<PAGE>
RULE NO. 424(b)(5)
REGISTRATION NO. 333-21071
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED APRIL 4, 1997)
[LOGO]
EMPIRE FUNDING
EMPIRE FUNDING HOME LOAN OWNER TRUST 1997-1
<TABLE>
<S> <C> <C>
$21,750,000 CLASS A-1 7.00% HOME LOAN ASSET BACKED NOTES
$7,400,000 CLASS A-2 7.06% HOME LOAN ASSET BACKED NOTES
$8,500,000 CLASS A-3 7.17% HOME LOAN ASSET BACKED NOTES
$11,791,000 CLASS A-4 7.77% HOME LOAN ASSET BACKED NOTES
$4,250,000 CLASS A-5 7.51% HOME LOAN ASSET BACKED NOTES
$8,978,000 CLASS M-1 7.89% HOME LOAN ASSET BACKED NOTES
$7,721,000 CLASS M-2 8.08% HOME LOAN ASSET BACKED NOTES
</TABLE>
FINANCIAL ASSET SECURITIES CORP.,
AS DEPOSITOR
EMPIRE FUNDING CORP.,
AS TRANSFEROR, SERVICER AND CLAIMS ADMINISTRATOR
HOME LOAN ASSET BACKED NOTES, SERIES 1997-1
DISTRIBUTIONS PAYABLE ON THE 25TH DAY OF EACH MONTH, COMMENCING IN APRIL 1997
The Empire Funding Home Loan Owner Trust 1997-1 (the "TRUST") was formed
pursuant to a trust agreement dated as of March 1, 1997 (the "TRUST
AGREEMENT") and entered into by Financial Asset Securities Corp., as depositor
(the "DEPOSITOR"), Wilmington Trust Company, as owner trustee (the "OWNER
TRUSTEE"), First Bank National Association, as co-owner trustee (in such
capacity, the "CO-OWNER TRUSTEE") and Empire Funding Corp. ("EMPIRE FUNDING").
The Trust issued $70,390,000 aggregate principal amount of Home Loan Asset
Backed Notes (the "NOTES") pursuant to an amended and restated indenture to be
dated as of April 1, 1997 (the "INDENTURE"), between the Trust and First Bank
National Association, as indenture trustee (in such capacity, the "INDENTURE
TRUSTEE"). The Trust also issued Home Loan Asset Backed Certificates (the
"CLASS B CERTIFICATES") and instruments evidencing the residual interest in
the Trust (the "RESIDUAL INTEREST"). The Notes are referred to herein as the
"OFFERED SECURITIES" and the Notes, Class B Certificates and the Residual
Interest are collectively referred to herein as the "SECURITIES". Only the
Notes are offered hereby.
The Trust primarily consists of a pool of home loans (the "POOL") which are
fixed rate residential home improvement loans, retail installment sale
contracts and home equity loans (the "LOANS"). The Loans are either unsecured
or secured by first- and junior-lien mortgages, deeds of trust or other
similar security instruments (the "MORTGAGES") as described herein under "The
Pool". The Loans were
(Continued on following page)
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
OFFERED SECURITIES, SEE THE INFORMATION HEREIN UNDER "RISK FACTORS" BEGINNING
ON PAGE S-16 AND IN THE PROSPECTUS BEGINNING ON PAGE 11.
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THE OFFERED SECURITIES REPRESENT INTERESTS IN OR OBLIGATIONS OF THE TRUST ONLY
AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, TRANSFEROR,
SERVICER, OWNER TRUSTEE, INDENTURE TRUSTEE, CLAIMS ADMINISTRATOR, CONTRACT OF
INSURANCE HOLDER OR ANY AFFILIATE THEREOF, EXCEPT TO THE EXTENT PROVIDED
HEREIN. NEITHER THE LOANS NOR THE OFFERED SECURITIES ARE INSURED OR GUARANTEED
BY ANY GOVERNMENTAL AGENCY OTHER THAN TO THE EXTENT OF THE FHA INSURANCE
DESCRIBED HEREIN.
THE OFFERED 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 ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
----------------
GREENWICH CAPITAL
MARKETS, INC.
------------
April 4, 1997
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(Continued from previous page)
transferred to the Depositor by EFC Securitized Assets, L.C., ("EFC") an
affiliate of Empire Funding, which simultaneously acquired the Loans from
Empire Funding pursuant to a home loan purchase agreement dated as of March 1,
1997 (the "HOME LOAN PURCHASE AGREEMENT"). The Loans were sold by the
Depositor to the Trust and will be serviced pursuant to an amended and
restated sale and servicing agreement (the "SALE AND SERVICING AGREEMENT") to
be dated as of April 1, 1997 among Empire Funding as transferor, servicer and
claims administrator (in such capacities, the "TRANSFEROR", "SERVICER" and
"CLAIMS ADMINISTRATOR", respectively), EFC, as contract of insurance holder
(in such capacity, the "CONTRACT OF INSURANCE HOLDER"), First Bank National
Association, as Indenture Trustee and Co-Owner Trustee, the Trust and the
Depositor. The assets of the Trust include the Loans and certain other
property. See "The Trust" herein. As of the Cut-Off Date, approximately 3.85%
of the Loans (based on current principal balance) will be partially insured by
the Federal Housing Administration (the "FHA") of the United States Department
of Housing and Urban Development ("HUD") under Title I of the National Housing
Act of 1934, as amended. See "The Title I Loan Program and the Contract of
Insurance--The Contract of Insurance" herein.
Distributions on the Offered Securities will be made on the 25th day of each
month or, if such day is not a business day, the next succeeding business day
(each, a "DISTRIBUTION DATE"), beginning in April 1997. The Notes will be
secured by the assets of the Trust pursuant to the Indenture. Interest on the
Classes of Notes will accrue at the above-specified fixed per annum interest
rates. On each Distribution Date, the holders of the Notes will be entitled to
receive, from and to the extent that funds are available therefor in the Note
Distribution Account, distributions with respect to interest and principal
calculated as described herein under "Description of the Offered Securities--
Distributions on the Offered Securities". Distributions of interest and
principal on the Class M-1 and Class M-2 Notes (the "MEZZANINE NOTES") will be
subordinated in priority to distributions of interest and principal,
respectively, on the Class A-1, Class A-2, Class A-3, Class A-4 and Class A-5
Notes (the "SENIOR NOTES") as described herein. Distributions on the Class B
Certificates will be subordinated in priority to payments due on the Notes to
the extent described herein.
THE YIELDS TO MATURITY OF ANY OFFERED SECURITIES MAY VARY FROM THE
ANTICIPATED YIELDS TO THE EXTENT SUCH OFFERED SECURITIES ARE PURCHASED AT A
DISCOUNT OR PREMIUM AND TO THE EXTENT THE RATE AND TIMING OF PAYMENTS THEREOF
ARE SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING
PREPAYMENTS) OF THE LOANS. HOLDERS OF THE OFFERED SECURITIES SHOULD CONSIDER,
IN THE CASE OF ANY OFFERED SECURITIES PURCHASED AT A DISCOUNT, THE RISK THAT A
LOWER THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL
YIELD THAT IS LOWER THAN THE ANTICIPATED YIELD AND, IN THE CASE OF ANY OFFERED
SECURITIES 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.
To the extent statements contained herein do not relate to historical or
current information, this Prospectus Supplement may be deemed to consist of
forward looking statements that involve risks and uncertainties that may
adversely affect the distributions to be made on, or the yield of, the Offered
Securities, which risks and uncertainties are discussed under "Risk Factors"
and "Prepayment and Yield Considerations" herein. As a consequence, no
assurance can be given as to the actual distributions on, or the yield of, any
Class of Offered Securities.
There is currently no secondary market for the Offered Securities and there
can be no assurance that such a market will develop or, if it does develop,
that it will continue.
The Offered Securities 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 $70,027,123.11, plus accrued interest from March 1, 1997 to, but
not including, April 8, 1997 (the "SETTLEMENT DATE"), before deducting
issuance expenses payable by the Depositor.
The Offered Securities are offered by the Underwriter, subject to prior
sale, when, as and if delivered to and accepted by the Underwriter and subject
to approval of certain legal matters by counsel. It is expected that delivery
of the Offered Securities will be made in book-entry form only through the
facilities of The Depository Trust Company (the "DEPOSITORY") on or about the
Settlement Date.
----------------
S-2
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This Prospectus Supplement does not contain complete information about the
offering of the Offered Securities. Additional information is contained in the
Prospectus dated April 4, 1997 (the "PROSPECTUS") which accompanies this
Prospectus Supplement and purchasers are urged to read both this Prospectus
Supplement and the Prospectus in full. Sales of the Offered Securities may not
be consummated unless the purchaser has received both this Prospectus
Supplement and the Prospectus.
Upon written request, Empire Funding will make available its most recent
audited financial statements. Requests should be directed to Empire Funding
Corp., 9737 Great Hills Trail, Austin, Texas 78759 (telephone number (512)
427-4004), Attention: Richard N. Steed, Senior Vice President.
