to review by federal or state authorities should
consult with their counsel or the applicable
authorities to determine whether an investment in a
particular class of Securities (whether or not such
class constitutes a "mortgage related security")
complies with applicable guidelines, policy
statements or restrictions. See "Legal Investment."
Certain Material
Federal Income Tax
Consequences The material federal income tax consequences to
Securityholders will vary depending on whether one
or more elections are made to treat the Trust Fund
or specified portions thereof as a real estate
mortgage investment conduit ("REMIC") under the
provisions of the Internal Revenue Code of 1986, as
amended (the "Code"). The Prospectus Supplement for
each Series of Securities will specify whether such
an election will be made. See "Certain Material
Federal Income Tax Consequences".
ERISA Considerations A fiduciary of any employee benefit plan or other
retirement plan or arrangement subject to the
Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or the Code should carefully
review with its legal advisors whether the purchase
or holding of Securities could give rise to a
transaction prohibited or not otherwise permissible
under ERISA or the Code. See "ERISA
Considerations". Certain classes of Securities may
not be transferred unless the Trustee and the
Depositor are furnished with a letter of
representation or an opinion of counsel to the
effect that such transfer will not result in a
violation of the prohibited transaction provisions
of ERISA and the Code and will not subject the
Trustee, the Depositor or the Master Servicer to
additional obligations. See "Description of the
Securities-General" and "ERISA Considerations".
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
LIMITED LIQUIDITY
There will be no market for the Securities of any Series prior to the
issuance thereof, and there can be no assurance that a secondary market will
develop or, if it does develop, that it will provide Securityholders with
liquidity of investment or will continue for the life of the Securities of
such Series.
LIMITED ASSETS
The Depositor does not have, nor is it expected to have, any significant
assets. Unless otherwise specified in the related Prospectus Supplement, the
Securities of a Series will be payable solely from the Trust Fund for such
Securities and will not have any claim against or security interest in the
Trust Fund for any other Series. There will be no recourse to the Depositor
or any other person for any failure to receive distributions on the
Securities. Further, at the times set forth in the related Prospectus
Supplement, certain Trust Fund Assets and/or any balance remaining in the
Security Account immediately after making all payments due on the Securities
of such Series, after making adequate provision for future payments on
certain classes of Securities and after making any other payments specified
in the related Prospectus Supplement, may be promptly released or remitted to
the Depositor, the Servicer, any credit enhancement provider or any other
person entitled thereto and will no longer be available for making payments
to Securityholders. Consequently, holders of Securities of each Series must
rely solely upon payments with respect to the Trust Fund Assets and the other
assets constituting the Trust Fund for a Series of Securities, including, if
applicable, any amounts available pursuant to any credit enhancement for such
Series, for the payment of principal of and interest on the Securities of
such Series.
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer or any of their respective affiliates. The
only obligations, if any, of the Depositor with respect to the Trust Fund
Assets or the Securities of any Series will be pursuant to certain
representations and warranties. The Depositor does not have, and is not
expected in the future to have, any significant assets with which to meet any
obligation to repurchase Trust Fund Assets with respect to which there has
been a breach of any representation or warranty. If, for example, the
Depositor were required to repurchase a Loan, its only sources of funds to
make such repurchase would be from funds obtained (i) from the enforcement of
a corresponding obligation, if any, on the part of the Seller or originator
of such Loan, or (ii) from a Reserve Account or similar credit enhancement
established to provide funds for such repurchases. The Master Servicer's
servicing obligations under the related Agreement may include its limited
obligation to make certain advances in the event of delinquencies on the
Loans, but only to the extent deemed recoverable. To the extent described in
the related Prospectus Supplement, the Depositor or Master Servicer will be
obligated under certain limited circumstances to purchase or act as a
remarketing agent with respect to a convertible Loan upon conversion to a
fixed rate.
CREDIT ENHANCEMENT
Although credit enhancement is intended to reduce the risk of delinquent
payments or losses to holders of Securities entitled to the benefit thereof,
the amount of such credit enhancement will be limited, as set forth in the
related Prospectus Supplement, and may decline and could be depleted under
certain circumstances prior to the payment in full of the related Series of
Securities, and as a result Securityholders may suffer losses. Moreover,
such credit enhancement may not cover all potential losses or risks. For
example, credit enhancement may or may not cover fraud or negligence by a
loan originator or other parties. See "Credit Enhancement".
PREPAYMENT AND YIELD CONSIDERATIONS
The timing of principal payments of the Securities of a Series will be
affected by a number of factors, including the following: (i) the extent of
prepayments of the Loans and, in the case of Private Asset Backed Securities,
the underlying loans related thereto, comprising the Trust Fund, which
prepayments may be influenced by a variety of factors, (ii) the manner of
allocating principal and/or payments among the classes of Securities of a
Series as specified in the related Prospectus Supplement, (iii) the exercise
by the party entitled thereto of any right of optional termination and (iv)
the rate and timing of payment defaults and losses incurred with respect to
the Trust Fund Assets. Prepayments of principal may also result from
repurchases of Trust Fund Assets due to material breaches of the Depositor's
or the Master Servicer's representations and warranties, as applicable. The
yield to maturity experienced by a holder of Securities may be affected by
the rate of prepayment of the Loans comprising or underlying the Trust Fund
Assets. See "Yield and Prepayment Considerations".
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending
two or more days prior to a Distribution Date, the effective yield to
Securityholders will be reduced from the yield that would otherwise be
obtainable if interest payable on the Security were to accrue through the day
immediately preceding each Distribution Date, and the effective yield (at
par) to Securityholders will be less than the indicated coupon rate. See
"Description of the Securities - Distributions of Interest".
BALLOON PAYMENTS
Certain of the Loans as of the Cut-off Date may not be fully amortizing
over their terms to maturity and, thus, will require substantial principal
payments (i.e., balloon payments) at their stated maturity. Loans with
balloon payments involve a greater degree of risk because the ability of a
borrower to make a balloon payment typically will depend upon its ability
either to timely refinance the loan or to timely sell the related Property.
The ability of a borrower to accomplish either of these goals will be
affected by a number of factors, including the level of available mortgage
rates at the time of sale or refinancing, the borrower's equity in the
related Property, the financial condition of the borrower and tax laws.
NATURE OF MORTGAGES
There are several factors that could adversely affect the value of
Properties such that the outstanding balance of the related Loans, together
with any senior financing on the Properties, if applicable, would equal or
exceed the value of the Properties. Among the factors that could adversely
affect the value of the Properties are an overall decline in the residential
real estate market in the areas in which the Properties are located or a
decline in the general condition of the Properties as a result of failure of
borrowers to maintain adequately the Properties or of natural disasters that
are not necessarily covered by insurance, such as earthquakes and floods. In
the case of Home Equity Loans, such decline could extinguish the value of the
interest of a junior mortgagee in the Property before having any effect on
the interest of the related senior mortgagee. If such a decline occurs, the
actual rates of delinquencies, foreclosures and losses on all Loans could be
higher than those currently experienced in the mortgage lending industry in
general.
Even assuming that the Properties provide adequate security for the
Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Loans and corresponding delays in the receipt of
related proceeds by Securityholders could occur. An action to foreclose on a
Property securing a Loan is regulated by state statutes and rules and is
subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a Property. In the event of a
default by a borrower, these restrictions, among other things, may impede the
ability of the Master Servicer to foreclose on or sell the Property or to
obtain liquidation proceeds sufficient to repay all amounts due on the
related Loan. In addition, the Master Servicer will be entitled to deduct
from related liquidation proceeds all expenses reasonably incurred in
attempting to recover amounts due on defaulted Loans and not yet repaid,
including payments to senior lienholders, legal fees and costs of legal
action, real estate taxes and maintenance and preservation expenses.
Liquidation expenses with respect to defaulted loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in
realizing upon a defaulted loan having a small remaining principal balance as
it would in the case of a defaulted loan having a large remaining principal
balance, the amount realized after expenses of liquidation would be smaller
as a percentage of the outstanding principal balance of the small loan than
would be the case with the defaulted loan having a large remaining principal
balance. Since the mortgages and deeds of trust securing the Home Equity
Loans will be primarily junior liens subordinate to the rights of the
mortgagee under the related senior mortgage(s) or deed(s) of trust, the
proceeds from any liquidation, insurance or condemnation proceeds will be
available to satisfy the outstanding balance of such junior lien only to the
extent that the claims of such senior mortgagees have been satisfied in full,
including any related foreclosure costs. In addition, a junior mortgagee may
not foreclose on the property securing a junior mortgage unless it forecloses
subject to any senior mortgage, in which case it must either pay the entire
amount due on any senior mortgage to the related senior mortgagee at or prior
to the foreclosure sale or undertake the obligation to make payments on any
such senior mortgage in the event the mortgagor is in default thereunder.
The Trust Fund will not have any source of funds to satisfy any senior
mortgages or make payments due to any senior mortgagees.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of certain
originators and servicers of Loans. In addition, most states have other
laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices which
may apply to the origination, servicing and collection of the Loans.
Depending on the provisions of the applicable law and the specific facts and
circumstances involved, violations of these laws, policies and principles may
limit the ability of the Master Servicer to collect all or part of the
principal of or interest on the Loans, may entitle the borrower to a refund
of amounts previously paid and, in addition, could subject the Master
Servicer to damages and administrative sanctions. See "Certain Legal Aspects
of the Loans".
ENVIRONMENTAL RISKS
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and
safety. In certain circumstances, these laws and regulations impose
obligations on owners or operators of residential properties such as those
subject to the Loans. The failure to comply with such laws and regulations
may result in fines and penalties.
Under various federal, state and local laws and regulations, an owner or
operator of real estate may be liable for the costs of addressing hazardous
substances on, in or beneath such property and related costs. Such liability
could exceed the value of the property and the aggregate assets of the owner
or operator. In addition, persons who transport or dispose of hazardous
substances, or arrange for the transportation, disposal or treatment of
hazardous substances, at off-site locations may also be held liable if there
are releases or threatened releases of hazardous substances at such off-site
locations.
Under the laws of some states and under the federal Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"),
contamination of property may give rise to a lien on the property to assure
the payment of the costs of clean-up. In several states, such a lien has
priority over the lien of an existing mortgage against such property.
Under the laws of some states, and under CERCLA and the federal Solid
Waste Disposal Act, there is a possibility that a lender may be held liable
as an "owner" or "operator" for costs of addressing releases or threatened
releases of hazardous substances at a property, or releases of petroleum from
an underground storage tank, under certain circumstances. See "Certain Legal
Aspects of the Loans--Environmental Risks."
CERTAIN OTHER LEGAL CONSIDERATIONS REGARDING THE LOANS
The Loans may also be subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Loans;
(ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of
age, race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act, in the extension of credit;
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience;
and
(iv) for Loans that were originated or closed after November 7,
1989, the Home Equity Loan Consumer Protection Act of 1988, which
requires additional application disclosures, limits changes that may be
made to the loan documents without the borrower's consent and restricts
a lender's ability to declare a default or to suspend or reduce a
borrower's credit limit to certain enumerated events.
The Riegle Act. Certain mortgage loans are subject to the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "Riegle
Act") which incorporates the Home Ownership and Equity Protection Act of
1994. These provisions impose additional disclosure and other requirements
on creditors with respect to non-purchase money mortgage loans with high
interest rates or high up-front fees and charges. The provisions of the
Riegle Act apply on a mandatory basis to all mortgage loans originated on or
after October 1, 1995. These provisions can impose specific statutory
liabilities upon creditors who fail to comply with their provisions and may
affect the enforceability of the related loans. In addition, any assignee of
the creditor would generally be subject to all claims and defenses that the
consumer could assert against the creditor, including, without limitation,
the right to rescind the mortgage loan.
The Home Improvement Contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission
and other similar federal and state statutes and regulations (collectively,
the "Holder in Due Course Rules"), which protect the homeowner from defective
craftsmanship or incomplete work by a contractor. These laws permit the
obligor to withhold payment if the work does not meet the quality and
durability standards agreed to by the homeowner and the contractor. The
Holder in Due Course Rules have the effect of subjecting any assignee of the
seller in a consumer credit transaction to all claims and defenses which the
obligor in the credit sale transaction could assert against the seller of the
goods.
Violations of certain provisions of these federal laws may limit the
ability of the Master Servicer to collect all or part of the principal of or
interest on the Loans and in addition could subject the Trust Fund to damages
and administrative enforcement. See "Certain Legal Aspects of the Loans".
RATING OF THE SECURITIES
It will be a condition to the issuance of a class of Securities that
they be rated in one of the four highest rating categories by the Rating
Agency identified in the related Prospectus Supplement. Any such rating
would be based on among other things, the adequacy of the value of the Trust
Fund Assets and any credit enhancement with respect to such class and will
respect such Rating Agency's assessment solely of the likelihood that holders
of a class of Securities will receive payments to which such Securityholders
are entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments on the related Loans
will be made, the degree to which the rate of such prepayments might differ
from that originally anticipated or the likelihood of early optional
termination of the Series of Securities. Such rating shall not be deemed a
recommendation to purchase, hold or sell Securities, inasmuch as it does not
address market price or suitability for a particular investor. Such rating
will not address the possibility that prepayment at higher or lower rates
than anticipated by an investor may cause such investor to experience a lower
than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios.
There is also no assurance that any such rating will remain in effect
for any given period of time or that it may not be lowered or withdrawn
entirely by the Rating Agency in the future if in its judgment circumstances
in the future so warrant. In addition to being lowered or withdrawn due to
any erosion in the adequacy of the value of the Trust Fund Assets or any
credit enhancement with respect to a Series, such rating might also be
lowered or withdrawn, among other reasons, because of an adverse change in
the financial or other condition of a credit enhancement provider or a change
in the rating of such credit enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a class of Securities will be determined on the basis of
criteria established by each Rating Agency rating classes of such Series.
Such criteria are sometimes based upon an actuarial analysis of the behavior
of similar loans in a larger group. Such analysis is often the basis upon
which each Rating Agency determines the amount of credit enhancement required
with respect to each such class. There can be no assurance that the
historical data supporting any such actuarial analysis will accurately
reflect future experience nor any assurance that the data derived from a
large pool of similar loans accurately predicts the delinquency, foreclosure
or loss experience of any particular pool of Loans. No assurance can be
given that the values of any Properties have remained or will remain at their
levels on the respective dates of origination of the related Loans. If the
residential real estate markets should experience an overall decline in
property values such that the outstanding principal balances of the Loans in
a particular Trust Fund and any secondary financing on the related Properties
become equal to or greater than the value of the Properties, the rates of
delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. In addition, adverse
economic conditions (which may or may not affect real property values) may
affect the timely payment by mortgagors of scheduled payments of principal
and interest on the Loans and, accordingly, the rates of delinquencies,
foreclosures and losses with respect to any Trust Fund. To the extent that
such losses are not covered by credit enhancement, such losses will be borne,
at least in part, by the holders of one or more classes of the Securities of
the related Series. See "Rating".
BOOK-ENTRY REGISTRATION
If issued in book-entry form, such registration may reduce the liquidity
of the Securities in the secondary trading market since investors may be
unwilling to purchase Securities for which they cannot obtain physical
certificates. Since transactions in Securities can be effected only through
the Depository Trust Company ("DTC"), participating organizations
("Participants"), Financial Intermediaries and certain banks, the ability of
a Securityholder to pledge a Security to persons or entities that do not
participate in the DTC system, or otherwise to take actions in respect of
such Securities, may be limited due to lack of a physical certificate
representing the Securities.
In addition, Securityholders may experience some delay in their receipt
of distributions of interest and principal on the Securities since
distributions are required to be forwarded by the Trustee to DTC and DTC will
then be required to credit such distributions to the accounts of Participants
which thereafter will be required to credit them to the accounts of
Securityholders either directly or indirectly through Financial
Intermediaries. See "Description of the Securities--Book-Entry Registration
of Securities".
PRE-FUNDING ACCOUNTS
If so provided in the related Prospectus Supplement, on the Closing Date
the Depositor will deposit an amount (the "Pre-Funded Amount") specified in
such Prospectus Supplement into the Pre-Funding Account. In no event shall
the Pre-Funded Amount exceed 25% of the initial aggregate principal amount of
the Certificates and/or Notes of the related Series of Securities. The Pre-
Funded Amount will be used to purchase Loans ("Subsequent Loans") in a period
from the Closing Date to a date not more than three months after the Closing
Date (such period, the "Funding Period") from the Depositor (which, in turn,
will acquire such Subsequent Loans from the Seller or Sellers specified in
the related Prospectus Supplement). To the extent that the entire Pre-Funded
Amount has not been applied to the purchase of Subsequent Loans by the end of
the related Funding Period, any amounts remaining in the Pre-Funding Account
will be distributed as a prepayment of principal to Certificateholders and/or
Noteholders on the Distribution Date immediately following the end of the
Funding Period, in the amounts and pursuant to the priorities set forth in
the related Prospectus Supplement.
LOWER CREDIT QUALITY TRUST FUND ASSETS
Certain of the Trust Fund Assets underlying or securing, as the case may
be, a Series of Securities may have been made to lower credit quality
borrowers who have marginal credit and fall into one of two categories:
customers with moderate income, limited assets and other income
characteristics which cause difficulty in borrowing from banks and other
traditional sources of lenders, and customers with a derogatory credit report
including a history of irregular employment, previous bankruptcy filings,
repossession of property, charged-off loans and garnishment of wages. The
average interest rate charged on such Trust Fund Assets made to these types
of borrowers is generally higher than that charged by lenders that typically
impose more stringent credit requirements. The payment experience on loans
made to these types of borrowers is likely to be different (i.e., greater
likelihood of later payments or defaults, less likelihood of prepayments)
from that on loans made to borrowers with higher credit quality, and is
likely to be more sensitive to changes in the economic climate in the areas
in which such borrowers reside. See "The Mortgage Pool" in the related
Prospectus Supplement.
DELINQUENT TRUST FUND ASSETS
No more than 5% (by principal balance) of the Trust Fund Assets for any
particular Series of Securities will be between 30 and 59 days past due as of
the related Cut-off Date.
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.
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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
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.
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 National Westminster Bank Plc and an affiliate of Greenwich Capital
Markets, Inc., a registered securities broker-dealer. The Depositor
maintains its principal office at 600 Steamboat Road, Greenwich, Connecticut
06830. Its telephone number is (203) 625-2700.
Neither the Depositor nor any of the Depositor's affiliates will insure
or guarantee distributions on the Securities of any Series.
LOAN PROGRAM
The Loans will have been purchased by the Depositor, either directly or
through affiliates, from Sellers. Unless otherwise specified in the related
Prospectus Supplement, the Loans so acquired by the Depositor will have been
originated in accordance with the underwriting criteria specified below under
"Underwriting Standards".
UNDERWRITING STANDARDS
Each Seller will represent and warrant that all Loans originated and/or
sold by it to the Depositor or one of its affiliates will have been
underwritten in accordance with standards consistent with those utilized by
mortgage lenders generally during the period of origination for similar types
of loans. As to any Loan insured by the FHA or partially guaranteed by the
VA, the Seller will represent that it has complied with underwriting policies
of the FHA or the VA, as the case may be.
Underwriting standards are applied by or on behalf of a lender to
evaluate the borrower's credit standing and repayment ability, and the value
and adequacy of the Property as collateral. In general, a prospective
borrower applying for a Loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent credit information,
including the principal balance and payment history with respect to any
senior mortgage, if any, which, unless otherwise specified in the related
Prospectus Supplement, the borrower's income will be verified by the Seller.
As part of the description of the borrower's financial condition, the
borrower generally is required to provide a current list of assets and
liabilities and a statement of income and expenses, as well as an
authorization to apply for a credit report which summarizes the borrower's
credit history with local merchants and lenders and any record of bankruptcy.
In most cases, an employment verification is obtained from an independent
source (typically the borrower's employer) which verification reports the
length of employment with that organization, the current salary, and whether
it is expected that the borrower will continue such employment in the future.
If a prospective borrower is self-employed, the borrower may be required to
submit copies of signed tax returns. The borrower may also be required to
authorize verification of deposits at financial institutions where the
borrower has demand or savings accounts.
In determining the adequacy of the property to be used as collateral, an
appraisal will generally be made of each property considered for financing.
The appraiser is generally required to inspect the property, issue a report
on its condition and, if applicable, verify that construction, if new, has
been completed. The appraisal is based on the market value of comparable
homes, the estimated rental income (if considered applicable by the
appraiser) and the cost of replacing the home. The value of the property
being financed, as indicated by the appraisal, must be such that it currently
supports, and is anticipated to support in the future, the outstanding loan
balance.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available (i) to meet the borrower's
monthly obligations on the proposed mortgage loan (generally determined on
the basis of the monthly payments due in the year of origination) and other
expenses related to the property (such as property taxes and hazard
insurance) and (ii) to meet monthly housing expenses and other financial
obligations and monthly living expenses. The underwriting standards applied
by Sellers, particularly with respect to the level of loan documentation and
the mortgagor's income and credit history, may be varied in appropriate cases
where factors such as low Combined Loan-to-Value Ratios or other favorable
credit exist.
QUALIFICATIONS OF SELLERS
Unless otherwise specified in the related Prospectus Supplement, each
Seller will be required to satisfy the qualifications set forth herein. Each
Seller must be an institution experienced in originating and servicing loans
of the type contained in the related Pool in accordance with accepted
practices and prudent guidelines, and must maintain satisfactory facilities
to originate and service those loans. Unless otherwise specified in the
related Prospectus Supplement, each Seller will be a seller/servicer approved
by either FNMA or FHLMC.
REPRESENTATIONS BY SELLERS; REPURCHASES OR SUBSTITUTIONS
Each Seller will have made representations and warranties in respect of
the Loans sold by such Seller and evidenced by all, or a part, of a Series of
Securities. Except as otherwise specified in the related Prospectus
Supplement, such representations and warranties include, among other things:
(i) that title insurance (or in the case of Properties located in areas where
such policies are generally not available, an attorney's certificate of
title) and any required hazard insurance policy (or certificate of title as
applicable) remained in effect on the date of purchase of the Loan from the
Seller by or on behalf of the Depositor; (ii) that the Seller had good title
to each such Loan and such Loan was subject to no offsets, defenses,
counterclaims or rights of rescission except to the extent that any buydown
agreement described herein may forgive certain indebtedness of a borrower;
(iii) that each Loan constituted a valid lien on the Property (subject only
to permissible liens disclosed, if applicable, title insurance exceptions, if
applicable, and certain other exceptions described in the Agreement) and that
the Property was free from damage and was in acceptable condition; (iv) that
there were no delinquent tax or assessment liens against the Property;
(v) that no required payment on a Loan was more than thirty days' delinquent;
and (vi) that each Loan was made in compliance with, and is enforceable
under, all applicable local, state and federal laws and regulations in all
material respects.
If so specified in the related Prospectus Supplement, the
representations and warranties of a Seller in respect of a Loan will be made
not as of the Cut-off Date but as of the date on which such Seller sold the
Loan to the Depositor or one of its affiliates. Under such circumstances, a
substantial period of time may have elapsed between such date and the date of
initial issuance of the Series of Securities evidencing an interest in such
Loan. Since the representations and warranties of a Seller do not address
events that may occur following the sale of a Loan by such Seller, its
repurchase obligation described below will not arise if the relevant event
that would otherwise have given rise to such an obligation with respect to a
Loan occurs after the date of sale of such Loan by such Seller to the
Depositor or its affiliates. However, the Depositor will not include any
Loan in the Trust Fund for any Series of Securities if anything has come to
the Depositor's attention that would cause it to believe that the
representationes and warranties of a Seller will not be accurate and complete
in all material respects in respect of such Loan as of the date of initial
issuance of the related Series of Securities. If the Master Servicer is also
a Seller of Loans with respect to a particular Series, such representations
will be in addition to the representations and warranties made by the Master
Servicer in its capacity as a Master Servicer.
The Master Servicer or the Trustee, if the Master Servicer is the
Seller, will promptly notify the relevant Seller of any breach of any
representation or warranty made by it in respect of a Loan which materially
and adversely affects the interests of the Securityholders in such Loan.
Unless otherwise specified in the related Prospectus Supplement, if such
Seller cannot cure such breach within 90 days following notice from the
Master Servicer or the Trustee, as the case may be, then such Seller will be
obligated either (i) to repurchase such Loan from the Trust Fund at a price
(the "Purchase Price") equal to 100% of the unpaid principal balance thereof
as of the date of the repurchase plus accrued interest thereon to the first
day of the month following the month of repurchase at the Loan Rate (less any
Advances or amount payable as related servicing compensation if the Seller is
the Master Servicer) or (ii) to substitute for such Loan a replacement loan
that satisfies certain requirements set forth in the Agreement. If a REMIC
election is to be made with respect to a Trust Fund, unless otherwise
specified in the related Prospectus Supplement, the Master Servicer or a
holder of the related residual certificate generally will be obligated to pay
any prohibited transaction tax which may arise in connection with any such
repurchase or substitution and the Trustee must have received a satisfactory
opinion of counsel that such repurchase or substitution will not cause the
Trust Fund to lose its status as a REMIC or otherwise subject the Trust Fund
to a prohibited transaction tax. The Master Servicer may be entitled to
reimbursement for any such payment from the assets of the related Trust Fund
or from any holder of the related residual certificate. See "Description of
the Securities--General". Except in those cases in which the Master Servicer
is the Seller, the Master Servicer will be required under the applicable
Agreement to enforce this obligation for the benefit of the Trustee and the
holders of the Securities, following the practices it would employ in its
good faith business judgment were it the owner of such Loan. This repurchase
or substitution obligation will constitute the sole remedy available to
holders of Securities or the Trustee for a breach of representation by a
Seller.
Neither the Depositor nor the Master Servicer (unless the Master
Servicer is the Seller) will be obligated to purchase or substitute a Loan if
a Seller defaults on its obligation to do so, and no assurance can be given
that Sellers will carry out their respective repurchase or substitution
obligations with respect to Loans. However, to the extent that a breach of a
representation and warranty of a Seller may also constitute a breach of a
representation made by the Master Servicer, the Master Servicer may have a
repurchase or substitution obligation as described below under "The
Agreements--Assignment of Trust Fund Assets".
DESCRIPTION OF THE SECURITIES
Each Series of Certificates will be issued pursuant to separate
agreements (each, a "Pooling and Servicing Agreement" or a "Trust Agreement")
among the Depositor, the Servicer, if the Series relates to Loans, and the
Trustee. A form of Pooling and Servicing Agreement and Trust Agreement has
been filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. Each Series of Notes will be issued pursuant to an
indenture (the "Indenture") between the related Trust Fund and the entity
named in the related Prospectus Supplement as trustee (the "Trustee") with
respect to such Series. A form of Indenture has been filed as an exhibit to
the Registration Statement of which this Prospectus forms a part. A Series
may consist of both Notes and Certificates. Each Agreement, dated as of the
related Cut-off Date, will be among the Depositor, the Master Servicer and
the Trustee for the benefit of the holders of the Securities of such Series.
The provisions of each Agreement will vary depending upon the nature of the
Securities to be issued thereunder and the nature of the related Trust Fund.
The following summaries describe certain provisions which may appear in each
Agreement. The Prospectus Supplement for a Series of Securities will
describe any provision of the Agreement relating to such Series that mainly
differs from the description thereof contained in this Prospectus. The
summaries do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, all of the provisions of the Agreement for
each Series of Securities and the applicable Prospectus Supplement. The
Depositor will provide a copy of the Agreement (without exhibits) relating to
any Series without charge upon written request of a holder of record of a
Security of such Series addressed to Financial Asset Securities Corp., 600
Steamboat Road, Greenwich, Connecticut 06830, Attention: Asset Backed Finance
Group.
GENERAL
Unless otherwise specified in the related Prospectus Supplement, the
Certificates of each Series will be issued in book-entry or fully registered
form, in the authorized denominations specified in the related Prospectus
Supplement, will evidence specified beneficial ownership interests in the
related Trust Fund created pursuant to each Agreement and will not be
entitled to payments in respect of the assets included in any other Trust
Fund established by the Depositor. Unless otherwise specified in the related
Prospectus Supplement, the Notes of each Series will be issued in book-entry
or fully registered form, in the authorized denominations specified in the
related Prospectus Supplement, will be secured by the pledge of the assets of
the related Trust Fund and will not be entitled to payments in respect of the
assets included in any other Trust Fund established by the Depositor. The
Securities will not represent obligations of the Depositor or any affiliate
of the Depositor. Certain of the Loans may be guaranteed or insured as set
forth in the related Prospectus Supplement. Each Trust Fund will consist of,
to the extent provided in the Agreement, (i) the Trust Fund Assets, as from
time to time are subject to the related Agreement (exclusive of any amounts
specified in the related Prospectus Supplement ("Retained Interest")),
including all payments of interest and principal received with respect to the
Loans after the Cut-off Date (to the extent not applied in computing the
Cut-off Date Principal Balance); (ii) such assets as from time to time are
required to be deposited in the related Security Account, as described below
under "The Agreements--Payments on Loans; Deposits to Security Account";
(iii) property which secured a Loan and which is acquired on behalf of the
Securityholders by foreclosure or deed in lieu of foreclosure and (iv) any
insurance policies or other forms of credit enhancement required to be
maintained pursuant to the related Agreement. If so specified in the related
Prospectus Supplement, a Trust Fund may also include one or more of the
following: reinvestment income on payments received on the Trust Fund
Assets, a Reserve Account, a mortgage pool insurance policy, a Special Hazard
Insurance Policy, a Bankruptcy Bond, one or more letters of credit, a surety
bond, guaranties or similar instruments or other agreements.
Each Series of Securities will be issued in one or more classes. Each
class of Securities of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Trust Fund Assets in the related Trust Fund. A Series of
Securities may include one or more classes that are senior in right to
payment to one or more other classes of Securities of such Series. One or
more classes of Securities of a Series may be entitled to receive
distributions of principal, interest or any combination thereof.
Distributions on one or more classes of a Series of Securities may be made
prior to one or more other classes, after the occurrence of specified events,
in accordance with a schedule or formula, on the basis of collections from
designated portions of the Trust Fund Assets in the related Trust Fund or on
a different basis, in each case as specified in the related Prospectus
Supplement. The timing and amounts of such distributions may vary among
classes or over time as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal
only or interest only) on the related Securities will be made by the Trustee
on each Distribution Date (i.e., monthly or at such other intervals and on
the dates as are specified in the Prospectus Supplement) in proportion to the
percentages specified in the related Prospectus Supplement. Distributions
will be made to the persons in whose names the Securities are registered at
the close of business on the dates specified in the related Prospectus
Supplement (each, a "Record Date"). Distributions will be made in the manner
specified in the Prospectus Supplement to the persons entitled thereto at the
address appearing in the register maintained for holders of Securities (the
"Security Register"); provided, however, that the final distribution in
retirement of the Securities will be made only upon presentation and
surrender of the Securities at the office or agency of the Trustee or other
person specified in the notice to Securityholders of such final distribution.
The Securities will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange
or transfer of Securities of any Series but the Trustee may require payment
of a sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding of a class of Securities
entitled only to a specified percentage of payments of either interest or
principal or a notional amount of other interest or principal on the related
Loans or a class of Securities entitled to receive payments of interest and
principal on the Loans only after payments to other classes or after the
occurrence of certain specified events by or on behalf of any employee
benefit plan or other retirement arrangement (including individual retirement
accounts and annuities, Keogh plans and collective investment funds in which
such plans, accounts or arrangements are invested) subject to provisions of
ERISA or the Code may result in prohibited transactions within the meaning of
ERISA and the Code. See "ERISA Considerations". Unless otherwise specified
in the related Prospectus Supplement, the transfer of Securities of such a
class will not be registered unless the transferee (i) represents that it is
not, and is not purchasing on behalf of, any such plan, account or
arrangement or (ii) provides an opinion of counsel satisfactory to the
Trustee and the Depositor that the purchase of Securities of such a class by
or on behalf of such plan, account or arrangement is permissible under
applicable law and will not subject the Trustee, the Master Servicer or the
Depositor to any obligation or liability in addition to those undertaken in
the Agreements.
As to each Series, an election may be made to treat the related Trust
Fund or designated portions thereof as a "real estate mortgage investment
conduit" or "REMIC" as defined in the Code. The related Prospectus
Supplement will specify whether a REMIC election is to be made.
Alternatively, the Agreement for a Series may provide that a REMIC election
may be made at the discretion of the Depositor or the Master Servicer and may
only be made if certain conditions are satisfied. As to any such Series, the
terms and provisions applicable to the making of a REMIC election, as well as
any material federal income tax consequences to Securityholders not otherwise
described herein, will be set forth in the related Prospectus Supplement. If
such an election is made with respect to a Series, one of the classes will be
designated as evidencing the sole class of "residual interests" in the
related REMIC, as defined in the Code. All other classes of Securities in
such a Series will constitute "regular interests" in the related REMIC, as
defined in the Code. As to each Series with respect to which a REMIC
election is to be made, the Master Servicer or a holder of the related
residual certificate will be obligated to take all actions required in order
to comply with applicable laws and regulations and will be obligated to pay
any prohibited transaction taxes. The Master Servicer, to the extent set
forth in the related Prospectus Supplement, will be entitled to reimbursement
for any such payment from the assets of the Trust Fund or from any holder of
the related residual certificate.
DISTRIBUTIONS ON SECURITIES
General. In general, the method of determining the amount of
distributions on a particular Series of Securities will depend on the type of
credit support, if any, that is used with respect to such Series. See
"Credit Enhancement". Set forth below are descriptions of various methods
that may be used to determine the amount of distributions on the Securities
of a particular Series. The Prospectus Supplement for each Series of
Securities will describe the method to be used in determining the amount of
distributions on the Securities of such Series.
Distributions allocable to principal and interest on the Securities will
be made by the Trustee out of, and only to the extent of, funds in the
related Security Account, including any funds transferred from any Reserve
Account (a "Reserve Account"). As between Securities of different classes
and as between distributions of principal (and, if applicable, between
distributions of Principal Prepayments, as defined below, and scheduled
payments of principal) and interest, distributions made on any Distribution
Date will be applied as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
distributions to any class of Securities will be made pro rata to all
Securityholders of that class.
Available Funds. All distributions on the Securities of each Series on
each Distribution Date will be made from the Available Funds described below,
in accordance with the terms described in the related Prospectus Supplement
and specified in the Agreement. Unless otherwise provided in the related
Prospectus Supplement, "Available Funds" for each Distribution Date will
equal the sum of the following amounts:
(i) the aggregate of all previously undistributed payments on
account of principal (including Principal Prepayments, if any, and
prepayment penalties, if so provided in the related Prospectus
Supplement) and interest on the Loans in the related Trust Fund
(including Liquidation Proceeds and Insurance Proceeds and amounts drawn
under letters of credit or other credit enhancement instruments as
permitted thereunder and as specified in the related Agreement) received
by the Master Servicer after the Cut-off Date and on or prior to the day
of the month of the related Distribution Date specified in the related
Prospectus Supplement (the "Determination Date") except
(a) all payments which were due on or before the Cut-off Date;
(b) all Liquidation Proceeds and all Insurance Proceeds, all
Principal Prepayments and all other proceeds of any Loan purchased
by the Depositor, Master Servicer, any Sub-Servicer or any Seller
pursuant to the Agreement that were received after the prepayment
period specified in the related Prospectus Supplement and all
related payments of interest representing interest for any period
after the interest accrual period;
(c) all scheduled payments of principal and interest due on a
date or dates subsequent to the Due Period relating to such
Distribution Date;
(d) amounts received on particular Loans as late payments of
principal or interest or other amounts required to be paid by
borrowers, but only to the extent of any unreimbursed advance in
respect thereof made by the Master Servicer (including the related
Sub-Servicers, Support Servicers or the Trustee);
(e) amounts representing reimbursement, to the extent permitted
by the Agreement and as described under "Advances" below, for
advances made by the Master Servicer, Sub-Servicers, Support
Servicers or the Trustee that were deposited into the Security
Account, and amounts representing reimbursement for certain other
losses and expenses incurred by the Master Servicer or the Depositor
and described below;
(f) that portion of each collection of interest on a particular
Loan in such Trust Fund which represents servicing compensation
payable to the Master Servicer or Retained Interest which is to be
retained from such collection or is permitted to be retained from
related Insurance Proceeds, Liquidation Proceeds or proceeds of
Loans purchased pursuant to the Agreement;
(ii) the amount of any advance made by the Master Servicer, Sub
Servicer, Support Servicer or Trustee as described under "Advances"
below and deposited by it in the Security Account;
(iii) if applicable, amounts withdrawn from a Reserve Account;
(iv) if applicable, amounts provided under a letter of credit,
insurance policy, surety bond or other third-party guaranties; and
(v) if applicable, the amount of prepayment interest shortfall.
Distributions of Interest. Unless otherwise specified in the related
Prospectus Supplement, interest will accrue on the aggregate Security
Principal Balance (or, in the case of Securities (i) entitled only to
distributions allocable to interest, the aggregate notional principal balance
or (ii) which, under certain circumstances, allow for the accrual of interest
otherwise scheduled for payment to remain unpaid until the occurrence of
certain events specified in the related Prospectus Supplement) of each class
of Securities entitled to interest from the date, at the Pass-Through Rate
(which may be a fixed rate or rate adjustable as specified in such Prospectus
Supplement) and for the periods specified in such Prospectus Supplement. To
the extent funds are available therefor, interest accrued during each such
specified period on each class of Securities entitled to interest (other than
a class of Securities that provides for interest that accrues, but is not
currently payable, referred to hereafter as "Accrual Securities") will be
distributable on the Distribution Dates specified in the related Prospectus
Supplement until the aggregate Security Principal Balance of the Securities
of such class has been distributed in full or, in the case of Securities
entitled only to distributions allocable to interest, until the aggregate
notional principal balance of such Securities is reduced to zero or for the
period of time designated in the related Prospectus Supplement. The original
Security Principal Balance of each Security will equal the aggregate
distributions allocable to principal to which such Security is entitled.
Unless otherwise specified in the related Prospectus Supplement,
distributions allocable to interest on each Security that is not entitled to
distributions allocable to principal will be calculated based on the notional
principal balance of such Security. The notional principal balance of a
Security will not evidence an interest in or entitlement to distributions
allocable to principal but will be used solely for convenience in expressing
the calculation of interest and for certain other purposes.