Until ninety days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Offered Securities, whether or not participating
in this distribution, may be required to deliver a Prospectus Supplement and
the Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus Supplement and the Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference all documents filed by the
Depositor with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934, as amended, on or subsequent to the
date of this Prospectus Supplement and prior to the termination of the
offering of the Offered Securities. The Depositor will provide without charge
to each person to whom this Prospectus Supplement and Prospectus are
delivered, on request of such person, a copy of any or all of the documents
incorporated herein by reference other than the exhibits to such documents
(unless such exhibits are specifically incorporated by reference in such
documents). Requests should be made in writing to Peter McMullin, Vice
President of Financial Asset Securities Corp., at 600 Steamboat Road,
Greenwich, Connecticut 06830.
AVAILABLE INFORMATION
In addition to the locations specified under "Available Information" in the
accompanying Prospectus, the Securities and Exchange Commission (the
"COMMISSION") maintains a World Wide 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.
S-3
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SUMMARY
The following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus Supplement and in the accompanying Prospectus. Certain capitalized
terms used herein are defined elsewhere in the Prospectus Supplement or in the
Prospectus.
Issuer....................... Empire Funding Home Loan Owner Trust 1997-1
(the "TRUST" or the "ISSUER"), a Delaware
business trust, established pursuant to a
trust agreement dated as of March 1, 1997
(the "TRUST AGREEMENT"), among the
Depositor, the Owner Trustee, the Co-Owner
Trustee and Empire Funding Corp.
Depositor.................... Financial Asset Securities Corp. (the
"DEPOSITOR"), a Delaware corporation. The
Depositor is an indirect limited purpose
finance subsidiary of National Westminster
Bank 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 Bank Plc or
any of their affiliates or any other person
or entity will insure or guarantee or
otherwise be obligated with respect to the
Offered Securities.
Transferor, Servicer and
Claims Administrator........ Empire Funding Corp. ("EMPIRE FUNDING"), an
Oklahoma corporation. Pursuant to a Home
Loan Purchase Agreement dated as of March 1,
1997 (the "HOME LOAN PURCHASE AGREEMENT"),
between Empire Funding, EFC and the
Depositor, Empire Funding (in such capacity,
the "TRANSFEROR") sold the Loans to EFC
which simultaneously sold the Loans to the
Depositor. Pursuant to an amended and
restated Sale and Servicing Agreement to be
dated as of April 1, 1997 (the "SALE AND
SERVICING AGREEMENT") among the Trust, the
Depositor, Empire Funding, EFC, the
Indenture Trustee and the Co-Owner Trustee,
the Depositor sold the Loans to the Trust.
Empire Funding will service the Loans (in
such capacity, the "SERVICER") and
administer claims filed under the contract
of insurance (in such capacity, the "CLAIMS
ADMINISTRATOR") pursuant to the Sale and
Servicing Agreement.
Contract of Insurance EFC Securitized Assets, L.C. ("EFC"), a
Holder...................... Texas limited liability company and an
affiliate of Empire Funding. Pursuant to the
Sale and Servicing Agreement, EFC will hold
the HUD contract of insurance (the "CONTRACT
OF INSURANCE HOLDER").
Indenture Trustee, Co-Owner
Trustee and Custodian....... First Bank National Association, a national
banking association, as the trustee (in such
capacity, the "INDENTURE TRUSTEE") under an
amended and restated indenture to be dated
as of April 1, 1997 (the "INDENTURE")
between the
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Trust and the Indenture Trustee, as the co-
owner trustee (in such capacity, the "CO-
OWNER TRUSTEE") under the Trust Agreement,
and as the custodian (the "CUSTODIAN") under
the amended and restated Custodial Agreement
to be dated as of April 1, 1997 among the
Owner Trustee, the Indenture Trustee and the
Custodian.
Owner Trustee................ Wilmington Trust Company, a Delaware banking
corporation, as owner trustee under the
Trust Agreement (the "OWNER TRUSTEE").
Closing Date................. March 31, 1997.
Settlement Date.............. On or about April 8, 1997.
Cut-Off Date................. Close of business on February 28, 1997;
except with respect to one Loan of $11,154
for which the Cut-Off Date is March 10,
1997.
Distribution Date............ The 25th day of each month or, if such day
is not a business day, the next succeeding
business day, commencing in April 1997
(each, a "DISTRIBUTION DATE").
Due Period................... With respect to a Distribution Date, the
calendar month immediately preceding such
Distribution Date (each, a "DUE PERIOD").
Determination Date........... The fourteenth calendar day of each month
or, if such day is not a Business Day, the
immediately preceding Business Day (each, a
"DETERMINATION DATE").
Record Date.................. The last Business Day of the month
immediately preceding the month in which
each Distribution Date occurs (each, a
"RECORD DATE").
Securities Issued:
The Notes.................... The Trust issued the Classes of Notes
pursuant to the Indenture in the respective
aggregate initial principal amounts
specified on the cover hereof (each such
aggregate principal amount being the
"ORIGINAL CLASS PRINCIPAL BALANCE" for the
related Class). The Notes will be secured by
the assets of the Trust pursuant to the
Indenture and, except as described herein,
will be senior in right of payment to the
Class B Certificates and the Residual
Interest. In addition, as described herein,
the Class A-1, Class A-2, Class A-3, Class
A-4 and Class A-5 Notes (the "SENIOR NOTES")
will also be senior in right of payment to
the Class M-1 and Class M-2 Notes (the
"MEZZANINE NOTES"). Interest will accrue on
the Classes of Notes at the respective per
annum interest rates set forth on the cover
hereof (as to each such Class, the "NOTE
INTEREST RATE"). Interest on the Notes will
accrue on the basis of a 360-day year
consisting of twelve 30-day months. See
"Description of the Offered Securities--
Distributions on the Offered Securities"
herein.
S-5
<PAGE>
The Class B Certificates..... The Trust issued the Class B Certificates
pursuant to the Trust Agreement in the
Original Class Principal Balance of
$1,437,188.84. The Class B Certificates are
not being offered hereby. On the Settlement
Date, the Original Class Principal Balance
of the Class B Certificates will equal the
excess of the Original Pool Principal
Balance over the aggregate of the Original
Class Principal Balances of all Classes of
Notes. The Class B Certificates will
represent undivided ownership interests in
the Trust. Interest on the Class B
Certificates will accrue at a per annum
pass-through rate of 8.82% (the "CLASS B
PASS-THROUGH RATE"). Interest on the Class B
Certificates will accrue on the basis of a
360-day year consisting of twelve 30-day
months. Payments of interest on the Class B
Certificates generally will be subordinate
in right of payment of interest on the
Notes, and payments of principal of the
Class B Certificates generally will be
subordinate in right of payment of principal
of the Notes, but each will be senior in
right of payment to the Residual Interest.
See "Description of the Offered Securities--
Distributions on the Offered Securities"
herein.
Residual Interest............ The Trust also issued an instrument
evidencing the residual interest in the
assets of the Trust (the "RESIDUAL
INTEREST"), which is not being offered
hereby. The Residual Interest has no Class
Principal Balance and will be subordinate in
right of payment to the Offered Securities
and the Class B Certificates.
Priority of Distributions:
Regular Distribution The Regular Distribution Amount will be
Amount...................... distributed on each Distribution Date in the
following order of priority:
(i) to pay accrued and unpaid interest
on the Senior Notes, pro rata;
(ii) sequentially, to pay accrued and
unpaid interest on the Class M-1 Notes,
the Class M-2 Notes and the Class B
Certificates, in that order;
(iii) first (A) to pay as principal of
the Class A-5 Notes until the Class
Principal Balance thereof is reduced to
zero, an amount equal to the Class A-5
Priority Principal Distribution Amount
and second (B) sequentially, to pay as
principal of the Class A-1, Class A-2,
Class A-3 and Class A-4 Notes, in that
order, until the respective Class
Principal Balances thereof are reduced
to zero, the amount necessary to reduce
the aggregate Class Principal Balance of
the Senior Notes to the Senior Optimal
Principal Balance;
(iv) sequentially, to pay as principal
of the Class M-1 and Class M-2 Notes, in
that order, until the Class Principal
Balances thereof are reduced to their
respective Class M-1 Optimal Principal
Balance and Class M-2 Optimal Principal
Balance;
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(v) as principal of the Class B
Certificates, until the Class Principal
Balance thereof is reduced to the
Class B Optimal Principal Balance;
(vi) to the Class M-1 Notes, the Class
M-2 Notes and the Class B Certificates,
in that order, their respective Loss
Reimbursement Deficiencies, if any; and
(vii) any remaining amount to the
Residual Interest.