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending
two or more days prior to a Distribution Date, the effective yield to
Securityholders will be reduced from the yield that would otherwise be
obtainable if interest payable on the Security were to accrue through the day
immediately preceding each Distribution Date, and the effective yield (at
par) to Securityholders will be less than the indicated coupon rate.
With respect to any class of Accrual Securities, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid
on a given Distribution Date will be added to the aggregate Security
Principal Balance of such class of Securities on that Distribution Date.
Distributions of interest on any class of Accrual Securities will commence
only after the occurrence of the events specified in the related Prospectus
Supplement. Prior to such time, the beneficial ownership interest of such
class of Accrual Securities in the Trust Fund, as reflected in the aggregate
Security Principal Balance of such class of Accrual Securities, will increase
on each Distribution Date by the amount of interest that accrued on such
class of Accrual Securities during the preceding interest accrual period but
that was not required to be distributed to such class on such Distribution
Date. Any such class of Accrual Securities will thereafter accrue interest
on its outstanding Security Principal Balance as so adjusted.
Distributions of Principal. The related Prospectus Supplement will
specify the method by which the amount of principal to be distributed on the
Securities on each Distribution Date will be calculated and the manner in
which such amount will be allocated among the classes of Securities entitled
to distributions of principal. The aggregate Security Principal Balance of
any class of Securities entitled to distributions of principal generally will
be the aggregate original Security Principal Balance of such class of
Securities specified in such Prospectus Supplement, reduced by all
distributions reported to the holders of such Securities as allocable to
principal and, (i) in the case of Accrual Securities, increased by all
interest accrued but not then distributable on such Accrual Securities and
(ii) in the case of adjustable rate Securities, subject to the effect of
negative amortization, if applicable.
If so provided in the related Prospectus Supplement, one or more classes
of Securities will be entitled to receive all or a disproportionate
percentage of the payments of principal which are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the month of such payments
("Principal Prepayments") in the percentages and under the circumstances or
for the periods specified in such Prospectus Supplement. Any such allocation
of Principal Prepayments to such class or classes of Securityholders will
have the effect of accelerating the amortization of such Securities while
increasing the interests evidenced by other Securities in the Trust Fund.
Increasing the interests of the other Securities relative to that of certain
Securities allocated by the principal prepayments is intended to preserve the
availability of the subordination provided by such other Securities. See
"Credit Enhancement-Subordination".
Unscheduled Distributions. The Securities will be subject to receipt of
distributionsbefore the next scheduled Distribution Date under the
circumstances and in the manner described below and in such Prospectus
Supplement. If applicable, the Trustee will be required to make such
unscheduled distributions on the day and in the amount specified in the
related Prospectus Supplement if, due to substantial payments of principal
(including Principal Prepayments) on the Trust Fund Assets, the Trustee or
the Master Servicer determines that the funds available or anticipated to be
available from the Security Account and, if applicable, any Reserve Account,
may be insufficient to make required distributions on the Securities on such
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, the amount of any such unscheduled distribution that is allocable
to principal will not exceed the amount that would otherwise have been
required to be distributed as principal on the Securities on the next
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, the unscheduled distributions will include interest at the
applicable Pass-Through Rate (if any) on the amount of the unscheduled
distribution allocable to principal for the period and to the date specified
in such Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
Securities would have been made on the next Distribution Date, and with
respect to Securities of the same class, unscheduled distributions of
principal will be made on the same basis as such distributions would have
been made on the next Distribution Date on a pro rata basis. Notice of any
unscheduled distribution will be given by the Trustee prior to the date of
such distribution.
ADVANCES
To the extent provided in the related Prospectus Supplement, the Master
Servicer will be required to advance on or before each Distribution Date
(from its own funds, funds advanced by Sub-Servicers or Support Servicers or
funds held in the Security Account for future distributions to the holders of
such Securities), an amount equal to the aggregate of payments of interest
and/or principal that were delinquent on the related Determination Date and
were not advanced by any Sub-Servicer, subject to the Master Servicer's
determination that such advances will be recoverable out of late payments by
borrowers, Liquidation Proceeds, Insurance Proceeds or otherwise. In
addition, to the extent provided in the related Prospectus Supplement, a cash
account may be established to provide for Advances to be made in the event of
certain Trust Fund Assets payment defaults or collection shortfalls.
In making Advances, the Master Servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to holders of the
Securities, rather than to guarantee or insure against losses. If Advances
are made by the Master Servicer from cash being held for future distribution
to Securityholders, the Master Servicer will replace such funds on or before
any future Distribution Date to the extent that funds in the applicable
Security Account on such Distribution Date would be less than the amount
required to be available for distributions to Securityholders on such date.
Any Master Servicer funds advanced will be reimbursable to the Master
Servicer out of recoveries on the specific Loans with respect to which such
Advances were made (e.g., late payments made by the related borrower, any
related Insurance Proceeds, Liquidation Proceeds or proceeds of any Loan
purchased by a Sub-Servicer or a Seller under the circumstances described
hereinabove). Advances by the Master Servicer (and any advances by a
Sub-Servicer or a Support Servicer) also will be reimbursable to the Master
Servicer (or Sub-Servicer or a Support Servicer) from cash otherwise
distributable to Securityholders (including the holders of Senior Securities)
to the extent that the Master Servicer determines that any such Advances
previously made are not ultimately recoverable as described above. To the
extent provided in the related Prospectus Supplement, the Master Servicer
also will be obligated to make Advances, to the extent recoverable out of
Insurance Proceeds, Liquidation Proceeds or otherwise, in respect of certain
taxes and insurance premiums not paid by borrowers on a timely basis. Funds
so advanced are reimbursable to the Master Servicer to the extent permitted
by the Agreement. The obligations of the Master Servicer to make advances
may be supported by a cash advance reserve fund, a surety bond or other
arrangement, in each case as described in such Prospectus Supplement.
The Master Servicer or Sub-Servicer may enter into an agreement (a
"Support Agreement") with a Support Servicer pursuant to which the Support
Servicer agrees to provide funds on behalf of the Master Servicer or Sub-
Servicer in connection with the obligation of the Master Servicer or Sub-
Servicer, as the case may be, to make Advances. The Support Agreement will
be delivered to the Trustee and the Trustee will be authorized to accept a
substitute Support Agreement in exchange for an original Support Agreement,
provided that such substitution of the Support Agreement will not adversely
affect the rating or ratings then in effect on the Securities.
Unless otherwise specified in the related Prospectus Supplement, in the
event the Master Servicer, a Sub-Servicer or a Support Servicer fails to make
a required Advance, the Trustee will be obligated to make such Advance in its
capacity as successor servicer. If the Trustee makes such an Advance, it
will be entitled to be reimbursed for such Advance to the same extent and
degree as the Master Servicer, a Sub-Servicer or a Support Servicer is
entitled to be reimbursed for Advances. See "Description of the Securities--
Distributions on Securities" herein.
COMPENSATING INTEREST
If so specified in the related Prospectus Supplement, the Master
Servicer will be required to remit to the Trustee, with respect to each Loan
in the related Trust Fund as to which a principal prepayment in full or a
principal payment which is in excess of the scheduled monthly payment and is
not intended to cure a delinquency was received during any Due Period, an
amount, from and to the extent of amounts otherwise payable to the Master
Servicer as servicing compensation, equal to the excess, if any, of (a) 30
days' interest on the principal balance of the related Loan at the Loan Rate
net of the per annum rate at which the Master Servicer's servicing fee
accrues, over (b) the amount of interest actually received on such Loan
during such Due Period, net of the Master Servicer's servicing fee.
REPORTS TO SECURITYHOLDERS
Prior to or concurrently with each distribution on a Distribution Date,
the Master Servicer or the Trustee will furnish to each Securityholder of
record of the related Series a statement setting forth, to the extent
applicable to such Series of Securities, among other things:
(i) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any Principal Prepayments
and any applicable prepayment penalties included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the aggregate amount (a) otherwise allocable to the
Subordinated Securityholders on such Distribution Date, and (b)
withdrawn from the Reserve Fund, if any, that is included in the amounts
distributed to the Senior Securityholders;
(v) the outstanding principal balance or notional principal balance
of such class after giving effect to the distribution of principal on
such Distribution Date;
(vi) the percentage of principal payments on the Loans (excluding
prepayments), if any, which such class will be entitled to receive on
the following Distribution Date;
(vii) the percentage of Principal Prepayments on the Loans, if
any, which such class will be entitled to receive on the following
Distribution Date;
(viii) the related amount of the servicing compensation retained or
withdrawn from the Security Account by the Master Servicer, and the
amount of additional servicing compensation received by the Master
Servicer attributable to penalties, fees, excess Liquidation Proceeds
and other similar charges and items;
(ix) the number and aggregate principal balances of Loans (A)
delinquent (exclusive of Loans in foreclosure) (1) 31 to 60 days, (2) 61
to 90 days and (3) 91 or more days and (B) in foreclosure and delinquent
(1) 31 to 60 days, (2) 61 to 90 days and (3) 91 or more days, as of the
close of business on the last day of the calendar month preceding such
Distribution Date;
(x) the book value of any real estate acquired through foreclosure
or grant of a deed in lieu of foreclosure;
(xi) if a class is entitled only to a specified portion of
payments of interest on the Loans in the related Pool, the Pass-Through
Rate, if adjusted from the date of the last statement, of the Loans
expected to be applicable to the next distribution to such class;
(xii) if applicable, the amount remaining in any Reserve Account
at the close of business on the Distribution Date;
(xiii) the Pass-Through Rate as of the day prior to the immediately
preceding Distribution Date;
and
(xiv) any amounts remaining under letters of credit, pool policies
or other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a
dollar amount per single Security of the relevant class having the Percentage
Interest specified in the related Prospectus Supplement. The report to
Securityholders for any Series of Securities may include additional or other
information of a similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Securityholder of record at any time during such calendar year a report (a)
as to the aggregate of amounts reported pursuant to (i) and (ii) above for
such calendar year or, in the event such person was a Securityholder of
record during a portion of such calendar year, for the applicable portion of
such year and (b) such other customary information as may be deemed necessary
or desirable for Securityholders to prepare their tax returns.
BOOK-ENTRY REGISTRATION OF SECURITIES
As described in the Prospectus Supplement, if not issued in fully
registered form, each class of Securities will be registered as book-entry
certificates (the "Book-Entry Securities"). Persons acquiring beneficial
ownership interests in the Securities ("Security Owners") will hold their
Securities through the Depository Trust Company ("DTC") in the United States,
or Cedel Bank, societe anonyme ("CEDEL") or the Euroclear System
("Euroclear") (in Europe) if they are participants ("Participants") of such
systems, or indirectly through organizations which are Participants in such
systems. The Book-Entry Securities will be issued in one or more
certificates which equal the aggregate principal balance of the Securities
and will initially be registered in the name of Cede & Co., the nominee of
DTC. CEDEL and Euroclear will hold omnibus positions on behalf of their
Participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank, N.A. will act as
depositary for CEDEL and the Brussels, Belgium branch of Morgan Guarantee
Trust Company of New York ("Morgan") will act as depositary for Euroclear (in
such capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). Except as described below, no Security Owner will
be entitled to receive a physical certificate representing such Security (a
"Definitive Security"). Unless and until Definitive Securities are issued,
it is anticipated that the only "Securityholders" of the Securities will be
Cede & Co., as nominee of DTC. Security Owners are only permitted to
exercise their rights indirectly through Participants and DTC.
The Security Owner's ownership of a Book-Entry Security will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Security Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Security will be recorded on the
records of DTC (or of a participating firm that acts as agent for the
Financial Intermediary, whose interest will in turn be recorded on the
records of DTC, if the Security Owner's Financial Intermediary is not a
Participant and on the records of CEDEL or Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and
interest on, the Securities from the Trustee through DTC and Participants.
While the Securities are outstanding (except under the circumstances
described below), under the rules, regulations and procedures creating and
affecting DTC and its operations (the "Rules"), DTC is required to make
book-entry transfers among Participants on whose behalf it acts with respect
to the Securities and is required to receive and transmit distributions of
principal of, and interest on, the Securities. Participants and indirect
participants with whom Security Owners have accounts with respect to
Securities are similarly required to make book-entry transfers and receive
and transmit such distributions on behalf of their respective Security
Owners. Accordingly, although Security Owners will not possess certificates,
the Rules provide a mechanism by which Security Owners will receive
distributions and will be able to transfer their interest.
Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive
Securities are issued, Security Owners who are not Participants may transfer
ownership of Securities only through Participants and indirect participants
by instructing such Participants and indirect participants to transfer
Securities, by book-entry transfer, through DTC for the account of the
purchasers of such Securities, which account is maintained with their
respective Participants. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of Securities will be executed through DTC
and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the Participants and indirect participants will make
debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Security Owners.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Such credits or any
transactions in such securities settled during such processing will be
reported to the relevant Euroclear or CEDEL Participants on such business
day. Cash received in CEDEL or Euroclear as a result of sales of securities
by or through a CEDEL Participant (as defined herein) or Euroclear
Participant (as defined herein) to a DTC Participant will be received with
value on the DTC settlement date but will be available in the relevant CEDEL
or Euroclear cash account only as of the business day following settlement in
DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system will,
if the transaction meets its settlement requirements, deliver instructions to
the Relevant Depositary to take action to effect final settlement on its
behalf by delivering or receiving securities in DTC, and making or receiving
payment in accordance with normal procedures for same day funds settlement
applicable to DTC. CEDEL Participants and Euroclear Participants may not
deliver instructions directly to the European Depositaries.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations
("CEDEL Participants") and facilitates the clearance and settlement of
securities transactions between CEDEL Participants through electronic
book-entry changes in accounts of CEDEL Participants, thereby eliminating the
need for physical movement of certificates. Transactions may be settled in
CEDEL in any of 28 currencies, including United States dollars. CEDEL
provides to its CEDEL Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally
traded securities and securities lending and borrowing. CEDEL interfaces
with domestic markets in several countries. As a professional depository,
CEDEL is subject to regulation by the Luxembourg Monetary Institute. CEDEL
participants are recognized financial institutions around the world,
including underwriters, securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. Indirect
access to CEDEL is also available to others, such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship
with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities
and cash. Transactions may be settled in any of 32 currencies, including
United States dollars. Euroclear includes various other services, including
securities lending and borrowing and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan, under contract with Euroclear Clearance Systems
S.C., a Belgian cooperative corporation (the "Cooperative"). All operations
are conducted by Morgan, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
Morgan is the Belgian branch of a New York banking corporation which is
a member bank of the Federal Reserve System. As such, it is regulated and
examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan are governed
by the Terms and Conditions Governing Use of Euroclear and the related
Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities
and cash from Euroclear, and receipts of payments with respect to securities
in Euroclear. All securities in Euroclear are held on a fungible basis
without attribution of specific certificates to specific securities clearance
accounts. The Euroclear Operator acts under the Terms and Conditions only on
behalf of Euroclear Participants, and has no record of or relationship with
persons holding through Euroclear Participants.
Under a book-entry format, beneficial owners of the Book-Entry
Securities may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with
respect to Securities held through CEDEL or Euroclear will be credited to the
cash accounts of CEDEL Participants or Euroclear Participants in accordance
with the relevant system's rules and procedures, to the extent received by
the Relevant Depositary. Such distributions will be subject to tax reporting
in accordance with relevant United States tax laws and regulations. See
"Certain Material Federal Income Tax Consequences--Tax Treatment of Foreign
Investors" and "--Tax Consequences to Holders of Notes--Backup Withholding"
herein. Because DTC can only act on behalf of Financial Intermediaries, the
ability of a beneficial owner to pledge Book-Entry Securities to persons or
entities that do not participate in the Depository system, or otherwise take
actions in respect of such Book-Entry Securities, may be limited due to the
lack of physical certificates for such Book-Entry Securities. In addition,
issuance of the Book-Entry Securities in book-entry form may reduce the
liquidity of such Securities in the secondary market since certain potential
investors may be unwilling to purchase Securities for which they cannot
obtain physical certificates.
Monthly and annual reports on the Trust will be provided to CEDE, as
nominee of DTC, and may be made available by CEDE to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose
DTC accounts the Book-Entry Securities of such beneficial owners are
credited.
DTC has advised the Trustee that, unless and until Definitive Securities
are issued, DTC will take any action permitted to be taken by the holders of
the Book-Entry Securities under the applicable Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Securities are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Securities. CEDEL or the Euroclear Operator, as the case may be, will take
any other action permitted to be taken by a Securityholder under the
Agreement on behalf of a CEDEL Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the ability
of the Relevant Depositary to effect such actions on its behalf through DTC.
DTC may take actions, at the direction of the related Participants, with
respect to some Securities which conflict with actions taken with respect to
other Securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee will recognize the holders of such Definitive Securities as
Securityholders under the applicable Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued
at any time.
None of the Servicer, the Depositor or the Trustee will have any
responsibility for any aspect of the records relating, to or payments made
on account of beneficial ownership interests of the Book-Entry Securities
held by Cede & Co., as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes
of a Series of Securities or with respect to the Trust Fund Assets in the
related Trust Fund. Credit enhancement may be in the form of a limited
financial guaranty policy issued by an entity named in the related Prospectus
Supplement, the subordination of one or more classes of the Securities of
such Series, the establishment of one or more Reserve Accounts, the use of a
cross-support feature, use of a mortgage pool insurance policy, FHA
Insurance, VA Guarantee, bankruptcy bond, special hazard insurance policy,
surety bond, letter of credit, guaranteed investment contract or another
method of credit enhancement described in the related Prospectus Supplement,
or any combination of the foregoing. Unless otherwise specified in the
related Prospectus Supplement, credit enhancement will not provide protection
against all risks of loss and will not guarantee repayment of the entire
principal balance of the Securities and interest thereon. If losses occur
which exceed the amount covered be credit enhancement or which are not
covered by the credit enhancement, Securityholders will bear their allocable
share of deficiencies.
SUBORDINATION
Protection afforded to holders of one or more classes of Securities of a
Series by means of the subordination feature may be accomplished by the
preferential right of holders of one or more other classes of such Series
(the "Senior Securities") to distributions in respect of scheduled principal,
Principal Prepayments, interest or any combination thereof that otherwise
would have been payable to holders of Subordinated Securities under the
circumstances and to the extent specified in the related Prospectus
Supplement. Protection may also be afforded to the holders of Senior
Securities of a Series by: (i) reducing the ownership interest of the related
Subordinated Securities; (ii) a combination of the immediately preceding
sentence and clause (i) above; or (iii) as otherwise described in the related
Prospectus Supplement. Delays in receipt of scheduled payments on the Loans
and losses on defaulted Loans may be borne first by the various classes of
Subordinated Securities and thereafter by the various classes of Senior
Securities, in each case under the circumstances and subject to the
limitations specified in such related Prospectus Supplement. The aggregate
distributions in respect of delinquent payments on the Loans over the lives
of the Securities or at any time, the aggregate losses in respect of
defaulted Loans which must be borne by the Subordinated Securities by virtue
of subordination and the amount of the distributions otherwise distributable
to the Subordinated Securityholders that will be distributable to Senior
Securityholders on any Distribution Date may be limited as specified in the
related Prospectus Supplement. If aggregate distributions in respect of
delinquent payments on the Loans or aggregate losses in respect of such Loans
were to exceed an amount specified in the related Prospectus Supplement,
holders of Senior Securities would experience losses on the Securities.