Excess Spread................ The Excess Spread will be distributed on
each Distribution Date in the following
order of priority (after giving effect to
all distributions specified above under "--
Regular Distribution Amount"): (i) in an
amount equal to the Overcollateralization
Deficiency Amount, if any, as follows: (A)
as principal to the Class A-5 Notes until
the Class Principal Balance thereof is
reduced to zero, an amount equal to the
Class A-5 Priority Excess Spread
Distribution Amount; (B) sequentially, as
principal of the Class A-1, Class A-2, Class
A-3 and Class A-4 Notes, in that order,
until the respective Class Principal
Balances thereof are reduced to zero, the
amount necessary to reduce the aggregate
Class Principal Balance of the Senior Notes
to the Senior Optimal Principal Balance; (C)
sequentially, as principal of the Class M-1
and Class M-2 Notes, in that order, until
the respective Class Principal Balances
thereof are reduced to the Class M-1 Optimal
Principal Balance and Class M-2 Optimal
Principal Balance, respectively; and (D) as
principal of the Class B Certificates, until
the Class Principal Balance thereof is
reduced to the Class B Optimal Principal
Balance; (ii) to the Class M-1 Notes, the
Class M-2 Notes and the Class B
Certificates, in that order, their
respective Loss Reimbursement Deficiencies,
if any; and (iii) any remaining amount to
the Residual Interest.
Final Scheduled Distribution The Class Principal Balance of each Class of
Date........................ Offered Securities, to the extent not
previously paid, will be payable in full on
the Distribution Date in March 2023 (as to
each such Class, the "FINAL SCHEDULED
DISTRIBUTION DATE"), although it is
anticipated that the actual final
Distribution Date for each such Class will
occur significantly earlier than the Final
Scheduled Distribution Date.
Form and Registration of the
Offered Securities.......... The Offered Securities will be issued only
in book-entry form. Persons acquiring
beneficial ownership interests in the
Offered Securities ("SECURITY OWNERS") will
hold such Offered Securities through the
book entry facilities of The Depository
Trust Company ("DTC"). Transfers within DTC
will be in accordance with the usual rules
and operating procedures of the DTC. So long
as each Class of Offered Securities is in
book-entry form, each such Class of Offered
Securities will be evidenced by one or more
certificates
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<PAGE>
registered in the name of the nominee of
DTC. The interests of such Security Owners
will be represented by book-entries on the
records of DTC and participating members
thereof. No Security Owner will be entitled
to receive a definitive certificate
representing such person's interest, except
in the event that Definitive Securities are
issued under the limited circumstances
described herein. All references in this
Prospectus Supplement to any Class of
Offered Securities reflect the rights of the
Security Owners of such Class only as such
rights may be exercised through DTC and its
participating members so long as such Class
of Offered Securities is held by DTC. See
"Risk Factors--Book-Entry Registration" in
the Prospectus and "Description of the
Securities--Book-Entry Registration of
Securities" in the Prospectus. The Security
Owners' interests in each Class of Offered
Securities will be held only in minimum
denominations of $25,000 and integral
multiples of $1,000 in excess thereof.
Assets of the Trust.......... On the Closing Date, the Trust purchased
3,243 fixed rate residential home
improvement loans and retail installment
sales contracts and home equity loans (the
"LOANS") having an aggregate unpaid
principal balance as of the Cut-Off Date of
approximately $71,827,144.69 (the "ORIGINAL
POOL PRINCIPAL BALANCE") pursuant to the
Sale and Servicing Agreement.
The assets of the Trust primarily consist of
a pool (the "POOL") of Loans which are
either unsecured or secured by mortgages,
deeds of trust or other similar security
instruments (the "MORTGAGES"). The assets of
the Trust also include (i) payments of
interest due in respect of the Loans after
the Cut-Off Date, principal received in
respect of the Loans after the Cut-Off Date
and payments of premiums on FHA Insurance
received in respect of the Loans after the
Cut-Off Date; (ii) amounts on deposit in the
Collection Account, Note Distribution
Account, Certificate Distribution Account
and FHA Premium Account; (iii) the rights to
the FHA Reserve Account attributable to the
FHA Loans; (iv) the rights to the premiums
on FHA Loans that are Invoiced Loans; (v)
the assignment of all rights of the
Depositor under the Home Loan Purchase
Agreement; and (vi) certain other ancillary
or incidental funds, rights and properties
related to the foregoing. See "The Trust--
General" herein. The Trust includes the
unpaid principal balance of each Loan as of
the Cut-Off Date (the "CUT-OFF DATE
PRINCIPAL BALANCE"). The "PRINCIPAL BALANCE"
of a Loan on any day subsequent to the Cut-
Off Date is equal to its Cut-Off Date
Principal Balance, minus all principal
reductions credited against the Principal
Balance of such Loan since the Cut-Off Date,
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<PAGE>
including any principal losses reported by
the Servicer on account of a modification of
such Loan. With respect to any date, the
"POOL PRINCIPAL BALANCE" will be equal to
the aggregate of the Principal Balances of
the Loans as of such date.
The Loans.................... The Loans consist of (i) closed-end fixed-
rate home improvement loans and retail
installment sale contracts secured by first-
and junior-lien mortgages, deeds of trust
and security deeds on residential properties
(which are primarily condominiums,
townhouses and one- to four-family
residences, including investment properties)
which are partially insured by the Federal
Housing Administration ("FHA") of the United
States Department of Housing and Urban
Development ("HUD") under Title I of the
National Housing Act of 1934, as amended
(the "SECURED FHA LOANS"), (ii) closed-end
fixed-rate home improvement loans and retail
installment sale contracts which are
partially insured by the FHA under the Title
I Program but which are unsecured general
obligations of the related borrowers (the
"UNSECURED FHA LOANS", and together with the
Secured FHA Loans, the "FHA LOANS"), (iii)
closed-end fixed-rate home improvement
loans, home equity loans, and debt
consolidation loans (the "SECURED
CONVENTIONAL LOANS") secured generally by
junior-lien mortgages, deeds of trust and
security deeds on residential properties
(collectively with the properties securing
the Secured FHA Loans, the "MORTGAGED
PROPERTIES"), and (iv) closed-end fixed-rate
home improvement loans, home equity loans,
and debt consolidation loans which are
unsecured (the "UNSECURED CONVENTIONAL
LOANS"). The Loans will not be insured by
primary mortgage insurance policies or any
pool insurance policy. In addition, with
respect to the Secured FHA Loans, the
Servicer will not require hazard insurance
to be maintained on the related Mortgaged
Properties. Moreover, the Loans will not be
guaranteed by the Transferor, the Depositor
or any of their respective affiliates. A
majority of the Loans will be either
unsecured or secured by liens on Mortgaged
Properties in which the borrowers have
little or no equity therein (i.e., the
related combined loan-to-value ratios exceed
100%) at the time of origination of such
Loans. See "The Pool" herein and "The Trust
Fund--The Loans" in the Prospectus.
"COMBINED LOAN-TO-VALUE RATIO" means, with
respect to any Loan, the fraction, expressed
as a percentage, the numerator of which is
the principal balance of such Loan at
origination plus, in the case of a junior
lien Loan, the aggregate outstanding
principal balance of the related senior lien
loans on the date of origination of such
Loan, and the
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<PAGE>
denominator of which is the appraised value
of the related Mortgaged Property at the
time of origination of such Loan (determined
as described herein under "Empire Funding--
Underwriting Criteria").
The Transferor will be obligated either to
repurchase any Loan as to which a
representation or warranty has been
breached, which breach remains uncured for a
period of 60 days and has a materially
adverse effect on the interests of the
holders of the Offered Securities in such
Loan (a "DEFECTIVE LOAN") or to remove such
Defective Loan and substitute a Qualified
Substitute Loan. As used herein, a
"QUALIFIED SUBSTITUTE LOAN" will have
characteristics that are generally the same
as or substantially similar to the
characteristics of the Loan which it
replaces. The repurchase of any Loan (rather
than the replacement thereof through
substitution) will result in accelerated
payments of principal distributions on the
Offered Securities. See "The Pool--
Repurchase or Substitution of Loans" herein.
Credit Enhancement........... Credit enhancement with respect to the Of-
fered Securities will be provided by (i) the
FHA Insurance to the extent described here-
in, (ii) the subordination of the right of
the Residual Interest and of certain Classes
of Offered Securities to receive distribu-
tions with respect to interest and principal
to the extent described below and (iii) the
overcollateralization feature described be-
low. See "Risk Factors--Adequacy of Credit
Enhancement" herein.
FHA Insurance and Contract
of Insurance................ The aggregate amount of insurance provided
by the FHA pursuant to the Title I Program
that is expected to be available to the
Claims Administrator in respect of the FHA
Loans is $276,533.15 (the "TRUST DESIGNATED
INSURANCE AMOUNT"). Such amount represents
10% of the Principal Balances of the FHA
Loans as of the Cut-Off Date.
EFC holds the Contract of Insurance for the
benefit of the Trust and other Related
Series Trusts. As of the Closing Date the
aggregate amount of insurance transferred or
to be transferred by the FHA pursuant to the
Title I Program to the Contract of Insurance
Holder is $3,025,615.67 (the "COMBINED FHA
INSURANCE AMOUNT") and for any date of
determination thereafter, the Combined FHA
Insurance Amount will equal such amount plus
all amounts subsequently transferred by the
Secretary of HUD to the Contract of
Insurance Holder's FHA Reserve Account less
the amount of FHA Insurance proceeds
received since the Closing Date under the
Contract of Insurance with respect to the
FHA Loans and loans in any Related Series
Trust. The Combined FHA Insurance Amount
will be reflected in an
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insurance coverage reserve account
maintained by the FHA in the name of the
Contract of Insurance Holder (the "FHA
RESERVE ACCOUNT").
The Secretary of HUD will not earmark the
insurance coverage in the FHA Reserve
Account for the benefit of the Trust or any
other Related Series Trust; however, each of
the Contract of Insurance Holder and the
Claims Administrator has agreed in the Sale
and Servicing Agreement to earmark the Trust
Designated Insurance Amount exclusively for
the benefit of the Trust. Notwithstanding
the foregoing, in the event that any portion
of the Combined FHA Insurance Amount is
applied to loans in a Related Series Trust
other than the Trust in excess of the
designated insurance amount for such Related
Series Trust, the Combined FHA Insurance
Amount available to cover defaults on the
FHA Loans will be reduced. See "Risk
Factors--Limitations on FHA Insurance," "The
Title I Loan Program and the Contract of
Insurance--FHA Insurance Coverage" and "--
The Contract Of Insurance" herein.
Subject to the then remaining Combined FHA
Insurance Amount, each FHA Loan will be
insured by the FHA in an amount equal to 90%
of the sum of the following: (a) the unpaid
loan obligation (equal to the net unpaid
principal and the uncollected interest
earned to the date of default) with
adjustments thereto if the holder of the
loan has proceeded against the property, if
any, securing such loan, (b) the interest on
the unpaid amount of the loan obligation
from the date of default to the date of the
claim's initial submission for payment plus
15 calendar days (not to exceed nine months
from the date of default), calculated at the
rate of 7% per annum, (c) the uncollected
court costs, (d) the attorneys' fees (not to
exceed $500), and (e) the expenses for
recording the assignment of the security to
the United States of America. See "The Title
I Loan Program and the Contract of
Insurance--The Title I Program" herein.
Since the remaining Combined FHA Insurance
Amount is dependent upon future events,
including reductions for the payment of
claims, no assurance can be given that the
Combined FHA Insurance Amount will be
adequate to cover 90% of the losses on such
FHA Loans. Further, it is possible that a
FHA Loan would not be submitted to the FHA
for insurance coverage due to the
limitations on the Trust Designated
Insurance Amount described above (even
though the Combined FHA Insurance Amount
might be sufficient to provide insurance
proceeds in respect of such FHA Loan).
Subordination................ The rights of the holders of the Class M-1
Notes to receive distributions of interest
on each Distribution Date generally will be
subordinated to such rights of the holders
of the Senior
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Notes, the rights of the holders of the
Class M-2 Notes to receive distributions of
interest on each Distribution Date,
generally will be subordinated to such
rights of the holders of the Class M-1 Notes
and the Senior Notes, and the rights of the
holders of the Class B Certificates to
receive distributions of interest on each
Distribution Date generally will be
subordinated to such rights of the holders
of the Notes. In addition, the rights of the
holders of the Class M-1 Notes to receive
distributions of principal on each
Distribution Date generally will be
subordinated to the rights of the holders of
the Senior Notes to receive distributions of
interest and principal on each Distribution
Date, and the rights of the holders of the
Class M-2 Notes to receive distributions of
principal on each Distribution Date
generally will be subordinated to the rights
of the holders of the Senior Notes and the
Class M-1 Notes to receive distributions of
interest and principal on each Distribution
Date. The rights of the holders of the Class
B Certificates to receive distributions of
principal on each Distribution Date
generally will be subordinated to the rights
of the holders of the Notes to receive
distributions of interest and principal on
each Distribution Date. In addition, the
rights of the holders of the Residual
Interest to receive any distributions from
amounts available on each Distribution Date
will be subordinated to such rights of the
holders of the Offered Securities. The
subordination described above is intended to
enhance the likelihood of receipt by the
holders of the Notes of the full amount of
interest and principal distributions due to
such holders and to afford such holders
protection against losses on the Loans. The
subordination of the Residual Interest to
the Class B Certificates is intended to
enhance the likelihood of regular receipt by
the holders of the Class B Certificates of
the full amount of interest and principal
distributions due to such holders and to
afford such holders protection against
losses on the Loans. See "Description of
Credit Enhancement--Subordination and
Allocation of Losses" herein.
Overcollateralization........ As of any date of determination, the
"OVERCOLLATERALIZATION AMOUNT" will equal
the excess of the Pool Principal Balance
over the aggregate of the Class Principal
Balances of the Securities. On the Closing
Date, the Overcollateralization Amount will
be zero. As a result of the application of
Excess Spread in reduction of the Class
Principal Balances of the Offered
Securities, the Overcollateralization Amount
is expected to increase over time until such
amount is equal to the Overcollateralization
Target Amount.
Generally, the "OVERCOLLATERALIZATION TARGET
AMOUNT" prior to the Stepdown Date will be
equal to the greater of (x)
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8% of the Original Pool Principal Balance
and (y) the Net Delinquency Calculation
Amount; on and after the Stepdown Date, the
Overcollateralization Target Amount will be
equal to the greater of (x) 16% of the Pool
Principal Balance as of the end of the
related Due Period and (y) the Net
Delinquency Calculation Amount. The
Overcollateralization Target Amount will not
in any event be less than 0.50% of the
Original Pool Principal Balance or greater
than the outstanding Class Principal
Balances of the Securities.
While the distribution of Excess Spread to
holders of the Offered Securities in
reduction of their respective Class
Principal Balances has been designed to
produce and maintain a given level of
overcollateralization with respect to the
Offered Securities, there can be no
assurance that Excess Spread will be
generated in sufficient amounts to ensure
that such overcollateralization level will
be achieved or maintained at all times. See
"Description of Credit Enhancement--
Subordination and Allocation of Losses" and
"Risk Factors--Adequacy of Credit
Enhancement" herein.
Application of Allocable
Loss Amounts................ In the event that (a) the aggregate of the
Class Principal Balances of all Classes of
Securities on any Distribution Date (after
giving effect to all distributions on such
date) exceeds (b) the Pool Principal Balance
as of the end of the immediately preceding
Due Period (such excess, an "ALLOCABLE LOSS
AMOUNT"), such Allocable Loss Amount will be
applied, sequentially, in reduction of the
Class Principal Balances of the Class B
Certificates, the Class M-2 Notes and the
Class M-1 Notes, in that order, until the
respective Class Principal Balances thereof
have been reduced to zero. Allocable Loss
Amounts will not be applied in reduction of
the Class Principal Balance of any Class of
Senior Notes. Allocable Loss Amounts applied
to any applicable Class of Offered
Securities will entitle such Class to
reimbursement (such entitlement, a "LOSS
REIMBURSEMENT DEFICIENCY") under the
circumstances and to the extent described
herein. See "Description of the Offered
Securities--Application of Allocable Loss
Amounts" herein.
Fees and Expenses of the On each Distribution Date, prior to
Trust....................... distributions on the Notes, amounts from the
Available Collection Amount will be
distributed to pay the following periodic
fees: (1) the unpaid and accrued fees of the
Servicer (the "SERVICING COMPENSATION"), (2)
the unpaid and accrued fees of the Indenture
Trustee (the "INDENTURE TRUSTEE FEE"), (3)
the unpaid and accrued the fees of the Owner
Trustee (the "OWNER TRUSTEE FEE") and (4)
the unpaid and accrued fees
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of the Custodian (the "CUSTODIAN FEE")
(collectively, the "TRUST FEES AND
EXPENSES").
Optional Termination......... The holders of Residual Interest exceeding
in the aggregate a 50% percentage interest
(the "MAJORITY RESIDUAL INTERESTHOLDERS")
may, at their option, effect an early
termination of the Trust on or after any
Distribution Date on which the Pool
Principal Balance declines to 10% or less of
the Original Pool Principal Balance, by
purchasing all of the Loans at a price equal
to or greater than the Termination Price.
The proceeds from any such sale will be
distributed (i) first, to the payment of
Trust Fees and Expenses, (ii) second, to the
Noteholders of each Class of Notes in an
amount equal to the then outstanding Class
Principal Balance thereof plus all accrued
and unpaid interest thereon, (iii) third, to
the holders of the Class B Certificates in
an amount equal to the then outstanding
Class Principal Balance thereof plus all
accrued and unpaid interest thereon and (iv)
fourth, to the holders of the Residual
Interest, the amount remaining, if any,
after the distributions specified in clauses
(i)-(iii) above. See "Description of the
Offered Securities--Optional Termination of
the Trust" herein.