In addition to or in lieu of the foregoing, if so specified in the
related Prospectus Supplement, all or any portion of distributions otherwise
payable to holders of Subordinated Securities on any Distribution Date may
instead be deposited into one or more Reserve Accounts established with the
Trustee or distributed to holders of Senior Securities. Such deposits may be
made on each Distribution Date, for specified periods or until the balance in
the Reserve Account has reached a specified amount and, following payments
from the Reserve Account to holders of Senior Securities or otherwise,
thereafter to the extent necessary to restore the balance in the Reserve
Account to required levels, in each case as specified in the related
Prospectus Supplement. Amounts on deposit in the Reserve Account may be
released to the holders of certain classes of Securities at the times and
under the circumstances specified in such Prospectus Supplement.
Various classes of Senior Securities and Subordinated Securities may
themselves be subordinate in their right to receive certain distributions to
other classes of Senior and Subordinated Securities, respectively, through a
cross support mechanism or otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among such classes
(i) in the order of their scheduled final distribution dates, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise, in each case as specified in the related
Prospectus Supplement. As between classes of Subordinated Securities,
payments to holders of Senior Securities on account of delinquencies or
losses and payments to any Reserve Account will be allocated as specified in
the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
A separate Special Hazard Insurance Policy may be obtained for the Pool
and issued by the insurer (the "Special Hazard Insurer") named in the related
Prospectus Supplement. Each Special Hazard Insurance Policy will, subject to
limitations described below, protect holders of the related Securities from
(i) loss by reason of damage to Properties caused by certain hazards
(including earthquakes and, to a limited extent, tidal waves and related
water damage or as otherwise specified in the related Prospectus Supplement)
not insured against under the standard form of hazard insurance policy for
the respective states in which the Properties are located or under a flood
insurance policy if the Property is located in a federally designated flood
area, and (ii) loss caused by reason of the application of the coinsurance
clause contained in hazard insurance policies. See "The Agreements-Hazard
Insurance". Each Special Hazard Insurance Policy will not cover losses
occasioned by fraud or conversion by the Trustee or Master Servicer, war,
insurrection, civil war, certain governmental action, errors in design,
faulty workmanship or materials (except under certain circumstances), nuclear
or chemical reactions, flood (if the Property is located in a federally
designated flood area), nuclear or chemical contamination and certain other
risks. The amount of coverage under any Special Hazard Insurance Policy will
be specified in the related Prospectus Supplement. Each Special Hazard
Insurance Policy will provide that no claim may be paid unless hazard and, if
applicable, flood insurance on the Property securing the Loan have been kept
in force and other protection and preservation expenses have been paid.
Subject to the foregoing limitations, and unless otherwise specified in
the related Prospectus Supplement, each Special Hazard Insurance Policy will
provide that where there has been damage to Property securing a foreclosed
Loan (title to which has been acquired by the insured) and to the extent such
damage is not covered by the hazard insurance policy or flood insurance
policy, if any, maintained by the borrower or the Master Servicer, the
Special Hazard Insurer will pay the lesser of (i) the cost of repair or
replacement of such property or (ii) upon transfer of the Property to the
Special Hazard Insurer, the unpaid principal balance of such Loan at the time
of acquisition of such Property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim settlement and
certain expenses incurred by the Master Servicer with respect to such
Property. If the unpaid principal balance of a Loan plus accrued interest
and certain expenses is paid by the Special Hazard Insurer, the amount of
further coverage under the related Special Hazard Insurance Policy will be
reduced by such amount less any net proceeds from the sale of the Property.
Any amount paid as the cost of repair of the Property will further reduce
coverage by such amount.
The Master Servicer may deposit cash, an irrevocable letter of credit or
any other instrument acceptable to each Rating Agency rating the Securities
of the related Series in a special trust account to provide protection in
lieu of or in addition to that provided by a Special Hazard Insurance Policy.
The amount of any Special Hazard Insurance Policy or of the deposit to the
special trust account relating to such Securities in lieu thereof may be
reduced so long as any such reduction will not result in a downgrading of the
rating of such Securities by any such Rating Agency.
BANKRUPTCY BONDS
A bankruptcy bond ("Bankruptcy Bond") for proceedings under the federal
Bankruptcy Code may be issued by an insurer named in such Prospectus
Supplement. Each Bankruptcy Bond will cover certain losses resulting from a
reduction by a bankruptcy court of scheduled payments of principal and
interest on a Loan or a reduction by such court of the principal amount of a
Loan and will cover certain unpaid interest on the amount of such a principal
reduction from the date of the filing of a bankruptcy petition. The required
amount of coverage under each Bankruptcy Bond will be set forth in the
related Prospectus Supplement. The Master Servicer may deposit cash, an
irrevocable letter of credit or any other instrument acceptable to each
Rating Agency rating the Securities of the related Series in a special trust
account to provide protection in lieu of or in addition to that provided by a
Bankruptcy Bond. Coverage under a Bankruptcy Bond may be cancelled or
reduced by the Master Servicer if such cancellation or reduction would not
adversely affect the then current rating or ratings of the related
Securities. See "Certain Legal Aspects of the Loans-Anti-Deficiency
Legislation and Other Limitations on Lenders".
RESERVE ACCOUNTS
Credit support with respect to a Series of Securities may be provided by
the establishment and maintenance with the Trustee for such Series of
Securities, in trust, of one or more Reserve Accounts for such Series. The
related Prospectus Supplement will specify whether or not any such Reserve
Accounts will be included in the Trust Fund for such Series.
The Reserve Account for a Series will be funded (i) by the deposit
therein of cash, United States Treasury securities, instruments evidencing
ownership of principal or interest payments thereon, letters of credit,
demand notes, certificates of deposit or a combination thereof in the
aggregate amount specified in the related Prospectus Supplement, (ii) by the
deposit therein from time to time of certain amounts, as specified in the
related Prospectus Supplement to which the Subordinate Securityholders, if
any, would otherwise be entitled or (iii) in such other manner as may be
specified in the related Prospectus Supplement.
Any amounts on deposit in the Reserve Account and the proceeds of any
other instrument upon maturity will be held in cash or will be invested in
Permitted Investments which may include obligations of the United States and
certain agencies thereof, certificates of deposit, certain commercial paper,
time deposits and bankers acceptances sold by eligible commercial banks and
certain repurchase agreements of United States government securities with
eligible commercial banks. If a letter of credit is deposited with the
Trustee, such letter of credit will be irrevocable. Any instrument deposited
therein will name the Trustee, in its capacity as trustee for the holders of
the Securities, as beneficiary and will be issued by an entity acceptable to
each Rating Agency that rates the Securities. Additional information with
respect to such instruments deposited in the Reserve Accounts will be set
forth in the related Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the Reserve Account for distribution to the
holders of Securities for the purposes, in the manner and at the times
specified in the related Prospectus Supplement.
POOL INSURANCE POLICIES
A separate pool insurance policy ("Pool Insurance Policy") may be
obtained for the Pool and issued by the insurer (the "Pool Insurer") named in
the related Prospectus Supplement. Each Pool Insurance Policy will, subject
to the limitations described below, cover loss by reason of default in
payment on Loans in the Pool in an amount equal to a percentage specified in
such Prospectus Supplement of the aggregate principal balance of such Loans
on the Cut-off Date which are not covered as to their entire outstanding
principal balances by Primary Mortgage Insurance Policies. As more fully
described below, the Master Servicer will present claims thereunder to the
Pool Insurer on behalf of itself, the Trustee and the holders of the
Securities. The Pool Insurance Policies, however, are not blanket policies
against loss, since claims thereunder may only be made respecting particular
defaulted Loans and only upon satisfaction of certain conditions precedent
described below. Unless otherwise specified in the related Prospectus
Supplement, the Pool Insurance Policies will not cover losses due to a
failure to pay or denial of a claim under a Primary Mortgage Insurance
Policy.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will provide that no claims may be validly presented
unless (i) any required Primary Mortgage Insurance Policy is in effect for
the defaulted Loan and a claim thereunder has been submitted and settled;
(ii) hazard insurance on the related Property has been kept in force and real
estate taxes and other protection and preservation expenses have been paid;
(iii) if there has been physical loss or damage to the Property, it has been
restored to its physical condition (reasonable wear and tear excepted) at the
time of issuance of the policy; and (iv) the insured has acquired good and
merchantable title to the Property free and clear of liens except certain
permitted encumbrances. Upon satisfaction of these conditions, the Pool
Insurer will have the option either (a) to purchase the property securing the
defaulted Loan at a price equal to the principal balance thereof plus accrued
and unpaid interest at the Loan Rate to the date of purchase and certain
expenses incurred by the Master Servicer on behalf of the Trustee and
Securityholders, or (b) to pay the amount by which the sum of the principal
balance of the defaulted Loan plus accrued and unpaid interest at the Loan
Rate to the date of payment of the claim and the aforementioned expenses
exceeds the proceeds received from an approved sale of the Property, in
either case net of certain amounts paid or assumed to have been paid under
the related Primary Mortgage Insurance Policy. If any Property securing a
defaulted Loan is damaged and proceeds, if any, from the related hazard
insurance policy or the applicable Special Hazard Insurance Policy are
insufficient to restore the damaged Property to a condition sufficient to
permit recovery under the Pool Insurance Policy, the Master Servicer will not
be required to expend its own funds to restore the damaged Property unless it
determines that (i) such restoration will increase the proceeds to
securityholders on liquidation of the Loan after reimbursement of the Master
Servicer for its expenses and (ii) such expenses will be recoverable by it
through proceeds of the sale of the Property or proceeds of the related Pool
Insurance Policy or any related Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will not insure (and many Primary Mortgage Insurance
Policies do not insure) against loss sustained by reason of a default arising
from, among other things, (i) fraud or negligence in the origination or
servicing of a Loan, including misrepresentation by the borrower, the
originator or persons involved in the origination thereof, or (ii) failure to
construct a Property in accordance with plans and specifications. A failure
of coverage attributable to one of the foregoing events might result in a
breach of the related Seller's representations described above, and, in such
events might give rise to an obligation on the part of such Seller to
purchase the defaulted Loan if the breach cannot be cured by such Seller. No
Pool Insurance Policy will cover (and many Primary Mortgage Insurance
Policies do not cover) a claim in respect of a defaulted Loan occurring when
the servicer of such Loan, at the time of default or thereafter, was not
approved by the applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Pool Insurance Policy will be reduced
over the life of the related Securities by the aggregate dollar amount of
claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all foreclosed properties. The amount of claims
paid may include certain expenses incurred by the Master Servicer as well as
accrued interest on delinquent Loans to the date of payment of the claim.
Accordingly, if aggregate net claims paid under any Pool Insurance Policy
reach the original policy limit, coverage under that Pool Insurance Policy
will be exhausted and any further losses will be borne by the
Securityholders.
FHA INSURANCE; VA GUARANTEES
Loans designated in the related Prospectus Supplement as insured by the
FHA will be insured by the FHA as authorized under the United States Housing
Act of 1934, as amended. In addition to the Title I Program of the FHA, see
"Certain Legal Considerations -- Title I Program", certain Loans will be
insured under various FHA programs including the standard FHA 203(b) program
to finance the acquisition of one- to four-family housing units and the FHA
245 graduated payment mortgage program. These programs generally limit the
principal amount and interest rates of the mortgage loans insured.
The insurance premiums for Loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development ("HUD")
or by the Master Servicer or any Sub-Servicer and are paid to the FHA. The
regulations governing FHA single-family mortgage insurance programs provide
that insurance benefits are payable either upon foreclosure (or other
acquisition of possession) and conveyance of the mortgaged premises to the
United States of America or upon assignment of the defaulted Loan to the
United States of America. With respect to a defaulted FHA-insured Loan, the
Master Servicer or any Sub-Servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the Master
Servicer or any Sub-Servicer or HUD, that default was caused by circumstances
beyond the mortgagor's control, the Master Servicer or any Sub-Servicer is
expected to make an effort to avoid foreclosure by entering, if feasible,
into one of a number of available forms of forbearance plans with the
mortgagor. Such plans may involve the reduction or suspension of regular
mortgage payments for a specified period, with such payments to be made upon
or before the maturity date of the mortgage, or the recasting of payments due
under the mortgage up to or, other than Loans originated under the Title I
Program of the FHA, beyond the maturity date. In addition, when a default
caused by such circumstances is accompanied by certain other criteria, HUD
may provide relief by making payments to the Master Servicer or any Sub-
Servicer in partial or full satisfaction of amounts due under the Loan (which
payments are to be repaid by the mortgagor to HUD) or by accepting assignment
of the loan from the Master Servicer or any Sub-Servicer. With certain
exceptions, at least three full monthly installments must be due and unpaid
under the Loan, and HUD must have rejected any request for relief from the
mortgagor before the Master Servicer or any Sub-Servicer may initiate
foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. The Master Servicer or any Sub-Servicer of each
FHA-insured Single Family Loan will be obligated to purchase any such
debenture issued in satisfaction of such Loan upon default for an amount
equal to the principal amount of any such debenture.
Other than in relation to the Title I Program of the FHA, the amount of
insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted Loan adjusted to reimburse the Master
Servicer or Sub-Servicer for certain costs and expenses and to deduct certain
amounts received or retained by the Master Servicer or Sub-Servicer after
default. When entitlement to insurance benefits results from foreclosure (or
other acquisition of possession) and conveyance to HUD, the Master Servicer
or Sub-Servicer is compensated for no more than two-thirds of its foreclosure
costs, and is compensated for interest accrued and unpaid prior to such date
but in general only to the extent it was allowed pursuant to a forbearance
plan approved by HUD. When entitlement to insurance benefits results from
assignment of the Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Loan, bears
interest from a date 30 days after the borrower's first uncorrected failure
to perform any obligation to make any payment due under the mortgage and,
upon assignment, from the date of assignment to the date of payment of the
claim, in each case at the same interest rate as the applicable HUD debenture
interest rate as described above.
Loans designated in the related Prospectus Supplement as guaranteed by
the VA will be partially guaranteed by the VA under the Serviceman's
Readjustment Act of 1944, as amended (a "VA Guaranty Policy"). The
Serviceman's Readjustment Act of 1944, as amended, permits a veteran (or in
certain instances the spouse of a veteran) to obtain a mortgage loan
guarantee by the VA covering mortgage financing of the purchase of a one- to
four-family dwelling unit at interest rates permitted by the VA. The program
has no mortgage loan limits, requires no down payment from the purchaser and
permits the guarantee of mortgage loans of up to 30 years' duration.
However, no Loan guaranteed by the VA will have an original principal amount
greater than five times the partial VA guarantee for such Loan.
The maximum guarantee that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage
loan, as further described in 38 United States Code Section 1803(a), as
amended. As of January 1, 1990, the maximum guarantee that may be issued by
the VA under a VA guaranteed mortgage loan of more than $144,000 is the
lesser of 25% of the original principal amount of the mortgage loan and
$46,000. The liability on the guarantee is reduced or increased pro rata
with any reduction or increase in the amount of indebtedness, but in no event
will the amount payable on the guarantee exceed the amount of the original
guarantee. The VA may, at its option and without regard to the guarantee,
make full payment to a mortgage holder of unsatisfied indebtedness on a
mortgage upon its assignment to the VA.
With respect to a defaulted VA guaranteed Loan, the Master Servicer or
Sub-Servicer is, absent exceptional circumstances, authorized to announce its
intention to foreclose only when the default has continued for three months.
Generally, a claim for the guarantee is submitted after liquidation of the
Property.
The amount payable under the guarantee will be the percentage of the VA-
insured Loan originally guaranteed applied to indebtedness outstanding as of
the applicable date of computation specified in the VA regulations. Payments
under the guarantee will be equal to the unpaid principal amount of the Loan,
interest accrued on the unpaid balance of the Loan to the appropriate date of
computation and limited expenses of the mortgagee, but in each case only to
the extent that such amounts have not been recovered through liquidation of
the Property. The amount payable under the guarantee may in no event exceed
the amount of the original guarantee.
CROSS-SUPPORT
The beneficial ownership of separate groups of assets included in a
Trust Fund may be evidenced by separate classes of the related Series of
Securities. In such case, credit support may be provided by a cross-support
feature which requires that distributions be made with respect to Securities
evidencing a beneficial ownership interest in, or secured by, other asset
groups within the same Trust Fund. The related Prospectus Supplement for a
Series which includes a cross-support feature will describe the manner and
conditions for applying such cross-support feature.
The coverage provided by one or more forms of credit support may apply
concurrently to two or more related Trust Funds. If applicable, the related
Prospectus Supplement will identify the Trust Funds to which such credit
support relates and the manner of determining the amount of the coverage
provided thereby and of the application of such coverage to the identified
Trust Funds.
OTHER INSURANCE, SURETY BONDS, GUARANTIES, LETTERS OF CREDIT AND SIMILAR
INSTRUMENTS OR AGREEMENTS
A Trust Fund may also include insurance, guaranties, surety bonds,
letters of credit or similar arrangements for the purpose of (i) maintaining
timely payments or providing additional protection against losses on the
assets included in such Trust Fund, (ii) paying administrative expenses or
(iii) establishing a minimum reinvestment rate on the payments made in
respect of such assets or principal payment rate on such assets. Such
arrangements may include agreements under which Securityholders are entitled
to receive amounts deposited in various accounts held by the Trustee upon the
terms specified in such Prospectus Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Securities will
be affected primarily by the amount and timing of principal payments received
on or in respect of the Trust Fund Assets included in the related Trust Fund.
With respect to a Trust Fund which includes Private Asset Backed Securities,
the possible effects of the amount and timing of principal payments received
with respect to the underlying mortgage loans will be described in the
related Prospectus Supplement. The original terms to maturity of the Loans
in a given Pool will vary depending upon the type of Loans included therein.
Each Prospectus Supplement will contain information with respect to the type
and maturities of the Loans in the related Pool. Unless otherwise specified
in the related Prospectus Supplement, Loans may be prepaid without penalty in
full or in part at any time. The prepayment experience on the Loans in a
Pool will affect the life of the related Series of Securities.
The rate of prepayment on the Loans cannot be predicted. Home equity
loans and home improvement contracts have been originated in significant
volume only during the past few years and the Depositor is not aware of any
publicly available studies or statistics on the rate of prepayment of such
loans. Generally, home equity loans and home improvement contracts are not
viewed by borrowers as permanent financing. Accordingly, the Loans may
experience a higher rate of prepayment than traditional first mortgage loans.
On the other hand, because home equity loans such as the Revolving Credit
Line Loans generally are not fully amortizing, the absence of voluntary
borrower prepayments could cause rates of principal payments lower than, or
similar to, those of traditional fully-amortizing first mortgages. The
prepayment experience of the related Trust Fund may be affected by a wide
variety of factors, including general economic conditions, prevailing
interest rate levels, the availability of alternative financing and homeowner
mobility and the frequency and amount of any future draws on any Revolving
Credit Line Loans. Other factors that might be expected to affect the
prepayment rate of a pool of home equity mortgage loans or home improvement
contracts include the amounts of, and interest rates on, the underlying
senior mortgage loans, and the use of first mortgage loans as long-term
financing for home purchase and subordinate mortgage loans as shorter-term
financing for a variety of purposes, including home improvement, education
expenses and purchases of consumer durables such as automobiles.
Accordingly, the Loans may experience a higher rate of prepayment than
traditional fixed-rate mortgage loans. In addition, any future limitations
on the right of borrowers to deduct interest payments on home equity loans
for federal income tax purposes may further increase the rate of prepayments
of the Loans. The enforcement of a "due-on-sale" provision (as described
below) will have the same effect as a prepayment of the related Loan. See
"Certain Legal Aspects of the Loans--Due-on-Sale Clauses". The yield to an
investor who purchases Securities in the secondary market at a price other
than par will vary from the anticipated yield if the rate of prepayment on
the Loans is actually different than the rate anticipated by such investor at
the time such Securities were purchased.
Collections on Revolving Credit Line Loans may vary because, among other
things, borrowers may (i) make payments during any month as low as the
minimum monthly payment for such month or, during the interest-only period
for certain Revolving Credit Line Loans and, in more limited circumstances,
Closed-End Loans, with respect to which an interest-only payment option has
been selected, the interest and the fees and charges for such month or (ii)
make payments as high as the entire outstanding principal balance plus
accrued interest and the fees and charges thereon. It is possible that
borrowers may fail to make the required periodic payments. In addition,
collections on the Loans may vary due to seasonal purchasing and the payment
habits of borrowers.
Unless otherwise specified in the related Prospectus Supplement, the
Loans will contain due-on-sale provisions permitting the mortgagee to
accelerate the maturity of the loan upon sale or certain transfers by the
borrower. Loans insured by the FHA, and Single Family Loans partially
guaranteed by the VA, are assumable with the consent of the FHA and the VA,
respectively. Thus, the rate of prepayments on such Loans may be lower than
that of conventional Loans bearing comparable interest rates. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
generally will enforce any due-on-sale or due-on-encumbrance clause, to the
extent it has knowledge of the conveyance or further encumbrance or the
proposed conveyance or proposed further encumbrance of the Property and
reasonably believes that it is entitled to do so under applicable law;
provided, however, that the Master Servicer will not take any enforcement
action that would impair or threaten to impair any recovery under any related
insurance policy. See "The Agreements-Collection Procedures" and "Certain
Legal Aspects of the Loans" for a description of certain provisions of each
Agreement and certain legal developments that may affect the prepayment
experience on the Loans.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. If prevailing rates fall
significantly below the Loan Rates borne by the Loans, such Loans may be
subject to higher prepayment rates than if prevailing interest rates remain
at or above such Loan Rates. Conversely, if prevailing interest rates rise
appreciably above the Loan Rates borne by the Loans, such Loans may
experience a lower prepayment rate than if prevailing rates remain at or
below such Loan Rates. However, there can be no assurance that such will be
the case.
When a full prepayment is made on a Loan, the borrower is charged
interest on the principal amount of the Loan so prepaid only for the number
of days in the month actually elapsed up to the date of the prepayment,
rather than for a full month. Unless the Master Servicer remits amounts
otherwise payable to it as servicing compensation, see "Description of the
Securities-Compensating Interest", the effect of prepayments in full will be
to reduce the amount of interest passed through in the following month to
holders of Securities because interest on the principal amount of any Loan so
prepaid will be paid only to the date of prepayment. Partial prepayments in
a given month may be applied to the outstanding principal balances of the
Loans so prepaid on the first day of the month of receipt or the month
following receipt. In the latter case, partial prepayments will not reduce
the amount of interest passed through in such month. Unless otherwise
specified in the related Prospectus Supplement, neither full nor partial
prepayments will be passed through until the month following receipt.
Even assuming that the Properties provide adequate security for the
Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Loans and corresponding delays in the receipt of
related proceeds by Securityholders could occur. An action to foreclose on a
Property securing a Loan is regulated by state statutes and rules and is
subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a property. In the event of a
default by a borrower, these restrictions among other things, may impede the
ability of the Master Servicer to foreclose on or sell the Property or to
obtain liquidation proceeds sufficient to repay all amounts due on the
related Loan. In addition, the Master Servicer will be entitled to deduct
from related liquidation proceeds all expenses reasonably incurred in
attempting to recover amounts due on defaulted Loans and not yet repaid,
including payments to senior lienholders, legal fees and costs of legal
action, real estate taxes and maintenance and preservation expenses.
Liquidation expenses with respect to defaulted mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time
of default. Therefore, assuming that a servicer took the same steps in
realizing upon a defaulted mortgage loan having a small remaining principal
balance as it would in the case of a defaulted mortgage loan having a large
remaining principal balance, the amount realized after expenses of
liquidation would be smaller as a percentage of the remaining principal
balance of the small mortgage loan than would be the case with the other
defaulted mortgage loan having a large remaining principal balance.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of certain
originators and servicers of Loans. In addition, most have other laws,
public policy and general principles of equity relating to the protection of
consumers, unfair and deceptive practices and practices which may apply to
the origination, servicing and collection of the Loans. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Master Servicer to collect all or part of the principal of or
interest on the Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Master Servicer to
damages and administrative sanctions.
If the rate at which interest is passed through to the holders of
Securities of a Series is calculated on a Loan-by-Loan basis,
disproportionate principal prepayments among Loans with different Loan Rates
will affect the yield on such Securities. In most cases, the effective yield
to Securityholders will be lower than the yield otherwise produced by the
applicable Pass-Through Rate and purchase price, because while interest will
accrue on each Loan from the first day of the month (unless otherwise
specified in the related Prospectus Supplement), the distribution of such
interest will not be made earlier than the month following the month of
accrual.
Under certain circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or any person specified in the related
Prospectus Supplement may have the option to purchase the assets of a Trust
Fund thereby effecting earlier retirement of the related Series of
Securities. See "The Agreements--Termination; Optional Termination".
Factors other than those identified herein and in the related Prospectus
Supplement could significantly affect principal prepayments at any time and
over the lives of the Securities. The relative contribution of the various
factors affecting prepayment may also vary from time to time. There can be
no assurance as to the rate of payment of principal of the Trust Fund Assets
at any time or over the lives of the Securities.
The Prospectus Supplement relating to a Series of Securities will
discuss in greater detail the effect of the rate and timing of principal
payments (including prepayments), delinquencies and losses on the yield,
weighted average lives and maturities of such Securities.
THE AGREEMENTS
Set forth below is a summary of certain provisions of each Agreement
which are not described elsewhere in this Prospectus. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of each Agreement. Where particular provisions
or terms used in the Agreements are referred to, such provisions or terms are
as specified in the Agreements. Except as otherwise specified, the Agreement
described herein contemplates a Trust Fund comprised of Loans. The
provisions of an Agreement with respect to a Trust Fund which consists of or
includes Private Asset Backed Securities may contain provisions similar to
those described herein but will be more fully described in the related
Prospectus Supplement.
ASSIGNMENT OF THE TRUST FUND ASSETS
Assignment of the Loans. At the time of issuance of the Securities of a
Series, the Depositor will cause the Loans comprising the related Trust Fund
to be assigned to the Trustee, together with all principal and interest
received by or on behalf of the Depositor on or with respect to such Loans
after the Cut-off Date, other than principal and interest due on or before
the Cut-off Date and other than any Retained Interest specified in the
related Prospectus Supplement. The Trustee will, concurrently with such
assignment, deliver the Securities to the Depositor in exchange for the
Loans. Each Loan will be identified in a schedule appearing as an exhibit to
the related Agreement. Such schedule will include information as to the
outstanding principal balance of each Loan after application of payments due
on or before the Cut-off Date, as well as information regarding the Loan Rate
or APR, the current scheduled monthly payment of principal and interest, the
maturity of the Loan, the Combined Loan-to-Value Ratios at origination and
certain other information.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will as to each Home Improvement Contract, deliver or cause to be
delivered to the Trustee the original Home Improvement Contract and copies of
documents and instruments related to each Home Improvement Contract and,
other than in the case of unsecured Home Improvement Contracts, the security
interest in the Property securing such Home Improvement Contract. In order
to give notice of the right, title and interest of Securityholders to the
Home Improvement Contracts, the Depositor will cause a UCC-1 financing
statement to be executed by the Depositor or the Seller identifying the
Trustee as the secured party and identifying all Home Improvement Contracts
as collateral. Unless otherwise specified in the related Prospectus
Supplement, the Home Improvement Contracts will not be stamped or otherwise
marked to reflect their assignment to the Trustee. Therefore, if, through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Home Improvement Contracts without notice of such
assignment, the interest of Securityholders in the Home Improvement Contracts
could be defeated. See "Certain Legal Aspects of the Loans--The Home
Improvement Contracts."
Unless otherwise specified in the related Prospectus Supplement, the
Agreement will require that, within the time period specified therein, the
Depositor will also deliver or cause to be delivered to the Trustee (or to
the custodian hereinafter referred to) as to each Home Equity Loan, among
other things, (i) the mortgage note or contract endorsed without recourse in
blank or to the order of the Trustee, (ii) the mortgage, deed of trust or
similar instrument (a "Mortgage") with evidence of recording indicated
thereon (except for any Mortgage not returned from the public recording
office, in which case the Depositor will deliver or cause to be delivered a
copy of such Mortgage together with a certificate that the original of such
Mortgage was delivered to such recording office), (iii) an assignment of the
Mortgage to the Trustee, which assignment will be in recordable form in the
case of a Mortgage assignment, and (iv) such other security documents,
including those relating to any senior interests in the Property, as may be
specified in the related Prospectus Supplement. Unless otherwise specified
in the related Prospectus Supplement, the Depositor will promptly cause the
assignments of the related Loans to be recorded in the appropriate public
office for real property records, except in states in which, in the opinion
of counsel acceptable to the Trustee, such recording is not required to
protect the Trustee's interest in such Loans against the claim of any
subsequent transferee or any successor to or creditor of the Depositor or the
originator of such Loans.
The Trustee (or the custodian hereinafter referred to) will review such
Loan documents within the time period specified in the related Prospectus
Supplement after receipt thereof, and the Trustee will hold such documents in
trust for the benefit of the Securityholders. Unless otherwise specified in
the related Prospectus Supplement, if any such document is found to be
missing or defective in any material respect, the Trustee (or such custodian)
will notify the Master Servicer and the Depositor, and the Master Servicer
will notify the related Seller. If the Seller cannot cure the omission or
defect within a specified number of days after receipt of such notice (or
such other period as may be specified in the related Prospectus Supplement),
the Seller will be obligated either (i) to purchase the related Loan from the
Trust at the Purchase Price or (ii) to remove such Loan from the Trust Fund
and substitute in its place one or more other Loans. There can be no
assurance that a Seller will fulfill this purchase or substitution
obligation. Although the Master Servicer may be obligated to enforce such
obligation to the extent described above under "Loan Program-Representations
by Sellers; Repurchases", neither the Master Servicer nor the Depositor will
be obligated to purchase or replace such Loan if the Seller defaults on its
obligation, unless such breach also constitutes a breach of the
representations or warranties of the Master Servicer or the Depositor, as the
case may be. Unless otherwise specified in the related Prospectus
Supplement, this purchase obligation constitutes the sole remedy available to
the Securityholders or the Trustee for omission of, or a material defect in,
a constituent document.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review
the documents relating to the Loans as agent of the Trustee.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Agreement. Upon a breach of any such representation
of the Master Servicer which materially and adversely affects the interests
of the Securityholders in a Loan, the Master Servicer will be obligated
either to cure the breach in all material respects or to purchase or replace
the Loan at the Purchase Price. Unless otherwise specified in the related
Prospectus Supplement, this obligation to cure, purchase or substitute
constitutes the sole remedy available to the Securityholders or the Trustee
for such a breach of representation by the Master Servicer.
Assignment of Private Asset Backed Securities. The Depositor will cause
Private Asset Backed Securities to be registered in the name of the Trustee.
The Trustee (or the custodian) will have possession of any certificated
Private Asset Backed Securities. Unless otherwise specified in the related
Prospectus Supplement, the Trustee will not be in possession of or be
assignee of record of any underlying assets for a Private Asset Backed
Security. See "The Trust Fund-Private Asset Backed Securities" herein. Each
Private Asset Backed Security will be identified in a schedule appearing as
an exhibit to the related Agreement which will specify the original principal
amount, outstanding principal balance as of the Cut-off Date, annual pass-
through rate or interest rate and maturity date and certain other pertinent
information for each Private Asset Backed Security conveyed to the Trustee.
Notwithstanding the foregoing provisions, with respect to a Trust Fund
for which a REMIC election is to be made, no purchase or substitution of a
Loan will be made if such purchase or substitution would result in a
prohibited transaction tax under the Code.
PAYMENTS ON LOANS; DEPOSITS TO SECURITY ACCOUNT
Each Sub-Servicer servicing a Loan pursuant to a Sub-Servicing Agreement
(as defined below under "-Sub-Servicing of Loans") will establish and
maintain an account (the "Sub-Servicing Account") which meets the following
requirements and is otherwise acceptable to the Master Servicer. A Sub-
Servicing Account must be established with a Federal Home Loan Bank or with a
depository institution (including the Sub-Servicer itself) whose accounts are
insured by either the Bank Insurance Fund (the "BIF") of the FDIC or the
Savings Association Insurance Fund (as successor to the Federal Savings and
Loan Insurance Corporation ("SAIF")) of the FDIC. If a Sub-Servicing Account
is maintained at an institution that is a Federal Home Loan Bank or an FDIC-
insured institution and, in either case, the amount on deposit in the Sub-
Servicing Account exceeds the FDIC insurance coverage amount, then such
excess amount must be remitted to the Master Servicer within one business day
of receipt. In addition, the Sub-Servicer must maintain a separate account
for escrow and impound funds relating to the Loans. Each Sub-Servicer is
required to deposit into its Sub-Servicing Account on a daily basis all
amounts described below under "-Sub-Servicing of Loans" that are received by
it in respect of the Loans, less its servicing or other compensation. On or
before the date specified in the Sub-Servicing Agreement, the Sub-Servicer
will remit or cause to be remitted to the Master Servicer or the Trustee all
funds held in the Sub-Servicing Account with respect to Loans that are
required to be so remitted. The Sub-Servicer may also be required to advance
on the scheduled date of remittance an amount corresponding to any monthly
installment of interest and/or principal, less its servicing or other
compensation, on any Loan for which payment was not received from the
mortgagor. Unless otherwise specified in the related Prospectus Supplement,
any such obligation of the Sub-Servicer to advance will continue up to and
including the first of the month following the date on which the related
Property is sold at a foreclosure sale or is acquired on behalf of the
Securityholders by deed in lieu of foreclosure, or until the related Loan is
liquidated.
The Master Servicer will establish and maintain or cause to be
established and maintained with respect to the related Trust Fund a separate
account or accounts for the collection of payments on the related Trust Fund
Assets in the Trust Fund (the "Security Account") must be either (i)
maintained with a depository institution the debt obligations of which (or in
the case of a depository institution that is the principal subsidiary of a
holding company, the obligations of which) are rated in one of the two
highest rating categories by the Rating Agency or Rating Agencies that rated
one or more classes of the related Series of Securities, (ii) an account or
accounts the deposits in which are fully insured by either the BIF or SAIF,
(iii) an account or accounts the deposits in which are insured by the BIF or
SAIF (to the limits established by the FDIC), and the uninsured deposits in
which are otherwise secured such that, as evidenced by an opinion of counsel,
the Securityholders have a claim with respect to the funds in the Security
Account or a perfected first priority security interest against any
collateral securing such funds that is superior to the claims of any other
depositors or general creditors of the depository institution with which the
Security Account is maintained, or (iv) an account or accounts otherwise
acceptable to each Rating Agency. The collateral eligible to secure amounts
in the Security Account is limited to United States government securities and
other high-quality investments ("Permitted Investments"). A Security Account
may be maintained as an interest bearing account or the funds held therein
may be invested pending each succeeding Distribution Date in Permitted
Investments. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer or its designee will be entitled to receive
any such interest or other income earned on funds in the Security Account as
additional compensation and will be obligated to deposit in the Security
Account the amount of any loss immediately as realized. The Security Account
may be maintained with the Master Servicer or with a depository institution
that is an affiliate of the Master Servicer, provided it meets the standards
set forth above.
The Master Servicer will deposit or cause to be deposited in the
Security Account for each Trust Fund on a daily basis, to the extent
applicable and provided in the Agreement, the following payments and
collections received or advances made by or on behalf of it subsequent to the
Cut-off Date (other than payments due on or before the Cut-off Date and
exclusive of any amounts representing Retained Interest):
(i) all payments on account of principal, including Principal
Prepayments and any applicable prepayment penalties, on the Loans;
(ii) all payments on account of interest on the Loans, net of
applicable servicing compensation;
(iii) all proceeds (net of unreimbursed payments of property taxes,
insurance premiums and similar items ("Insured Expenses") incurred, and
unreimbursed advances made, by the related Sub-Servicer, if any) of the
hazard insurance policies and any Primary Mortgage Insurance Policies,
to the extent such proceeds are not applied to the restoration of the
property or released to the Mortgagor in accordance with the Master
Servicer's normal servicing procedures (collectively, "Insurance
Proceeds") and all other cash amounts (net of unreimbursed expenses
incurred in connection with liquidation or foreclosure ("Liquidation
Expenses") and unreimbursed advances made, by the related Sub-Servicer,
if any) received and retained in connection with the liquidation of
defaulted Loans, by foreclosure or otherwise ("Liquidation Proceeds"),
together with any net proceeds received on a monthly basis with respect
to any properties acquired on behalf of the Securityholders by
foreclosure or deed in lieu of foreclosure;
(iv) all proceeds of any Loan or property in respect thereof
purchased by the Master Servicer, the Depositor, any Sub-Servicer or any
Seller as described under "Loan Program-Representations by Sellers;
Repurchases" or "-Assignment of Trust Fund Assets" above and all
proceeds of any Loan repurchased as described under "-Termination;
Optional Termination" below;
(v) all payments required to be deposited in the Security Account
with respect to any deductible clause in any blanket insurance policy
described under "-Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments for the benefit of the
Master Servicer of funds held in the Security Account; and
(vii) all other amounts required to be deposited in the Security
Account pursuant to the Agreement.
PRE-FUNDING ACCOUNT
If so provided in the related Prospectus Supplement, the Master Servicer
will establish and maintain a Pre-Funding Account, in the name of the related
Trustee on behalf of the related Securityholders, into which the Depositor
will deposit the Pre-Funded Amount on the related Closing Date. The Pre-
Funded Amount will not exceed 25% of the initial aggregate principal amount
of the Certificates and Notes of the related Series. The Pre-Funded Amount
will be used by the related Trustee to purchase Subsequent Loans from the
Depositor from time to time during the Funding Period. The Funding Period,
if any, for a Trust Fund will begin on the related Closing Date and will end
on the date specified in the related Prospectus Supplement, which in no event
will be later than the date that is three months after the Closing Date. Any
amounts remaining in the Pre-Funding Account at the end of the Funding Period
will be distributed to the related Securityholders in the manner and priority
specified in the related Prospectus Supplement, as a prepayment of principal
of the related Securities.