Servicing of the Loans....... The Servicer will perform the loan servicing
functions with respect to the Loans pursuant
to the Sale and Servicing Agreement and will
be entitled to receive a fee (the "SERVICING
FEE") and other servicing compensation
(collectively, the "SERVICING
COMPENSATION"), payable monthly, as
described herein (see "Description of the
Transfer and Servicing Agreements--
Servicing" herein). The Servicer may
subcontract its servicing obligations and
duties with respect to certain Loans to
certain qualified servicers pursuant to a
subservicing agreement (each such servicer,
in this capacity, a "Subservicer"). However,
the Servicer will not be relieved of its
servicing obligations and duties with
respect to any subserviced Loans. In
addition, the Servicer will be responsible
for paying the fees of any such Subservicer.
Tax Status................... In the opinion of Tax Counsel, for Federal
income tax purposes, the Notes will be
characterized as debt and the Trust will not
be characterized as an association (or a
publicly traded partnership) taxable as a
corporation. Each Noteholder, by the
acceptance of a Note, will agree to treat
the Notes as indebtedness for Federal income
tax purposes. Alternative characterizations
of the Trust are possible, but would not
result in materially adverse tax
consequences to Securityholders. See
"Certain Federal Income Tax Consequences"
herein and "Certain Material Federal Income
Tax Considerations" in the Prospectus for
additional
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information concerning the application of
Federal income tax laws to the Trust and the
Offered Securities.
ERISA........................ Generally, Plans that are subject to the
requirements of the Employee Retirement
Income Security Act of 1974, as amended
("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, 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. See "ERISA
Considerations" herein and in the
Prospectus.
Legal Investment............. The Offered Securities will not constitute
"mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"), because most of the
Mortgages securing the Loans are not first
mortgages and some of the Loans are not
secured by 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 Offered
Securities. See "Legal Investment Matters"
herein and "Legal Investment" in the
Prospectus.
Ratings of the Offered It is a condition to the issuance of the
Securities................... Offered Securities that each of the Senior
Notes be rated "AAA" by Standard & Poor's, a
division of The McGraw-Hill Companies, Inc.
("STANDARD & POOR'S"), and Duff & Phelps
Credit Rating Co. ("DCR" and together with
Standard & Poor's, the "RATING AGENCIES"),
and that the Class M-1 Notes be rated "AA"
and the Class M-2 Notes be rated "A-" by
Standard & Poor's and DCR. A security rating
does not address the frequency of principal
prepayments or the corresponding effect on
yield to holders of the Offered Securities.
None of the Depositor, Transferor, Servicer,
Claims Administrator, Contract of Insurance
Holder, Indenture Trustee, Owner Trustee,
Co-Owner Trustee or any other person is
obligated to maintain the rating on any
Class of Offered Securities.
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<PAGE>
RISK FACTORS
Prospective investors in the Offered Securities should consider the
following risk factors (as well as the factors set forth under "Risk Factors"
in the Prospectus) in connection with the purchase of Offered Securities.
These factors are intended to identify the significant sources of risk
affecting an investment in the Offered Securities. Unless the context
indicates otherwise, any numerical or statistical information presented is
based upon the characteristics of the Loans proposed to be included in the
Pool as of the date of this Prospectus Supplement.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The rates of principal payment on the Offered Securities and the aggregate
amount of distributions and yields to maturity of the Offered Securities will
be related to, among other things, the rate and timing of payments of
principal on the Loans. The rate of principal payments on the Loans will in
turn be affected by the amortization of the Loans and by the rate of principal
prepayments thereon (including for this purpose, prepayments resulting from
(i) refinancing, (ii) liquidations of the Loans due to defaults, casualties
and condemnations and (iii) repurchases by the Transferor as required pursuant
to the Home Loan Purchase Agreement). Generally, if prevailing interest rates
on similar loans fall significantly below the interest rates on the Loans, the
Loans may be subject to higher prepayment rates than if prevailing rates
remain at or above the interest rates on the Loans. Conversely, if prevailing
interest rates rise significantly above the interest rates on the Loans, the
rate of prepayments may decrease. The Loans may be prepaid by the obligors
thereunder (the "OBLIGORS") at any time. The Mortgage Loans are subject to the
"due-on-sale" provisions included therein. Prepayments, liquidations and
purchases of the Loans (including any purchase by the Servicer of the
remaining Loans and Mortgaged Properties (title to which as been acquired by
the Trust) in connection with the optional redemption of the Offered
Securities) will, subject to certain conditions, result in distributions to
holders of the Offered Securities then entitled to receive principal
distributions of principal that would otherwise be distributed over the
remaining terms of such Loans. In addition, the overcollateralization
provisions will result in a limited acceleration of principal payments to the
holders of the Offered Securities. See "Description of the Offered Securities"
herein. Since the rate of payment of principal on the Loans will depend on
future events and a variety of factors, no assurance can be given as to such
rate or the rate of principal prepayments.
All of the Loans may be prepaid in whole or in part at any time. Home loans
such as the Loans have been originated in significant volume only during the
past few years and neither the Transferor, the Depositor nor the Servicer is
aware of any publicly available studies or statistics on the rate of
prepayment of such 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 Loans contain due-on-sale provisions and
the Servicer intends to enforce such provisions unless (i) the Servicer, in a
manner consistent with accepted servicing practices, permits the purchaser of
the related Mortgaged Property to assume the Loan or (ii) such enforcement is
not permitted by applicable law. To the extent permitted by applicable law,
such assumption will not release the original borrower from its obligation
under any such Loan. See "Certain Legal Aspects of the Loans--"Due-on-Sale'
Clauses" in the Prospectus.
The extent to which the yield to maturity of an Offered Security may vary
from the anticipated yield will depend upon (i) the degree to which it is
purchased at a premium or discount, (ii) the degree to which the timing of
distributions to holders thereof is sensitive to scheduled payments,
prepayments, liquidations, defaults, delinquencies, substitutions,
modifications and repurchases of Loans and to the distribution of Excess
Spread and (iii) to the application of Allocable Loss Amounts to certain
Classes of Offered Securities as specified herein. In the case of any Offered
Security purchased at a discount, an investor should consider the risk that a
slower than anticipated rate of principal distributions to the holders of such
Offered Security (including without limitation principal prepayments on the
Loans) could result in an actual yield to such investor that is lower than the
anticipated yield and, in the case of any Offered Security purchased at a
premium, the risk that a faster than anticipated rate of principal
distributions to the holders of such Offered Security (including without
limitation principal prepayments on the Loans) could result in an actual yield
to such investor that is lower than the
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anticipated yield. On each Distribution Date, until the Overcollateralization
Amount is at least equal to the Overcollaterization Target Amount, the
allocation of the Excess Spread for such Distribution Date as an additional
distribution of principal on one or more Classes of the Offered Securities
will accelerate the amortization of such Classes of the Offered Securities
relative to the amortization of the Loans. Further, in the event that
significant distributions of principal are made to holders of the Offered
Securities as a result of prepayments, liquidations, repurchases and purchases
of the Loans or distributions of Excess Spread, there can be no assurance that
holders of the Offered Securities will be able to reinvest such distributions
in a comparable alternative investment having a comparable yield. See
"Prepayment and Yield Considerations" herein.
ADEQUACY OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Offered Securities will be provided
by (i) with respect to the FHA Loans, by the FHA insurance, (ii) the
subordination of distributions in respect of the Residual Interest and the
Class B Certificates (as well as the subordination of certain Classes of
Offered Securities to other Classes of Offered Securities, as described
herein), and (iii) the overcollateralization feature which results from the
limited acceleration of the principal amortization of one or more Classes of
the Offered Securities relative to the amortization of the Loans by the
application of Excess Spread, as described herein. If the Loans experience
higher rates of delinquencies, defaults and losses than initially anticipated
in connection with the ratings of the Offered Securities, the amounts
available from the credit enhancement may not be adequate to cover the delays
or shortfalls in distributions to the holders of the Offered Securities that
result from such higher delinquencies, defaults and losses. If the amounts
available from the credit enhancement are inadequate, the holders of the
Offered Securities will bear the risk of any delays and losses resulting from
the delinquencies, defaults and losses on the Loans.
The rights of the holders of the Class M-1 Notes to receive distributions of
interest on each Distribution Date generally will be subordinated to such
rights of the holders of the Senior Notes, the rights of the holders of the
Class M-2 Notes to receive distributions of interest on each Distribution Date
generally will be subordinated to such rights of the holders of the Class M-1
Notes and the Senior Notes, and the rights of the holders of the Class B
Certificates to receive distributions of interest on each Distribution Date
generally will be subordinated to such rights of the holders of the Notes. In
addition, the rights of the holders of the Class M-1 Notes to receive
distributions of principal on each Distribution Date generally will be
subordinated to the rights of the holders of the Senior Notes to receive
distributions of interest and principal on each Distribution Date, and the
rights of the holders of the Class M-2 Notes to receive distributions of
principal on each Distribution Date generally will be subordinated to the
rights of the holders of the Senior Notes and the Class M-1 Notes to receive
distributions of interest and principal on each Distribution Date. In
addition, distributions of principal of the Class B Certificates generally
will be subordinated in priority of payment to the Notes. Consequently, the
Class B Certificateholders may receive no distributions of interest on a
Distribution Date until all amounts due on the Notes on account of interest on
the Notes have been distributed to the Noteholders, and may receive no
distributions of principal on a Distribution Date until all amounts due on the
Notes on account of interest and principal on the Notes have been distributed
to the Noteholders. See "Description of Credit Enhancement--Subordination and
Allocation of Losses" herein.
While the distribution of Excess Spread to the holders of the Offered
Securities in the manner specified herein has been designed to produce and
maintain a given level of overcollateralization with respect to the Offered
Securities, there can be no assurance that Excess Spread will be generated in
sufficient amounts to ensure that such overcollateralization level will be
achieved or maintained at all times. In particular, as a result of
delinquencies on the Loans during any Due Period, the amount of interest
received on the Loans during such Due Period may be less than the amount of
interest distributable on the Offered Securities on the related Distribution
Date. Such an occurrence will cause the Class Principal Balances of the
Offered Securities to decrease at a slower rate relative to the Pool Principal
Balance, resulting in a reduction of the Overcollateralization Amount and, in
some circumstances, an Allocable Loss Amount.
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The holders of the Residual Interest will not be required to refund any
amounts previously distributed to such holders pursuant to the Transfer and
Servicing Agreements, including any distributions of Excess Spread, regardless
of whether there are sufficient funds on a subsequent Distribution Date to
make a full distribution to holders of the Offered Securities.
RELATED SERIES TRUSTS
The Contract of Insurance Holder is EFC Securitized Assets, L.C. for the
benefit of the Trust. The Contract of Insurance may be held for the benefit of
the Trust, as well as the Empire Funding Home Loan REMIC Trust 1997-A and any
other subsequently created trusts of which the Trustee is the trustee thereof,
the Contract of Insurance Holder is the contract of insurance holder thereof
and to which Title I Loans are sold directly or indirectly by the Transferor
and the related securities (each, a "RELATED SERIES TRUST"). The Secretary of
HUD will not earmark the monies in the FHA Reserve Account for the benefit of
any particular Related Series Trust, but each of the Contract of Insurance
Holder and the Claims Administrator has agreed in the Sale and Servicing
Agreement to earmark the Trust Designated Insurance Amount exclusively for the
benefit of the Trust. The Contract of Insurance Holder and the Claims
Administrator will not submit any claim to the FHA in respect of the FHA Loans
if the amount of such claim and all claims paid in respect of the FHA Loans
would exceed the Trust Designated Insurance Amount. Notwithstanding the
foregoing, in the event that an portion of the Combined FHA Insurance Amount
is inadvertently applied to loans in a Related Series Trust other than the
Trust in excess of the designated insurance amount for such Related Series
Trust, the Combined FHA Insurance Amount available to cover defaults on the
FHA Loans will be reduced. Such an occurrence could result in shortfalls of
interest and principal on the Offered Securities, to the extent such
shortfalls are not otherwise covered by overcollateralization.
LIMITATIONS ON FHA INSURANCE
The availability of FHA Insurance following a default on an FHA Loan is
limited and is subject to a number of conditions, including strict compliance
by the Transferor, the Contract of Insurance Holder, the Claims Administrator
and the Servicer with FHA Regulations in originating and servicing the FHA
Loan and limits on the aggregate insurance coverage available with respect to
all Title I Loans then owned and reported for FHA Insurance by the Contract of
Insurance Holder. The availability of FHA Insurance in respect of the FHA
Loans is also limited to the extent of the Trust Designated Insurance Amount.
Although the Transferor has represented that it has complied with all
applicable FHA Regulations, such regulations are susceptible to differences in
interpretation. The Contract of Insurance Holder is not required to obtain,
and has not obtained, approval from FHA of the origination and servicing
practices of the Transferor and the Servicer. Failure to comply with all FHA
Regulations may result in a denial of FHA Insurance claims, and there can be
no assurance that FHA's interpretation of its regulations will not become
stricter in the future. In addition, any claim paid by FHA will cover, at
most, 90% of the sum of the unpaid principal on the related FHA Loan, a
portion of the unpaid interest and certain other liquidation costs up to the
Contract of Insurance Holder's aggregate amount of FHA insurance coverage. The
Transferor has agreed in the Sale and Servicing Agreement to purchase from the
Trust any FHA Loan that is rejected by the FHA for insurance benefits under
the Contract of Insurance (other than rejection for clerical error in
computing the claim amount or due to the exhaustion of the Combined FHA
Insurance Amount).
RISK OF HIGHER DEFAULT RATES ASSOCIATED WITH CALIFORNIA REAL PROPERTY
Since a substantial portion (approximately 52.52% by Original Pool Principal
Balance) of the Mortgaged Properties is located in California, the recent
overall decline and a further overall decline in the California residential
real estate market may have and could continue to adversely affect the values
of the Mortgaged Properties securing such Mortgage Loans such that the
Principal Balances of the related Mortgage Loans, together with any primary
financing on such Mortgaged Properties, could equal or exceed the value of
such Mortgaged Properties. As the residential real estate market is influenced
by many factors, including the general condition of the economy and interest
rates, no assurances can be given that the California real estate market will
not weaken further. If the California residential real estate market should
experience an overall decline in property values after the dates of
origination of the Mortgage Loans, the rates of losses on the Mortgage Loans
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may be expected to increase, and may increase substantially. Because a
substantial portion of the Mortgaged Properties is in California, the risk of
occurrence of earthquake damage exists that may not be covered by any hazard
insurance and that may result in greater losses on Mortgaged Properties that
suffer earthquake damage.
ADEQUACY OF THE MORTGAGED PROPERTIES AS SECURITY FOR THE LOANS
As of the Cut-Off Date the weighted average combined loan-to-value ratio of
the Loans was 113.64%. As of the Cut-Off Date, 6.53% of the loans were
unsecured obligations of the related Obligors. As a result of the foregoing,
the Mortgaged Properties may not provide adequate security for the Loans. Even
assuming that a Mortgaged Property provides adequate security for the related
Loan, substantial delays could be encountered in connection with the
liquidation of a Loan that would result in current shortfalls in distributions
to the holders of the Offered Securities to the extent such shortfalls are not
covered by the credit enhancement described herein. In addition, liquidation
expenses relating to any Defaulted Loan (such as legal fees, real estate
taxes, and maintenance and preservation expenses) would reduce the liquidation
proceeds otherwise payable to the holders of the Offered Securities. In the
event that any Mortgaged Property fails to provide adequate security for the
related Loan, any losses in connection with such Loan will be borne by holders
of the Offered Securities as described herein to the extent that the credit
enhancement described herein is insufficient to absorb all such losses.
RECENT ORIGINATION OF LOANS
Loans representing approximately 0.30% of the Original Pool Principal
Balance were 30 days or more delinquent in their scheduled monthly payments of
principal and interest as of February 28, 1997; however, approximately 36.09%
of the Original Pool Principal Balance consists of Loans that have a first
scheduled monthly payment due date occurring on or after January 29, 1997 and,
therefore, it was not possible for such Loans to have had a scheduled monthly
payment that was 30 days or more delinquent as of February 28, 1997.
UNDERWRITING GUIDELINES
Pursuant to the underwriting guidelines of the Transferor, the assessment of
the creditworthiness of the related borrower is the primary consideration in
underwriting the Loans, and with respect to any Mortgage Loans, the evaluation
of the adequacy of the value of the related Mortgaged Property or other
secured property in relation to the Loan, together with the amount of all
liens senior to the lien of the Loan, is given less consideration, and in
certain cases no consideration, in underwriting the Loans. See, "Empire
Funding--Underwriting Criteria" herein. In general, the credit quality of the
Loans is lower than that of mortgage loans conforming to the FNMA or FHLMC
underwriting guidelines for first-lien, single family mortgage loans.
Accordingly, the Loans are likely to experience higher rates of delinquencies,
defaults and losses (which rates could be substantially higher) than those
rates that would be experienced by similar types of loans underwritten in
conformity with the FNMA or FHLMC underwriting guidelines for first-lien,
single family mortgage loans. In addition, the losses sustained from defaulted
Loans are likely to be more severe in relation to the outstanding principal
balances of such defaulted Loans, because the costs incurred in the collection
and liquidation of defaulted Loans in relation to the smaller principal
balances thereof are proportionately higher than first-lien, single family
mortgage loans, and because in the case of Secured Loans the majority of such
Loans are secured by junior liens on Mortgaged Properties in which the
borrowers have no equity therein (i.e., the related Combined loan-to-value
ratio exceed 100%) at the time of origination of such Loans. See, "--Adequacy
of Credit Enhancement" above.