SUB-SERVICING OF LOANS
Each Seller of a Loan or any other servicing entity may act as the Sub-
Servicer for such Loan pursuant to an agreement (each, a "Sub-Servicing
Agreement"), which will not contain any terms inconsistent with the related
Agreement. While each Sub-Servicing Agreement will be a contract solely
between the Master Servicer and the Sub-Servicer, the Agreement pursuant to
which a Series of Securities is issued will provide that, if for any reason
the Master Servicer for such Series of Securities is no longer the Master
Servicer of the related Loans, the Trustee or any successor Master Servicer
must recognize the Sub-Servicer's rights and obligations under such Sub-
Servicing Agreement.
With the approval of the Master Servicer, a Sub-Servicer may delegate
its servicing obligations to third-party servicers, but such Sub-Servicer
will remain obligated under the related Sub-Servicing Agreement. Each Sub-
Servicer will be required to perform the customary functions of a servicer of
mortgage loans. Such functions generally include collecting payments from
mortgagors or obligors and remitting such collections to the Master Servicer;
maintaining hazard insurance policies as described herein and in any related
Prospectus Supplement, and filing and settling claims thereunder, subject in
certain cases to the right of the Master Servicer to approve in advance any
such settlement; maintaining escrow or impoundment accounts of mortgagors or
obligors for payment of taxes, insurance and other items required to be paid
by the mortgagor or obligor pursuant to the related Loan; processing
assumptions or substitutions, although, the Master Servicer is generally
required to exercise due-on-sale clauses to the extent such exercise is
permitted by law and would not adversely affect insurance coverage;
attempting to cure delinquencies; supervising foreclosures; inspecting and
managing Properties under certain circumstances; maintaining accounting
records relating to the Loans; and, to the extent specified in the related
Prospectus Supplement, maintaining additional insurance policies or credit
support instruments and filing and settling claims thereunder. A Sub-
Servicer will also be obligated to make advances in respect of delinquent
installments of interest and/or principal on Loans, as described more fully
above under "-Payments on Loans; Deposits to Security Account", and in
respect of certain taxes and insurance premiums not paid on a timely basis by
mortgagors or obligors.
As compensation for its servicing duties, each Sub-Servicer will be
entitled to a monthly servicing fee (to the extent the scheduled payment on
the related Loan has been collected) in the amount set forth in the related
Prospectus Supplement. Each Sub-Servicer is also entitled to collect and
retain, as part of its servicing compensation, any prepayment or late charges
provided in the Mortgage Note or related instruments. Each Sub-Servicer will
be reimbursed by the Master Servicer for certain expenditures which it makes,
generally to the same extent the Master Servicer would be reimbursed under
the Agreement. The Master Servicer may purchase the servicing of Loans if
the Sub-Servicer elects to release the servicing of such Loans to the Master
Servicer. See "-Servicing and Other Compensation and Payment of Expenses".
Each Sub-Servicer may be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Sub-Servicer in its
servicing capacity. Each Sub-Servicer will be required to maintain a
fidelity bond and an errors and omissions policy with respect to its
officers, employees and other persons acting on its behalf or on behalf of
the Master Servicer.
Each Sub-Servicer will be required to service each Loan pursuant to the
terms of the Sub-Servicing Agreement for the entire term of such Loan, unless
the Sub-Servicing Agreement is earlier terminated by the Master Servicer or
unless servicing is released to the Master Servicer. The Master Servicer may
terminate a Sub-Servicing Agreement without cause, upon written notice to the
Sub-Servicer in the manner specified in such Sub-Servicing Agreement.
The Master Servicer may agree with a Sub-Servicer to amend a Sub-
Servicing Agreement or, upon termination of the Sub-Servicing Agreement, the
Master Servicer may act as servicer of the related Loans or enter into new
Sub-Servicing Agreements with other Sub-Servicers. If the Master Servicer
acts as servicer, it will not assume liability for the representations and
warranties of the Sub-Servicer which it replaces. Each Sub-Servicer must be
a Seller or meet the standards for becoming a Seller or have such servicing
experience as to be otherwise satisfactory to the Master Servicer and the
Depositor. The Master Servicer will make reasonable efforts to have the new
Sub-Servicer assume liability for the representations and warranties of the
terminated Sub-Servicer, but no assurance can be given that such an
assumption will occur. In the event of such an assumption, the Master
Servicer may in the exercise of its business judgment release the terminated
Sub-Servicer from liability in respect of such representations and
warranties. Any amendments to a Sub-Servicing Agreement or new Sub-Servicing
Agreements may contain provisions different from those which are in effect in
the original Sub-Servicing Agreement. However, each Agreement will provide
that any such amendment or new agreement may not be inconsistent with or
violate such Agreement.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers, will
make reasonable efforts to collect all payments called for under the Loans
and will, consistent with each Agreement and any Pool Insurance Policy,
Primary Mortgage Insurance Policy, FHA Insurance, VA Guaranty Policy and
Bankruptcy Bond or alternative arrangements, follow such collection
procedures as are customary with respect to loans that are comparable to the
Loans. Consistent with the above, the Master Servicer may, in its
discretion, (i) waive any assumption fee, late payment or other charge in
connection with a Loan and (ii) to the extent not inconsistent with the
coverage of such Loan by a Pool Insurance Policy, Primary Mortgage Insurance
Policy, FHA Insurance, VA Guaranty or Bankruptcy Bond or alternative
arrangements, if applicable, arrange with a borrower a schedule for the
liquidation of delinquencies running for no more than 125 days after the
applicable due date for each payment. Both the Sub-Servicer and the Master
Servicer may be obligated to make Advances during any period of such an
arrangement.
Except as otherwise specified in the related Prospectus Supplement, in
any case in which property securing a Loan has been, or is about to be,
conveyed by the mortgagor or obligor, the Master Servicer will, to the extent
it has knowledge of such conveyance or proposed conveyance, exercise or cause
to be exercised its rights to accelerate the maturity of such Loan under any
due-on-sale clause applicable thereto, but only if the exercise of such
rights is permitted by applicable law. If these conditions are not met or if
the Master Servicer reasonably believes it is unable under applicable law to
enforce such due-on-sale clause, or the Master Servicer will enter into or
cause to be entered into an assumption and modification agreement with the
person to whom such property has been or is about to be conveyed, pursuant to
which such person becomes liable for repayment of the Loan and, to the extent
permitted by applicable law, the mortgagor remains liable thereon. Any fee
collected by or on behalf of the Master Servicer for entering into an
assumption agreement will be retained by or on behalf of the Master Servicer
as additional servicing compensation. See "Certain Legal Aspects of the
Loans-Due-on-Sale Clauses". In connection with any such assumption, the
terms of the related Loan may not be changed.
HAZARD INSURANCE
Except as otherwise specified in the related Prospectus Supplement, the
Master Servicer will require the mortgagor or obligor on each Loan to
maintain a hazard insurance policy providing for no less than the coverage of
the standard form of fire insurance policy with extended coverage customary
for the type of Property in the state in which such Property is located. All
amounts collected by the Master Servicer under any hazard policy (except for
amounts to be applied to the restoration or repair of the Property or
released to the mortgagor or obligor in accordance with the Master Servicer's
normal servicing procedures) will be deposited in the related Security
Account. In the event that the Master Servicer maintains a blanket policy
insuring against hazard losses on all the Loans comprising part of a Trust
Fund, it will conclusively be deemed to have satisfied its obligation
relating to the maintenance of hazard insurance. Such blanket policy may
contain a deductible clause, in which case the Master Servicer will be
required to deposit from its own funds into the related Security Account the
amounts which would have been deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements securing a Loan
by fire, lightning, explosion, smoke, windstorm and hail, riot, strike and
civil commotion, subject to the conditions and exclusions particularized in
each policy. Although the policies relating to the Loans may have been
underwritten by different insurers under different state laws in accordance
with different applicable forms and therefore may not contain identical terms
and conditions, the basic terms thereof are dictated by respective state
laws, and most such policies typically do not cover any physical damage
resulting from the following: war, revolution, governmental actions, floods
and other water-related causes, earth movement (including earthquakes,
landslides and mud flows), nuclear reactions, wet or dry rot, vermin,
rodents, insects or domestic animals, theft and, in certain cases, vandalism.
The foregoing list is merely indicative of certain kinds of uninsured risks
and is not intended to be all inclusive. If the Property securing a Loan is
located in a federally designated special flood area at the time of
origination, the Master Servicer will require the mortgagor or obligor to
obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Loans
typically contain a clause which in effect requires the insured at all time
to carry insurance of a specified percentage of the full replacement value of
the insured property in order to recover the full amount of any partial loss.
If the insured's coverage falls below this specified percentage, then the
insurer's liability in the event of partial loss will not exceed the larger
of (i) the actual cash value (generally defined as replacement cost at the
time and place of loss, less physical depreciation) of the improvements
damaged or destroyed or (ii) such proportion of the loss as the amount of
insurance carried bears to the specified percentage of the full replacement
cost of such improvements. Since the amount of hazard insurance the Master
Servicer may cause to be maintained on the improvements securing the Loans
declines as the principal balances owing thereon decrease, and since improved
real estate generally has appreciated in value over time in the past, the
effect of this requirement in the event of partial loss may be that hazard
insurance proceeds will be insufficient to restore fully the damaged
property. If specified in the related Prospectus Supplement, a special
hazard insurance policy will be obtained to insure against certain of the
uninsured risks described above. See "Credit Enhancement-Special Hazard
Insurance Policies".
If the Property securing a defaulted Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged Property, the Master Servicer is not required to expend its own funds
to restore the damaged Property unless it determines (i) that such
restoration will increase the proceeds to Securityholders on liquidation of
the Loan after reimbursement of the Master Servicer for its expenses and (ii)
that such expenses will be recoverable by it from related Insurance Proceeds
or Liquidation Proceeds.
If recovery on a defaulted Loan under any related Insurance Policy is
not available for the reasons set forth in the preceding paragraph, or if the
defaulted Loan is not covered by an Insurance Policy, the Master Servicer
will be obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Loan. If the proceeds of any liquidation of the Property securing the
defaulted Loan are less than the principal balance of such Loan plus interest
accrued thereon that is payable to Securityholders, the Trust Fund will
realize a loss in the amount of such difference plus the aggregate of
expenses incurred by the Master Servicer in connection with such proceedings
and which are reimbursable under the Agreement. In the unlikely event that
any such proceedings result in a total recovery which is, after reimbursement
to the Master Servicer of its expenses, in excess of the principal balance of
such Loan plus interest accrued thereon that is payable to Securityholders,
the Master Servicer will be entitled to withdraw or retain from the Security
Account amounts representing its normal servicing compensation with respect
to such Loan and, unless otherwise specified in the related Prospectus
Supplement, amounts representing the balance of such excess, exclusive of any
amount required by law to be forwarded to the related borrower, as additional
servicing compensation.
Unless otherwise specified in the related Prospectus Supplement, if the
Master Servicer or its designee recovers Insurance Proceeds which, when added
to any related Liquidation Proceeds and after deduction of certain expenses
reimbursable to the Master Servicer, exceed the principal balance of such
Loan plus interest accrued thereon that is payable to Securityholders, the
Master Servicer will be entitled to withdraw or retain from the Security
Account amounts representing its normal servicing compensation with respect
to such Loan. In the event that the Master Servicer has expended its own
funds to restore the damaged Property and such funds have not been reimbursed
under the related hazard insurance policy, it will be entitled to withdraw
from the Security Account out of related Liquidation Proceeds or Insurance
Proceeds in an amount equal to such expenses incurred by it, in which event
the Trust Fund may realize a loss up to the amount so charged. Since
Insurance Proceeds cannot exceed deficiency claims and certain expenses
incurred by the Master Servicer, no such payment or recovery will result in a
recovery to the Trust Fund which exceeds the principal balance of the
defaulted Loan together with accrued interest thereon. See "Credit
Enhancement".
REALIZATION UPON DEFAULTED LOANS
Primary Mortgage Insurance Policies. The Master Servicer will maintain
or cause each Sub-Servicer to maintain, as the case may be, in full force and
effect, to the extent specified in the related Prospectus Supplement, a
Primary Mortgage Insurance Policy with regard to each Loan for which such
coverage is required. The Master Servicer will not cancel or refuse to renew
any such Primary Mortgage Insurance Policy in effect at the time of the
initial issuance of a Series of Securities that is required to be kept in
force under the applicable Agreement unless the replacement Primary Mortgage
Insurance Policy for such cancelled or nonrenewed policy is maintained with
an insurer whose claims-paying ability is sufficient to maintain the current
rating of the classes of Securities of such Series that have been rated.
Although the terms and conditions of primary mortgage insurance vary,
the amount of a claim for benefits under a Primary Mortgage Insurance Policy
covering a Loan will consist of the insured percentage of the unpaid
principal amount of the covered Loan and accrued and unpaid interest thereon
and reimbursement of certain expenses, less (i) all rents or other payments
collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to the Property, (ii)
hazard insurance proceeds in excess of the amount required to restore the
Property and which have not been applied to the payment of the Loan, (iii)
amounts expended but not approved by the issuer of the related Primary
Mortgage Insurance Policy (the "Primary Insurer"), (iv) claim payments
previously made by the Primary Insurer and (v) unpaid premiums.
Primary Mortgage Insurance Policies reimburse certain losses sustained
by reason of defaults in payments by borrowers. Primary Mortgage Insurance
Policies will not insure against, and exclude from coverage, a loss sustained
by reason of a default arising from or involving certain matters, including
(i) fraud or negligence in origination or servicing of the Loans, including
misrepresentation by the originator, borrower or other persons involved in
the origination of the Loans; (ii) failure to construct the Property subject
to the Loan in accordance with specified plans; (iii) physical damage to the
Property; and (iv) the related Master Servicer or Sub-servicer not being
approved as a servicer by the Primary Insurer.
Recoveries Under a Primary Mortgage Insurance Policy. As conditions
precedent to the filing of or payment of a claim under a Primary Mortgage
Insurance Policy covering a Loan, the insured will be required to (i) advance
or discharge (a) all hazard insurance policy premiums and (b) as necessary
and approved in advance by the Primary Insurer, (1) real estate property
taxes, (2) all expenses required to maintain the related Property in at least
as good a condition as existed at the effective date of such Primary Mortgage
Insurance Policy, ordinary wear and tear excepted, (3) Property sales
expenses, (4) any outstanding liens (as defined in such Primary Mortgage
Insurance Policy) on the Property and (5) foreclosure costs, including court
costs and reasonable attorneys' fees; (ii) in the event of any physical loss
or damage to the Property, to have the Property restored and repaired to at
least as good a condition as existed at the effective date of such Primary
Mortgage Insurance Policy, ordinary wear and tear excepted; and (iii) tender
to the Primary Insurer good and merchantable title to and possession of the
Property.
In those cases in which a Loan is serviced by a Sub-Servicer, the Sub-
Servicer, on behalf of itself, the Trustee and Securityholders, will present
claims to the Primary Insurer, and all collection thereunder will be
deposited in the Sub-Servicing Account. In all other cases, the Master
Servicer, on behalf of itself, the Trustee and the Securityholders, will
present claims to the insurer under each Primary Mortgage Insurance Policy,
and will take such reasonable steps as are necessary to receive payment or to
permit recovery thereunder with respect to defaulted Loans. As set forth
above, all collections by or on behalf of the Master Servicer under any
Primary Mortgage Insurance Policy and, when the Property has not been
restored, the hazard insurance policy, are to be deposited in the Security
Account, subject to withdrawal as heretofore described.
If the Property securing a defaulted Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged Property to a condition sufficient to permit recovery under the
related Primary Mortgage Insurance Policy, if any, the Master Servicer is not
required to expend its own funds to restore the damaged Property unless it
determines (i) that such restoration will increase the proceeds to
Securityholders on liquidation of the Loan after reimbursement of the Master
Servicer for its expenses and (ii) that such expenses will be recoverable by
it from related Insurance Proceeds or Liquidation Proceeds.
If recovery on a defaulted Loan under any related Primary Mortgage
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Loan is not covered by a Primary Mortgage
Insurance Policy, the Master Servicer will be obligated to follow or cause to
be followed such normal practices and procedures as it deems necessary or
advisable to realize upon the defaulted Loan. If the proceeds of any
liquidation of the Property securing the defaulted Loan are less than the
principal balance of such Loan plus interest accrued thereon that is payable
to Securityholders, the Trust Fund will realize a loss in the amount of such
difference plus the aggregate of expenses incurred by the Master Servicer in
connection with such proceedings and which are reimbursable under the
Agreement. In the unlikely event that any such proceedings result in a total
recovery which is, after reimbursement to the Master Servicer of its
expenses, in excess of the principal balance of such Loan plus interest
accrued thereon that is payable to Securityholders, the Master Servicer will
be entitled to withdraw or retain from the Security Account amounts
representing its normal servicing compensation with respect to such Loan and,
except as otherwise specified in the Prospectus Supplement, amounts
representing the balance of such excess, exclusive of any amount required by
law to be forwarded to the related borrower, as additional servicing
compensation.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer's primary servicing compensation with respect to a Series of
Securities will come from the monthly payment to it, out of each interest
payment on a Loan, of an amount equal to the percentage per annum specified
in the related Prospectus Supplement of the outstanding principal balance
thereof. Since the Master Servicer's primary compensation is a percentage of
the outstanding principal balance of each Loan, such amounts will decrease as
the Loans amortize. In addition to primary compensation, the Master Servicer
or the Sub-Servicers may be entitled to retain all assumption fees and late
payment charges, to the extent collected from borrowers, and, if so provided
in the related Prospectus Supplement, any prepayment penalties and any
interest or other income which may be earned on funds held in the Security
Account or any Sub-Servicing Account. Unless otherwise specified in the
related Prospectus Supplement, any Sub-Servicer will receive a portion of the
Master Servicer's primary compensation as its sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, the Master Servicer
will, unless otherwise specified in the related Prospectus Supplement, pay
from its servicing compensation certain expenses incurred in connection with
its servicing of the Loans, including, without limitation, payment of any
premium for any insurance policy, guaranty, surety or other form of credit
enhancement as specified in the related Prospectus Supplement, payment of the
fees and disbursements of the Trustee and independent accountants, payment of
expenses incurred in connection with distributions and reports to
Securityholders, and payment of any other expenses described in the related
Prospectus Supplement.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to
the Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with the Uniform Single Audit Program
for Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC,
the servicing by or on behalf of the Master Servicer of mortgage loans or
private asset backed securities, or under pooling and servicing agreements
substantially similar to each other (including the related Agreement) was
conducted in compliance with such agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, the Audit
Program for Mortgages serviced for FHLMC, or the Uniform Single Audit Program
for Mortgage Bankers, it is required to report. In rendering its statement
such firm may rely, as to matters relating to the direct servicing of Loans
or Private Asset Backed Securities by Sub-Servicers, upon comparable
statements for examinations conducted substantially in compliance with the
Uniform Single Audit Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FHLMC (rendered within one year of such statement) of
firms of independent public accountants with respect to the related Sub-
Servicer.
Each Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of
officers of the Master Servicer may be obtained by Securityholders of the
related Series without charge upon written request to the Master Servicer at
the address set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The Master Servicer under each Agreement will be named in the related
Prospectus Supplement. The entity serving as Master Servicer may have normal
business relationships with the Depositor or the Depositor's affiliates.
Each Agreement will provide that the Master Servicer may not resign from
its obligations and duties under the Agreement except upon a determination
that its duties thereunder are no longer permissible under applicable law.