Although the creditworthiness of the related borrower is the primary
consideration in the underwriting of the Loans, no assurance can be given that
such creditworthiness of the borrower will not deteriorate as a result of
future economic and social factors, which deterioration may result in a
delinquency or default by such borrower on the related Loan. Furthermore,
because the adequacy of the value of the related Mortgaged Property is given
less consideration, and in certain cases no consideration, in underwriting the
Loan, no assurance can be given that in the case of Secured Loans any proceeds
will be recovered from the foreclosure or liquidation of the related Mortgage
Property from a defaulted Loan. See, "--Realization Upon Defaulted Mortgage
Loans" below.
S-19
<PAGE>
In response to changes and developments in the consumer finance area as well
as the refinement of the Transferor's credit evaluation methodology, the
Transferor's underwriting requirements for certain types of home loans may
change from time to time, which in certain instances may result in more
stringent and in other instances less stringent underwriting requirements.
Depending upon the date on which the Loans were originated or purchased by the
Transferor, such Loans included in the Pool may have been originated or
purchased by the Transferor under different underwriting requirements, and
accordingly, certain Loans included in the Pool may be of a different credit
quality and have different loan characteristics from other Loans. Furthermore,
to the extent that certain Loans were originated or purchased by the
Transferor under less stringent underwriting requirements, such Loans may be
more likely to experience higher rates of delinquencies, defaults and losses
than those Loans originated or purchased under more stringent underwriting
requirements.
LIMITED HISTORICAL DELINQUENCY, LOSS AND PREPAYMENT INFORMATION
Since January 1995, the Servicer has substantially increased the volume of
conventional home loans, including additional types of home loans (i.e., its
debt consolidation loans and high LTV home equity loans) that it has
originated, purchased, sold and/or serviced, and thus, it has limited
historical experience with respect to the performance, including the
delinquency and loss experience and the rate of prepayments of these
conventional home loans, with respect to its entire portfolio of loans and in
particular with respect to such increased volume and additional types of
loans. Accordingly, neither the delinquency experience and loan loss and
liquidation experience set forth under "Empire Funding--Servicing Experience,"
herein nor the prepayment scenarios set forth under "Prepayment and Yield
Considerations--Weighted Average Life of the Offered Securities" herein may be
indicative of the performance of the Loans included in the Pool. Prospective
investors should make their investment determination based on the Loan
underwriting criteria, the availability of the credit enhancement described
herein, the characteristics of the initial Loans and other information
provided herein, and not based on any prior delinquency experience and loan
loss and liquidation experience information set forth herein or any rate of
prepayments assumed herein.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
Substantially all of the Mortgage Loans are secured by junior liens, and the
related senior liens are not included in the Pool. The primary risk to holders
of Mortgage Loans secured by junior liens is the possibility that adequate
funds will not be received in connection with a foreclosure of the related
Mortgaged Property to satisfy fully both the senior lien(s) and the Mortgage
Loan. See "Risk Factors--Nature of Mortgages" in the Prospectus. In accordance
with the loan servicing practices of the Servicer for home loans secured by
junior liens in its portfolio and based upon a determination that the
realization from a defaulted junior lien Mortgage Loan may not be an
economically viable alternative, the Servicer, in most cases, will not (i)
pursue the foreclosure of a defaulted Mortgage Loan, (ii) satisfy the senior
mortgage(s) at or prior to the foreclosure sale of the Mortgaged Property, or
(iii) advance funds to keep the senior mortgage(s) current. The Trust will
have no source of funds to satisfy the senior mortgage(s) or make payments due
to the senior mortgage(s), and, therefore, holders of the Offered Securities
should not expect that any senior mortgage(s) will be kept current by the
Trust for the purpose of protecting any junior lien Mortgage Loan. See
"Certain Legal Aspects of the Loans--Foreclosure/Repossession" in the
Prospectus.
Generally the underwriting requirements of the Transferor requires that a
borrower obtain title or fire and casualty insurance as a condition to the
closing of a Conventional Loan, however, the Transferor does not monitor the
maintenance of insurance thereafter. Accordingly, if the Mortgaged Property
suffers any uninsured hazard or casualty losses, holders of any Offered
Securities may bear the risk of loss resulting from a default by the related
borrower to the extent such losses are not recovered by foreclosure or
liquidation proceeds on such defaulted Mortgage Loans or from amounts
available from the credit enhancement provided for the Offered Securities.
The Servicer may pursue alternative methods of servicing defaulted Loans to
maximize proceeds therefrom, including without limitation, the modification of
such Loans, which, among other things, may include the abatement of accrued
interest or the reduction of a portion of the outstanding principal balance of
such Loans.
S-20
<PAGE>
The costs incurred in the collection and liquidation of defaulted Loans in
relation to the smaller principal balances thereof are proportionately higher
than first-lien single-family mortgage loans, and because substantially all of
the Loans will have combined loan-to-value ratios at the time of origination
that exceed 100%, losses sustained from defaulted Loans are likely to be more
severe (and could be total losses) in relation to the outstanding principal
balance of such defaulted Loans. In fact, no assurance can be given that any
proceeds, or a significant amount of proceeds, will be recovered from the
liquidation of defaulted Loans.
UNSECURED LOANS
A default by an obligor on an unsecured Loan or the application of federal
bankruptcy laws and state debtor relief laws could result in such loan being
written-off by the Servicer. In the event of a default of an unsecured Loan,
if the FHA Insurance Reserve is insufficient or if there is no FHA Insurance
with respect to such Loan, the Trust and, accordingly, the holders of the
Offered Securities will bear (i) the risk of delay in distributions while a
judgment against the obligor is obtained and (ii) the risk of loss if the
judgment cannot be obtained or is not realized upon.
NO SERVICER DELINQUENCY ADVANCES
In the event of a delinquency or a default with respect to a Loan, the
Servicer will have no obligation to advance scheduled monthly payments of
principal or interest with respect to such Loan. As a result of the foregoing,
the amount of interest received on the Loans during such Due Period may be
less than the amount of interest distributable on the Offered Securities on
the related Distribution Date. Such an occurrence will cause the Class
Principal Balances of the Offered Securities to decrease at a slower rate
relative to the Pool Principal Balance, resulting in a reduction of the
Overcollateralization Amount and, in some circumstances, an Allocable Loss
Amount. However, the Servicer will make such reasonable and customary expense
advances with respect to the Loans as generally would be required in
accordance with its servicing practices. See "Description of the Transfer and
Servicing Agreements--Servicing" herein.
DEPENDENCE ON SERVICER FOR SERVICING LOANS
Pursuant to the Sale and Servicing Agreement, the Servicer will perform the
daily loan servicing functions for the Loans that include, without limitation,
the collection of payments from the Loans, the remittance of funds from such
collections for distribution to the holders of the Offered Securities, the
bookkeeping and accounting for such collections and distributions, all other
servicing activities relating to the Loans, the preparation of the monthly
servicing and remittance reports pursuant to the Sale and Servicing Agreement
and the maintenance of all records and files pertaining to such servicing
activities. Upon the Servicer's failure to remedy an Event of Default under
the Sale and Servicing Agreement, a majority of the holders of the Offered
Securities or the Indenture Trustee or the Owner Trustee may remove the
Servicer and appoint a successor servicer pursuant to the terms of the Sale
and Servicing Agreement. Absent such a replacement, the holders of the Offered
Securities will be dependent upon the Servicer to adequately and timely
perform its servicing obligations and remit to the Indenture Trustee the funds
from the payments of principal and interest received on the Loans. The manner
in which the Servicer performs its servicing obligations will affect the
amount and timing of the principal and interest payments received on the
Loans. The principal and interest payments received on the Loans are the sole
source of funds for the distributions due to the holders of the Offered
Securities under the Sale and Servicing Agreement. Accordingly, the holders of
the Offered Securities will be dependent upon the Servicer to adequately and
timely perform its servicing obligations and such performance will affect the
amount and timing of distributions to the holders of the Offered Securities.
See "Empire Funding--Servicing Experience" herein.
LEGAL CONSIDERATIONS
The sale of the Loans from the Transferor to EFC and from EFC to the
Depositor pursuant to the Home Loan Purchase Agreement will be treated by the
Transferor, EFC and the Depositor as a sale of the Loans. The Transferor will
warrant that such transfer is a sale of the Transferor's interest in the
Loans. In the event of an
S-21
<PAGE>
insolvency of the Transferor, the receiver or bankruptcy trustee of the
Transferor may attempt to recharacterize the sale of the Loans as a borrowing
by the Transferor secured by a pledge of the Loans. If the receiver or
bankruptcy trustee decided to challenge such transfer, delays in payments on
the Offered Securities and possible reductions in the amount thereof could
occur. The Depositor will warrant in the Sale and Servicing Agreement that the
transfer of the Loans to the Trust is a valid transfer of all of the
Depositor's right, title and interest in the Loans to the Trust.