The Master Servicer may, however, be removed from its obligations and duties
as set forth in the Agreement. No such resignation will become effective
until the Trustee or a successor servicer has assumed the Master Servicer's
obligations and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer,
the Depositor nor any director, officer, employee, or agent of the Master
Servicer or the Depositor will be under any liability to the related Trust
Fund or Securityholders for any action taken or for refraining from the
taking of any action in good faith pursuant to the Agreement, or for errors
in judgment; provided, however, that neither the Master Servicer, the
Depositor nor any such person will be protected against any liability which
would otherwise be imposed by reason of wilful misfeasance or gross
negligence in the performance of duties thereunder or by reasons of reckless
disregard of obligations and duties thereunder. To the extent provided in
the related Agreement, the Master Servicer, the Depositor and any director,
officer, employee or agent of the Master Servicer or the Depositor may be
entitled to indemnification by the related Trust Fund and may be held
harmless against any loss, liability or expense incurred in connection with
any legal action relating to the Agreement or the Securities, other than any
loss, liability or expense related to any specific Loan or Loans (except any
such loss, liability or expense otherwise reimbursable pursuant to the
Agreement) and any loss, liability or expense incurred by reason of willful
misfeasance or gross negligence in the performance of duties thereunder or by
reason of reckless disregard of obligations and duties thereunder. In
addition, each Agreement will provide that neither the Master Servicer nor
the Depositor will be under any obligation to appear in, prosecute or defend
any legal action which is not incidental to its respective responsibilities
under the Agreement and which in its opinion may involve it in any expense or
liability. The Master Servicer or the Depositor may, however, in its
discretion undertake any such action which it may deem necessary or desirable
with respect to the Agreement and the rights and duties of the parties
thereto and the interests of the Securityholders thereunder. In such event,
the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Trust Fund and the
Master Servicer or the Depositor, as the case may be, will be entitled to be
reimbursed therefor out of funds otherwise distributable to Securityholders.
Except as otherwise specified in the related Prospectus Supplement, any
person into which the Master Servicer may be merged or consolidated, or any
person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Agreement.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Servicing Agreement. Except as
otherwise specified in the related Prospectus Supplement, Events of Default
under each Agreement will consist of (i) any failure by the Master Servicer
to distribute or cause to be distributed to Securityholders of any class any
required payment (other than an Advance) which continues unremedied for five
business days after the giving of written notice of such failure to the
Master Servicer by the Trustee or the Depositor, or to the Master Servicer,
the Depositor and the Trustee by the holders of Securities of such class
evidencing not less than 25% of the aggregate Percentage Interests evidenced
by such class; (ii) any failure by the Master Servicer to make an Advance as
required under the Agreement, unless cured as specified therein; (iii) any
failure by the Master Servicer duly to observe or perform in any material
respect any of its other covenants or agreements in the Agreement which
continues unremedied for thirty days after the giving of written notice of
such failure to the Master Servicer by the Trustee or the Depositor, or to
the Master Servicer, the Depositor and the Trustee by the holders of
Securities of any class evidencing not less than 25% of the aggregate
Percentage Interests constituting such class; and (iv) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceeding and certain actions by or on behalf of the Master Servicer
indicating its insolvency, reorganization or inability to pay its
obligations.
If specified in the related Prospectus Supplement, the Agreement will
permit the Trustee to sell the Trust Fund Assets and the other assets of the
Trust Fund in the event that payments in respect thereto are insufficient to
make payments required in the Agreement. The assets of the Trust Fund will
be sold only under the circumstances and in the manner specified in the
related Prospectus Supplement.
So long as an Event of Default under an Agreement remains unremedied,
the Depositor or the Trustee may, and at the direction of holders of
Securities of any class evidencing not less than 51% of the aggregate
Percentage Interests constituting such class and under such other
circumstances as may be specified in such Agreement, the Trustee shall,
terminate all of its rights and obligations of the Master Servicer under the
Agreement relating to such Trust Fund and in and to the Trust Fund Assets,
whereupon the Trustee will succeed to all of the responsibilities, duties and
liabilities of the Master Servicer under the Agreement, including, if
specified in the related Prospectus Supplement, the obligation to make
advances, and will be entitled to similar compensation arrangements. In the
event that the Trustee is unwilling or unable so to act, it may appoint, or
petition a court of competent jurisdiction for the appointment of, a mortgage
loan servicing institution with a net worth of a least $10,000,000 to act as
successor to the Master Servicer under the Agreement. Pending such
appointment, the Trustee is obligated to act in such capacity. The Trustee
and any such successor may agree upon the servicing compensation to be paid,
which in no event may be greater than the compensation payable to the Master
Servicer under the Agreement.
No Securityholder, solely by virtue of such holder's status as a
Securityholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Securities of any class of such Series evidencing not less than 25% of the
aggregate Percentage Interests constituting such class have made written
request upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity, and
the Trustee for 60 days has neglected or refused to institute any such
proceeding.
Indenture. Except as otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for five (5) 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 thirty (30) 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 thirty (30) 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,
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.
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
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and
safety. These include laws and regulations governing air pollutant
emissions, hazardous and toxic substances, impacts to wetlands, leaks from
underground storage tanks, and the management, removal and disposal of lead-
and asbestos-containing materials. In certain circumstances, these laws and
regulations impose obligations on the owners or operators of residential
properties such as those subject to the Loans. The failure to comply with
such laws and regulations may result in fines and penalties.
Moreover, under various federal, state and local laws and regulations,
an owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs. Such
liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of such substances, and could exceed
the value of the property and the aggregate assets of the owner or operator.
In addition, persons who transport or dispose of hazardous substances, or
arrange for the transportation, disposal or treatment of hazardous
substances, at off-site locations may also be held liable if there are
releases or threatened releases of hazardous substances at such off-site
locations.
In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), contamination of property may give rise to a lien on the property
to assure the payment of the costs of clean-up. In several states, such a
lien has priority over the lien of an existing mortgage against such
property. Under CERCLA, such a lien is subordinate to pre-existing,
perfected security interests.
Under the laws of some states, and under CERCLA, there is a possibility
that a lender may be held liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by a current or prior owner or operator. CERCLA and some state laws
provide an exemption from the definition of "owner or operator" for a secured
creditor who, without "participating in the management" of a facility, holds
indicia of ownership primarily to protect its security interest in the
facility. The Solid Waste Disposal Act ("SWDA") provides similar protection
to secured creditors in connection with liability for releases of petroleum
from certain underground storage tanks. However, if a lender "participates
in the management" of the facility in question or is found not to have held
its interest primarily to protect a security interest, the lender may forfeit
its secured creditor exemption status.
A regulation promulgated by the U.S. Environmental Protection Agency
("EPA") in April 1992 attempted to clarify the activities in which lenders
could engage both prior to and subsequent to foreclosure of a security
interest without forfeiting the secured creditor exemption under CERCLA. The
rule was struck down in 1994 by the United States Court of Appeals for the
District of Columbia Circuit in Kelley ex rel State of Michigan v.
Environmental Protection Agency, 15 F.3d 1100 (D.C Cir. 1994), reh'g denied,
25 F.3d 1088, cert. denied sub nom. Am. Bankers Ass'n v. Kelley, 115 S.Ct.
900 (1995). Another EPA regulation promulgated in 1995 clarifies the
activities in which lenders may engage without forfeiting the secured
creditor exemption under the underground storage tank provisions of the SWDA.
That regulation has not been struck down.
On September 30, 1996, Congress amended both CERCLA and the SWDA to
provide additional clarification regarding the scope of the lender liability
exemptions under the two statutes. Among other things, the 1996 amendments
specify the circumstances under which a lender will be protected by the
CERCLA and SWDA exemptions, both while the borrower is still in possession of
the secured property and following foreclosure on the secured property.
Generally, the amendments state that a lender who holds indicia of
ownership primarily to protect a security interest in a facility will be
considered to participate in management only if, while the borrower is still
in possession of the facility encumbered by the security interest, the lender
(i) exercises decision-making control over environmental compliance related
to the facility such that the lender has undertaken responsibility for
hazardous substance handling or disposal practices related to the facility or
(ii) exercises control at a level comparable to that of a manager of the
facility such that the lender has assumed or manifested responsibility for
(x) overall management of the facility encompassing daily-decision making
with respect to environmental compliance or (y) overall or substantially all
of the operational functions (as distinguished from financial or
administrative functions) of the facility other than the function of
environmental compliance. The amendments also specify certain activities
that are not considered to be "participation in management", including
monitoring or enforcing the terms of the extension of credit or security
interest, inspecting the facility, and requiring a lawful means of addressing
the release or threatened release of a hazardous substance.
The 1996 amendments also specify that a lender who did not participate
in management of a facility prior to foreclosure will not be considered an
"owner or operator", even if the lender forecloses on the facility and after
foreclosure sells or liquidates the facility, maintains business activities,
winds up operations, undertakes an appropriate response action, or takes any
other measure to preserve, protect, or prepare the facility prior to sale or
disposition, if the lender seeks to sell or otherwise divest the facility at
the earliest practicable, commercially reasonable time, on commercially
reasonable terms, taking into account market conditions and legal and
regulatory requirements.
The CERCLA and SWDA lender liability amendments specifically address the
potential liability of lenders who hold mortgages or similar conventional
security interests in real property, such as the Trust Fund does in
connection with the Home Equity Loans and the Home Improvement Contracts.
The amendments do not clearly address the potential liability of lenders who
retain legal title to a property and enter into an agreement with the
purchaser for the payment of the purchase price and interest over the term of
the contract, such as the Trust Fund does in connection with the Installment
Contracts.
If a lender (including a lender under an Installment Contract) is or
becomes liable under CERCLA, it may be authorized to bring a statutory action
for contribution against any other "responsible parties", including a
previous owner or operator. However, such persons or entities may be
bankrupt or otherwise judgment proof, and the costs associated with
environmental cleanup and related actions may be substantial. Moreover, some
state laws imposing liability for addressing hazardous substances do not
contain exemptions from liability for lenders. Whether the costs of
addressing a release or threatened release at a property pledged as
collateral for one of the Loans (or at a property subject to an Installment
Contract), would be imposed on the Trust Fund, and thus occasion a loss to
the Securityholders, therefore depends on the specific factual and legal
circumstances at issue.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of
a mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption would
defeat the title of any purchaser from the lender subsequent to foreclosure
or sale under a deed of trust. Consequently, the practical effect of the
redemption right is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run. In some states,
there is no right to redeem property after a trustee's sale under a deed of
trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have adopted statutory prohibitions restricting the right
of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or certain other foreclosure proceedings. A deficiency
judgment is a personal judgment against the borrower equal in most cases to
the difference between the amount due to the lender and the fair market value
of the real property sold at the foreclosure sale. Other statutes require
the beneficiary or mortgagee to exhaust the security afforded under a deed of
trust or mortgage by foreclosure in an attempt to satisfy the full debt
before bringing a personal action against the borrower. In certain other
states, the lender has the option of bringing a personal action against the
borrower on the debt without first exhausting such security; however, in some
of these states, the lender, following judgment on such personal action, may
be deemed to have elected a remedy and may be precluded from exercising
remedies with respect to the security. Consequently, the practical effect of
the election requirement, when applicable, is that lenders will usually
proceed first against the security rather than bringing a personal action
against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a foreclosure sale
to the excess of the outstanding debt over the fair market value of the
property at the time of the public sale. The purpose of these statutes is
generally to prevent a beneficiary or a mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids
at the foreclosure sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy
laws, the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state
laws affording relief to debtors, may interfere with or affect the ability of
the secured mortgage lender to realize upon its security. For example, in a
proceeding under the federal Bankruptcy Code, a lender may not foreclose on
the Property without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the Property is
not the debtor's principal residence and the court determines that the value
of the Property is less than the principal balance of the mortgage loan, for
the reduction of the secured indebtedness to the value of the Property as of
the date of the commencement of the bankruptcy, rendering the lender a
general unsecured creditor for the difference, and also may reduce the
monthly payments due under such mortgage loan, change the rate of interest
and alter the mortgage loan repayment schedule. The effect of any such
proceedings under the federal Bankruptcy Code, including but not limited to
any automatic stay, could result in delays in receiving payments on the Loans
underlying a Series of Securities and possible reductions in the aggregate
amount of such payments.
The federal tax laws provide priority to certain tax liens over the lien
of a mortgage or secured party. Numerous federal and state consumer
protection laws impose substantive requirements upon mortgage lenders in
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 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
"Premium"). For loans having a maturity of 25 months or less, the FHA bills
the lender for the entire 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 a 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 Premium paid for such year.
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. 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.
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.
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.
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
domestic building and loan association will constitute "loans... secured by
an interest in real property" within the meaning of Code section
7701(a)(19)(C)(v); and (ii) Securities held by a real estate investment trust
will constitute "real estate assets" within the meaning of Code section
856(c)(5)(A) and interest on Securities will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code section 856(c)(3)(B).
Interest and Acquisition Discount. In the opinion of Tax Counsel,
Regular Interest Securities are generally taxable to holders in the same
manner as evidences of indebtedness issued by the REMIC. Stated interest on
the Regular Interest Securities will be taxable as ordinary income and taken
into account using the accrual method of accounting, regardless of the
holder's normal accounting method. Interest (other than original issue
discount) on Securities (other than Regular Interest Securities) that are
characterized as indebtedness for federal income tax purposes will be
includible in income by holders thereof in accordance with their usual
methods of accounting. Securities characterized as debt for federal income
tax purposes and Regular Interest Securities will be referred to hereinafter
collectively as "Debt Securities."
Tax Counsel is of the opinion that Debt Securities that are Compound
Interest Securities will, and certain of the other Debt Securities issued at
a discount may, be issued with "original issue discount" ("OID"). The
following discussion is based in part on the rules governing OID which are
set forth in Sections 1271-1275 of the Code and the Treasury regulations
issued thereunder on February 2, 1994 (the "OID Regulations"). A holder
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the Debt
Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. In the
opinion of Tax Counsel, a holder of a Debt Security must include such OID in
gross income as ordinary interest income as it accrues under a method taking
into account an economic accrual of the discount. In general, OID must be
included in income in advance of the receipt of the cash representing that
income. The amount of OID on a Debt Security will be considered to be zero
if it is less than a de minimis amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than
a substantial amount of a particular class of Debt Securities is sold for
cash on or prior to the Closing Date, the issue price for such class will be
treated as the fair market value of such class on the Closing Date. The
issue price of a Debt Security also includes the amount paid by an initial
Debt Security holder for accrued interest that relates to a period prior to
the issue date of the Debt Security. The stated redemption price at maturity
of a Debt Security includes the original principal amount of the Debt
Security, but generally will not include distributions of interest if such
distributions constitute "qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as
described below) provided that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Debt
Security. The OID Regulations state that interest payments are
unconditionally payable only if a late payment or nonpayment is expected to
be penalized or reasonable remedies exist to compel payment. Certain Debt
Securities may provide for default remedies in the event of late payment or
nonpayment of interest. In the opinion of Tax Counsel, the interest on such
Debt Securities will be unconditionally payable and constitute qualified
stated interest, not OID. However, absent clarification of the OID
Regulations, where Debt Securities do not provide for default remedies, the
interest payments will be included in the Debt Security's stated redemption
price at maturity and taxed as OID. Interest is payable at a single fixed
rate only if the rate appropriately takes into account the length of the
interval between payments. Distributions of interest on Debt Securities with
respect to which deferred interest will accrue, will not constitute qualified
stated interest payments, in which case the stated redemption price at
maturity of such Debt Securities includes all distributions of interest as
well as principal thereon. Where the interval between the issue date and the
first Distribution Date on a Debt Security is either longer or shorter than
the interval between subsequent Distribution Dates, all or part of the
interest foregone, in the case of the longer interval, and all of the
additional interest, in the case of the shorter interval, will be included in
the stated redemption price at maturity and tested under the de minimis rule
described below. In the case of a Debt Security with a long first period
which has non-de minimis OID, all stated interest in excess of interest
payable at the effective interest rate for the long first period will be
included in the stated redemption price at maturity and the Debt Security
will generally have OID. Holders of Debt Securities should consult their own
tax advisors to determine the issue price and stated redemption price at
maturity of a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered to
be zero if such OID is less than 0.25% of the stated redemption price at
maturity of the Debt Security multiplied by the weighted average maturity of
the Debt Security. For this purpose, the weighted average maturity of the
Debt Security is computed as the sum of the amounts determined by multiplying
the number of full years (i.e., rounding down partial years) from the issue
date until each distribution in reduction of stated redemption price at
maturity is scheduled to be made by a fraction, the numerator of which is the
amount of each distribution included in the stated redemption price at
maturity of the Debt Security and the denominator of which is the stated
redemption price at maturity of the Debt Security. Holders generally must
report de minimis OID pro rata as principal payments are received, and such
income will be capital gain if the Debt Security is held as a capital asset.
However, accrual method holders may elect to accrue all de minimis OID as
well as market discount under a constant interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a
qualified variable rate and not as contingent interest if, generally, (i)
such interest is unconditionally payable at least annually, (ii) the issue
price of the debt instrument does not exceed the total noncontingent
principal payments and (iii) interest is based on a "qualified floating
rate," an "objective rate," or a combination of "qualified floating rates"
that do not operate in a manner that significantly accelerates or defers
interest payments on such Debt Security. In the case of Compound Interest
Securities, certain Interest Weighted Securities, and certain of the other
Debt Securities, none of the payments under the instrument will be considered
qualified stated interest, and thus the aggregate amount of all payments will
be included in the stated redemption price.
The Internal Revenue Services (the "IRS") recently issued regulations
(the "Contingent Regulations") governing the calculation of OID on
instruments having contingent interest payments. The Contingent Regulations
represent the only guidance regarding the views of the IRS with respect to
contingent interest instruments and specifically do not apply for purposes of
calculating OID on debt instruments subject to Code Section 1272(a)(6), such
as the Debt Security. Additionally, the OID Regulations do not contain
provisions specifically interpreting 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.
The legislative history of the 1986 Act indicates that premium is to be
accrued in the same manner as market discount. Accordingly, it appears that
the accrual of premium on a class of Pay-Through Securities will be
calculated using the prepayment assumption used in pricing such class. If a
holder makes an election to amortize premium on a Debt Security, such
election will apply to all taxable debt instruments (including all REMIC
regular interests and all pass-through certificates representing ownership
interests in a trust holding debt obligations) held by the holder at the
beginning of the taxable year in which the election is made, and to all
taxable debt instruments acquired thereafter by such holder, and will be
irrevocable without the consent of the IRS. Purchasers who pay a premium for
the Securities should consult their tax advisers regarding the election to
amortize premium and the method to be employed.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt Security to elect to accrue all
interest, discount (including de minimis market or original issue discount)
and premium in income as interest, based on a constant yield method for Debt
Securities acquired on or after April 4, 1994. If such an election were to
be made with respect to a Debt Security with market discount, the holder of
the Debt Security would be deemed to have made an election to include in
income currently market discount with respect to all other debt instruments
having market discount that such holder of the Debt Security acquires during
the year of the election or thereafter. Similarly, a holder of a Debt
Security that makes this election for a Debt Security that is acquired at a
premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
holder owns or acquires. The election to accrue interest, discount and
premium on a constant yield method with respect to a Debt Security is
irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
General. In the opinion of Tax Counsel, if a REMIC election is made
with respect to a Series of Securities, then the arrangement by which the
Securities of that Series are issued will be treated as a REMIC as long as
all of the provisions of the applicable Agreement are complied with and the
statutory and regulatory requirements are satisfied. Securities will be
designated as "Regular Interests" or "Residual Interests" in a REMIC, as
specified in the related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if
a REMIC election is made with respect to a Series of Securities, in the
opinion of Tax Counsel (i) Securities held by a domestic building and loan
association will constitute "a regular or a residual interest in a REMIC"
within the meaning of Code Section 7701(a)(19)(C)(xi) (assuming that at least
95% of the REMIC's assets consist of cash, government securities, "loans
secured by an interest in real property," and other types of assets described
in Code Section 7701(a)(19)(C)); and (ii) Securities held by a real estate
investment trust will constitute "real estate assets" within the meaning of
Code Section 856(c)(6)(B), and income with respect to the Securities will be
considered "interest on obligations secured by mortgages on real property or
on interests in real property" within the meaning of Code Section
856(c)(3)(B) (assuming, for both purposes, that at least 95% of the REMIC's
assets are qualifying assets). If less than 95% of the REMIC's assets
consist of assets described in clause (i) or (ii) above, then a Security will
qualify for the tax treatment described in clause (i) or (ii) in the
proportion that such REMIC assets are qualifying assets.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, in the opinion of Tax Counsel, all of the expenses of
a REMIC will be taken into account by holders of the Residual Interest
Securities. In the case of a "single class REMIC," however, the expenses
will be allocated, under Treasury regulations, among the holders of the
Regular Interest Securities and the holders of the Residual Interest
Securities on a daily basis in proportion to the relative amounts of income
accruing 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.
Further, if the holder of a Residual Interest Security is an organization
subject to the tax on unrelated business income imposed by Code Section 511,
such holder's excess inclusion income will be treated as unrelated business
taxable income of such holder. In addition, under Treasury regulations yet
to be issued, if a real estate investment trust, a regulated investment
company, a common trust fund, or certain cooperatives were to own a Residual
Interest Security, a portion of dividends (or other distributions) paid by
the real estate investment trust (or other entity) would be treated as excess
inclusion income. If a Residual Security is owned by a foreign person excess
inclusion income is subject to tax at a rate of 30% which may not be reduced
by treaty, is not eligible for treatment as "portfolio interest" and is
subject to certain additional limitations. See "Tax Treatment of Foreign
Investors." The Small Business Job Protection Act of 1996 has eliminated the
special rule permitting Section 593 institutions ("thrift institutions") to
use net operating losses and other allowable deductions to offset their
excess inclusion income from REMIC residual certificates that have
"significant value" within the meaning of the REMIC Regulations, effective
for taxable years beginning after December 31, 1995, except with respect to
residual certificates continuously held by a thrift institution since
November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect on excess inclusions on the
alternative minimum taxable income of a residual holder. First, alternative
minimum taxable income for such residual holder is determined without regard
to the special rule that taxable income cannot be less than excess
inclusions. Second, a residual holder's alternative minimum taxable income
for a tax year cannot be less than excess inclusions for the year. Third,
the amount of any alternative minimum tax net operating loss deductions must
be computed without regard to any excess inclusions. These rules are
effective for tax years beginning after December 31, 1986, unless a residual
holder elects to have such rules apply only to tax years beginning after
August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to
the excess, if any, of REMIC taxable income for the quarterly period
allocable to a Residual Interest Security, over the daily accruals for such
quarterly period of (i) 120% of the long term applicable federal rate on the
Startup Day multiplied by (ii) the adjusted issue price of such Residual
Interest Security at the beginning of such quarterly period. The adjusted
issue price of a Residual Interest at the beginning of each calendar quarter
will equal its issue price (calculated in a manner analogous to the
determination of the issue price of a Regular Interest), increased by the
aggregate of the daily accruals for prior calendar quarters, and decreased
(but not below zero) by the amount of loss allocated to a holder and the
amount of distributions made on the Residual Interest Security before the
beginning of the quarter. The long-term federal rate, which is announced
monthly by the Treasury Department, is an interest rate that is based on the
average market yield of outstanding marketable obligations of the United
States government having remaining maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities.
As a condition to qualification as a REMIC, reasonable arrangements must be
made to prevent the ownership of a REMIC residual interest by any
"Disqualified Organization." Disqualified Organizations include the United
States, any State or political subdivision thereof, any foreign government,
any international organization, or any agency or instrumentality of any of
the foregoing, a rural electric or telephone cooperative described in Section
1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
Sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income. Accordingly, the applicable Pooling and Servicing
Agreement will prohibit Disqualified Organizations from owning a Residual
Interest Security. In addition, no transfer of a Residual Interest Security
will be permitted unless the proposed transferee shall have furnished to the
Trustee an affidavit representing and warranting that it is neither a
Disqualified Organization nor an agent or nominee acting on behalf of a
Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a
Disqualified Organization holds an interest in a pass-through entity after
March 31, 1988 (including, among others, a partnership, trust, real estate
investment trust, regulated investment company, or any person holding as
nominee), that owns a Residual Interest Security, the pass-through entity
will be required to pay an annual tax on its allocable share of the excess
inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all
Federal tax purposes unless no significant purpose of the transfer was to
impede the assessment or collection of tax. A Residual Interest Security is
a "noneconomic residual interest" unless, at the time of the transfer (i) the
present value of the expected future distributions on the Residual Interest
Security at least equals the product of the present value of the anticipated
excess inclusions and the highest rate of tax for the year in which the
transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which the taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. If a transfer of a Residual
Interest is disregarded, the transferor would be liable for any Federal
income tax imposed upon taxable income derived by the transferee from the
REMIC. The REMIC Regulations provide no guidance as to how to determine if a
significant purpose of a transfer is to impede the assessment or collection
of tax. A similar type of limitation exists with respect to certain
transfers of residual interests by foreign persons to United States persons.
See "--Tax Treatment of Foreign Investors."
Mark to Market Rules. Prospective purchasers of a REMIC Residual
Interest Security should be aware that the IRS recently finalized regulations
(the "Mark-to-Market Regulations") which provide that a REMIC Residual
Interest Security acquired after January 3, 1995 cannot be marked-to-market.
Prospective purchasers of a REMIC Residual Interest Security should consult
their tax advisors regarding the possible application of the 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 "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 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 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, New York, New York 10048.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Securities and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related Series of
Securities. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of the Securities of each Series
offered hereby and by the Prospectus Supplement that they shall have been
rated in one of the four highest rating categories by the nationally
recognized statistical rating agency or agencies (each, a "Rating Agency")
specified in the related Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of
the value of the Trust Fund Assets and any credit enhancement with respect to
such class and will reflect such Rating Agency's assessment solely of the
likelihood that holders of a class of Securities of such class will receive
payments to which such Securityholders are entitled under the related
Agreement. Such rating will not constitute an assessment of the likelihood
that principal prepayments on the related Loans will be made, the degree to
which the rate of such prepayments might differ from that originally
anticipated or the likelihood of early optional termination of the Series of
Securities. Such rating should not be deemed a recommendation to purchase,
hold or sell Securities, inasmuch as it does not address market price or
suitability for a particular investor. Such rating will not address the
possibility that prepayment at higher or lower rates than anticipated by an
investor may cause such investor to experience a lower than anticipated yield
or that an investor purchasing a Security at a significant premium might fail
to recoup its initial investment under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect
for any given period of time or that it may not be lowered or withdrawn
entirely by the Rating Agency in the future if in its judgment circumstances
in the future so warrant. In addition to being lowered or withdrawn due to
any erosion in the adequacy of the value of the Trust Fund Assets or any
credit enhancement with respect to a Series, such rating might also be
lowered or withdrawn among other reasons, because of an adverse change in the
financial or other condition of a credit enhancement provider or a change in
the rating of such credit enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a Series of Securities will be determined on the basis of
criteria established by each Rating Agency rating classes of such Series.
Such criteria are sometimes based upon an actuarial analysis of the behavior
of mortgage loans in a larger group. Such analysis is often the basis upon
which each Rating Agency determines the amount of credit enhancement required
with respect to each such class. There can be no assurance that the
historical data supporting any such actuarial analysis will accurately
reflect future experience nor any assurance that the data derived from a
large pool of mortgage loans accurately predicts the delinquency, foreclosure
or loss experience of any particular pool of Loans. No assurance can be
given that values of any Properties have remained or will remain at their
levels on the respective dates of origination of the related Loans. If the
residential real estate markets should experience an overall decline in
property values such that the outstanding principal balances of the Loans in
a particular Trust Fund and any secondary financing on the related Properties
become equal to or greater than the value of the Properties, the rates of
delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. In additional,
adverse economic conditions (which may or may not affect real property
values) may affect the timely payment by mortgagors of scheduled payments of
principal and interest on the Loans and, accordingly, the rates of
delinquencies, foreclosures and losses with respect to any Trust Fund. To
the extent that such losses are not covered by credit enhancement, such
losses will be borne, at least in part, by the holders of one or more classes
of the Securities of the related Series.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the Securities being registered under this
Registration Statement, other than underwriting discounts and commissions:
SEC Registration Fee $ 303,030.31
Printing and Engraving Fees $ 250,000.00
Legal Fees and Expenses $ 1,000,000.00
Trustee Fees and Expenses $ 100,000.00
Accounting Fees and Expenses $ 250,000.00
Rating Agency Fees $ 400,000.00
Miscellaneous $ 200,000.00
Total $ 2,503,030.31
____________
* All amounts except the SEC Registration Fee are estimates.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Certificate of Incorporation provides for
indemnification of directors and officers of the Registrant to the full
extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law provides, in
substance, that Delaware corporations shall have the power, under specified
circumstances, to indemnify their directors, officers, employees and agents
in connection with actions, suits or proceedings brought against them by a
third party or in the right of the corporation, by reason of the fact that
they were or are such directors, officers, employees or agents, against
expenses incurred in any such action, suit or proceeding. The Delaware
General Corporation Law also provides that the Registrant may purchase
insurance on behalf of any such director, officer, employee or agent.
ITEM 16. EXHIBITS.
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of the Registrant.*
3.2 By-laws of the Registrant.*
4.1 Forms of Pooling and Servicing Agreement.*
4.2 Form of Trust Agreement.*
4.3 Form of Indenture.*
5.1 Opinion of Brown & Wood LLP as to legality of the Certificates.
8.1 Opinion of Brown & Wood LLP as to certain tax matters.
10.1 Form of Mortgage Loan Purchase Agreement.*
23.1 Consent of Brown & Wood LLP (included in Exhibits 5.1 and 8.1
hereof).
24.1 Power of Attorney (included on signature page).
__________________________
*Previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933, as amended (the "Act");
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
The undersigned Registrant undertakes that, for purposes of determining
any liability under the Act, each filing of the Trust's annual report
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934 that is incorporated by reference in this Registration Statement shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance on Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act of 1939 in
accordance with the rules and regulations prescribed by the Commission under
Section 305(b)(2) of the Trust Indenture Act of 1939.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Greenwich, Connecticut, on the 13th day of
June, 1997.
FINANCIAL ASSET SECURITIES CORP.
By /s/Wayne C. Olson
---------------------------
Name: Wayne C. Olson
Title: President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of John C. Anderson, Paul D. Stevelman,
Peter McMullin, Craig Eckes, or any of them, his true and lawful attorneys-
in-fact and agents, with full power of substitution and resubstitution, for
him and his name, place and stead, in any and all capacities, to sign any or
all amendments (including post-effective amendments) to the Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or
their or his substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on the dates indicated.
SIGNATURES TITLE DATE
-------- ----- ----
/s/Wayne C. Olson President (Principal June 13, 1997
- ---------------- Executive Officer,
Wayne C. Olson Principal Financial Officer)
/s/Kevin C. Piccoli Controller (Principal June 13, 1997
- ------------------- Accounting Officer)
Kevin C. Piccoli
/s/Konrad R. Kruger Director June 13, 1997
- -------------------
Konrad R. Kruger
/s/Jay N. Levine Director June 13, 1997
- ----------------
Jay N. Levine
/s/John C. Anderson Director June 13, 1997
- -------------------
John C. Anderson
/s/David R. Jones Director June 13, 1997
- ------------------
David R. Jones
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT PAGE
NO. DESCRIPTION OF EXHIBIT NUMBER
- ----- ------------------ --------
1.1 -- Form of Underwriting Agreement.*
3.1 -- Certificate of Incorporation of the
Registrant.*
3.2 -- By-laws of the Registrant.*
4.1 -- Form of Pooling and Servicing Agreement.*
4.2 -- Form of Trust Agreement.*
4.3 -- Form of Indenture.*
5.1 -- Opinion of Brown & Wood LLP as to legality
of the Certificates.
8.1 -- Opinion of Brown & Wood LLP as to certain
tax matters.
10.1 -- Form of Mortgage Loan Purchase Agreement.*
23.1 -- Consent of Brown & Wood LLP (included in
Exhibits 5.1 and 8.1).
24.1 -- Power of Attorney (included on signature
page).
- ----------------
*Previously filed.
Exhibit 5.1
(BROWN & WOOD LLP LETTERHEAD)
June 17, 1997
Financial Asset Securities Corp.
600 Steamboat Road
Greenwich, Connecticut 06830
Re: Financial Asset Securities Corp.
Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
We have acted as counsel for Financial Asset Securities Corp., a
Delaware corporation (the "Company"), in connection with the preparation of
the registration statement on Form S-3 (the "Registration Statement")
relating to the Securities (defined below) and with the authorization and
issuance from time to time in one or more series (each, a "Series") of up to
$1,000,000,000 aggregate principal amount of asset-backed securities (the
"Securities"). As set forth in the Registration Statement, each Series of
Securities will be issued under and pursuant to the conditions of a separate
pooling and servicing agreement, master pooling and servicing agreement,
pooling agreement, trust agreement or indenture (each, an "Agreement") among
the Company, a trustee (the "Trustee") and, where appropriate, a servicer
(the "Servicer"), each to be identified in the prospectus supplement for such
Series of Securities.
We have examined copies of the Company's Certificate of Incorporation,
the Company's By-laws and forms of each Agreement, as filed or incorporated
by reference as exhibits to the Registration Statement, and the forms of
Securities included in any Agreement so filed or incorporated by reference in
the Registration Statement and such other records, documents and statutes as
we have deemed necessary for purposes of this opinion.
Based upon the foregoing, we are of the opinion that:
1. When any Agreement relating to a Series of Securities has been duly
and validly authorized by all necessary action on the part of the Company and
has been duly executed and delivered by the Company, the Servicer, if any,
the Trustee and any other party thereto, such Agreement will constitute a
legal, valid and binding agreement of the Company, enforceable against the
Company in accordance with its terms, except as enforcement thereof may be
limited by bankruptcy, insolvency or other laws relating to or affecting
creditors' rights generally or by general equity principles.
2. When a Series of Securities has been duly authorized by all
necessary action on the part of the Company (subject to the terms thereof
being otherwise in compliance with applicable law at such time), duly
executed and authenticated by the Trustee for such Series in accordance with
the terms of the related Agreement and issued and delivered against payment
therefor as described in the Registration Statement, such Series of
Securities will be legally and validly issued, fully paid and nonassessable,
and the holders thereof will be entitled to the benefits of the related
Agreement.
In rendering the foregoing opinions, we express no opinion as to the
laws of any jurisdiction other than the laws of the State of New York
(excluding choice of law principles therein) and the federal laws of the
United States of America.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the references to this firm under the heading
"Legal Matters" in each Prospectus forming a part of the Registration
Statement, without admitting that we are "experts" within the meaning of the
Securities Act of 1933, as amended, or the Rules and Regulations of the
Commission issued thereunder, with respect to any part of the Registration
Statement, including this exhibit.
Very truly yours,
/s/Brown & Wood LLP
Exhibit 8.1
(BROWN & WOOD LLP LETTERHEAD)
June 17, 1997
Financial Asset Securities Corp.
600 Steamboat Road
Greenwich, Connecticut 06830
Re: Financial Asset Securities Corp.
Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
We have acted as special tax counsel for Financial Asset Securities
Corp., a Delaware corporation (the "Company"), in connection with the
preparation of the registration statement on Form S-3 (the "Registration
Statement") relating to the Securities (defined below) and with the
authorization and issuance from time to time in one or more series (each, a
"Series") of up to $1,000,000,000 aggregate principal amount of asset-backed
securities (the "Securities"). The Registration Statement is being filed
with the Securities and Exchange Commission under the Securities Act of 1933,
as amended. As set forth in the Registration Statement, each Series of
Securities will be issued under and pursuant to the conditions of a separate
pooling and servicing agreement, master pooling and servicing agreement,
pooling agreement, trust agreement or indenture (each an "Agreement") among
the Company, a trustee (the "Trustee") and, where appropriate, a servicer
(the "Servicer"), each to be identified in the prospectus supplement for such
Series of Securities.
We have examined the prospectus and forms of prospectus supplement
related thereto contained in the Registration Statement (each, a
"Prospectus") and such other documents, records and instruments as we have
deemed necessary for the purposes of this opinion.
In arriving at the opinion expressed below, we have assumed that each
Agreement will be duly authorized by all necessary corporate action on the
part of the Company, the Trustee, the Servicer (where applicable) and any
other party thereto for such Series of Securities and will be duly executed
and delivered by the Company, the Trustee, the Servicer and any other party
thereto substantially in the applicable form filed or incorporated by
reference as an exhibit to the Registration Statement, that each Series of
Securities will be duly executed and delivered in substantially the forms set
forth in the related Agreement filed or incorporated by reference as an
exhibit to the Registration Statement, and that Securities will be sold as
described in the Registration Statement.
As special tax counsel to the Company, we have advised the Company with
respect to certain material federal income tax aspects of the proposed
issuance of each Series of Securities pursuant to the related Agreement.
Such advice has formed the basis for the description of selected federal
income tax consequences for holders of such Securities that appear under the
headings "Certain Material Federal Income Tax Considerations", "Certain
Federal Income Tax Consequences" and "Certain Federal Income Tax
Considerations", as applicable, in each Prospectus forming a part of the
Registration Statement. Such description does not purport to discuss all
possible federal income tax ramifications of the proposed issuance of the
Securities, but with respect to those federal income tax consequences
described therein, such description is accurate in all material respects.
This opinion is based on the facts and circumstances set forth in the
Registration Statement and in the other documents reviewed by us. Our
opinion as to the matters set forth herein could change with respect to a
particular Series of Securities as a result of changes in facts or
circumstances, changes in the terms of the documents reviewed by us, or
changes in the law subsequent to the date hereof. Because the Prospectuses
contemplate Series of Securities with numerous different characteristics, you
should be aware that the particular characteristics of each Series of
Securities must be considered in determining the applicability of this
opinion to a particular Series of Securities.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the references to this firm under the heading
"Certain Material Federal Income Tax Considerations" in each Prospectus
forming a part of the Registration Statement, without admitting that we are
"experts" within the meaning of the 1933 Act or the Rules and Regulations of
the Commission issued thereunder, with respect to any part of the
Registration Statement, including this exhibit.
Very truly yours
/s/Brown & Wood LLP