CERTAIN OTHER LEGAL CONSIDERATIONS
The underwriting, origination, servicing and collection of the Loans are
subject to a variety of State and Federal laws, public policies and principles
of equity. Depending on the provisions of applicable law and the specific
facts and circumstances involved, violations of these laws, policies or
principles may limit the ability of the Servicer to collect all or part of the
principal or interest on the Loans, may entitle the borrower to a refund of
amounts previously paid, and, in addition, could subject the Servicer to
damages and administrative sanctions. If the Servicer is unable to collect all
or part of the principal or interest on any Loans because of a violation of
the aforementioned laws, public policies or general principles of equity, then
the Trust may be delayed or unable to make all distributions owed to the
holders of the Offered Securities to the extent any related losses are not
otherwise covered by amounts available from the credit enhancement provided
for the Offered Securities. Furthermore, depending upon whether damages and
sanctions are assessed against the Servicer or the Transferor, such violations
may materially impact (i) the financial ability of the Servicer to continue to
act in such capacity or (ii) the ability of the Transferor to repurchase or
replace Defective Loans. See "Risk Factors--Certain Other Legal Considerations
Regarding the Loans" in the Prospectus. The Transferor will be required to
repurchase or replace any Loan which did not comply with applicable State and
Federal laws and regulations as of the Closing Date. See "--Limitations on
Repurchase or Replacement of Defective Loans by Transferor" below.
LIMITATIONS ON LIQUIDITY OF TRANSFEROR AND SERVICER
As a result of the Transferor's increasing volume of loan originations and
purchases, and its expanding securitization activities, the Transferor
requires substantial capital to fund its operations and has operated, and
expects to continue to operate, on a negative operating cash flow basis.
Currently, the Transferor funds substantially all of its operations, including
its loan originations and purchases, from borrowings under the Transferor's
lending arrangements with certain third parties, including warehouse and
residual financing facilities. See "Empire Funding" herein. There can be no
assurance that as the Transferor's existing lending arrangements mature, the
Transferor will have access to the financing necessary for its operations or
that such financing will be available to the Transferor on favorable terms. To
the extent that the Transferor is unable to arrange new or alternative methods
of financing on favorable terms, the Transferor may have to curtail its loan
origination and purchasing activities, which could have a material adverse
effect on the Transferor's financial condition and, in turn, its ability to
service the Loans and to repurchase any Defective Loans.
LIMITATIONS ON REPURCHASE OR REPLACEMENT OF DEFECTIVE LOANS BY TRANSFEROR
Pursuant to the Sale and Servicing Agreement, the Transferor has agreed to
cure in all material respects any breach of the Transferor's representations
and warranties set forth in the Sale and Servicing Agreement with respect to
Defective Loans. If the Transferor cannot cure such breach within a specified
period of time, the Transferor is required to repurchase such Defective Loans
from the Trust or substitute other loans for such Defective Loans. Although a
significant portion of the Loans will have been acquired from unaffiliated
correspondent lenders, the Transferor will make the representations and
warranties for all such Loans. For a summary description of the Transferor's
representations and warranties, See "The Agreements--Assignment of the Trust
Fund Assets" in the Prospectus.
No assurance can be given that, at any particular time, the Transferor will
be capable, financially or otherwise, of repurchasing or replacing any
Defective Loan(s) in the manner described above. If the Transferor
repurchases, or is obligated to repurchase, any defective home loan(s) from
any other series of asset backed
S-22
<PAGE>
securities, the financial ability of the Transferor to repurchase any
Defective Loan(s) from the Trust may be adversely affected. In addition, other
events relating to the Transferor and its home lending can occur that would
adversely affect the financial ability of the Transferor to repurchase
Defective Loans from the Trust, including, without limitation, the sale or
other disposition of all or any significant portion of its assets. If the
Transferor is unable to repurchase or replace a Defective Loan, then the
Servicer, on behalf of the Trust, will utilize customary servicing practices
to recover the maximum amount possible with respect to such Defective Loan,
and any resulting loss will be borne by the holders of the Offered Securities
to the extent that such loss is not otherwise covered by amounts available
from the credit enhancement provided for the Offered Securities. See "Empire
Funding" and "Description of Credit Enhancement" herein.
LOWER CREDIT QUALITY TRUST ASSETS
Certain of the assets of the Trust underlying or securing, as the case may
be, the Offered 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 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 "Empire Funding--Underwriting Criteria" herein.
S-23
<PAGE>
THE POOL
GENERAL
The Pool will consist of the collective pool of the Loans which are either
(i) closed-end fixed-rate home improvement loans and retail installment sale
contracts that are partially insured by the FHA under the Title I Program and
are secured by first- and junior-lien mortgages, deeds of trust and security
deeds on residences (which are primarily condominiums, townhouses and one- to
four-family residences, including investment properties) (the "SECURED FHA
LOANS"), (ii) closed-end fixed-rate home improvement and retail installment
sale contracts that are partially insured by the FHA under the Title I Program
but that are unsecured general obligations of the related Obligors (the
"UNSECURED FHA LOANS", and together with the Secured FHA Loans, the "FHA
LOANS"), (iii) closed-end fixed-rate home improvement loans, home equity loans
and debt consolidation loans that are not insured or guaranteed by any
government agency (the "SECURED CONVENTIONAL LOANS") and that are secured
generally by first- and junior-lien mortgages, deeds of trust and security
deeds on residences (which are primarily condominiums, townhouses and one- to
four-family residences, including investment properties) (collectively with
the properties securing the Secured FHA Loans, the "MORTGAGED PROPERTIES"),
and (iv) closed-end fixed-rate home improvement loans, home equity loans and
debt consolidation loans that are not insured or guaranteed by any government
agency and that are unsecured (the "UNSECURED CONVENTIONAL LOANS", and
together with the Secured Conventional Loans, the "CONVENTIONAL LOANS"). The
Conventional Loans and the FHA Loans are referred to collectively herein as
the "LOANS", and the Secured Conventional Loans and the Secured FHA Loans are
collectively referred to herein as the "MORTGAGE LOANS."
For a description of the underwriting criteria applicable to the Loans, See
"Empire Funding--Underwriting Criteria" herein. All of the Loans will be sold
by the Transferor to EFC and from EFC to the Depositor, which will then sell
the Loans to the Trust pursuant to the Sale and Servicing Agreement. Pursuant
to the Indenture, the Trust will pledge and assign the Loans to the Indenture
Trustee for the benefit of the holders of the Notes. The Trust will be
entitled to all payments of interest in respect of the Loans due after the
Cut-Off Date and all payments of principal in respect of the Loans received
after the Cut-Off Date.
PAYMENTS ON THE LOANS
Interest on each Loan is payable monthly on the outstanding Principal
Balance thereof at a fixed rate per annum (the "LOAN RATE"). The Loans are
actuarial loans which provide that interest is charged to the obligors
thereunder (the "OBLIGORS"), and payments are due from such Obligors, as of a
scheduled day of each month which is fixed at the time of origination. Each
regular scheduled payment made by the Obligor is, therefor, treated as
containing a predetermined amount of interest and principal. Scheduled monthly
payments made by the Obligors on the Loans either earlier or later than the
scheduled due dates thereof will not affect the amortization schedule or the
relative application of such payments to principal and interest. Interest
accrued on each Loan will be calculated on a basis of a 360-day year
consisting of twelve 30-day months.
CHARACTERISTICS OF LOANS
The following is a brief description of certain terms of the Loans included
in the Pool as of the date of this Prospectus Supplement. The Pool may vary
from the description below due to a number of factors, including prepayments
received after the Cut-Off Date. In addition, the Transferor has the option,
and in some cases the obligation, to repurchase or replace certain Loans under
certain circumstances as set forth herein under "The Transferor and Servicer--
Repurchase or Substitution of Loans." A schedule of the Loans included in the
Pool as of the Closing Date will be attached to the Sale and Servicing
Agreement delivered to the Indenture Trustee upon delivery of the Offered
Securities.
The Loans included in the Pool have the characteristics set forth below and
in the tables beginning on the following page. Unless otherwise indicated, all
percentages and weighted averages are percentages and weighted averages of the
Original Pool Principal Balance.
S-24
<PAGE>
LOAN STATISTICS
As of the Cut-Off Date, the Pool consisted of 3,243 Loans, 6.53% of which
are unsecured Loans and 93.47% of which are Mortgage Loans secured by
Mortgaged Properties located in 40 states and the District of Columbia. As of
the Cut-Off Date, the aggregate Principal Balances of the Loans was
approximately $71,827,144.69 (the "ORIGINAL POOL PRINCIPAL BALANCE"). The
Loans bear interest at fixed Loan Rates which range from approximately 8.99%
per annum to approximately 18.99% per annum and have a weighted average of
14.04% per annum. The Cut-Off Date Principal Balances of the Loans ranged from
$530.85 to $80,179.00 and average $22,148.36. As of the Cut-Off Date, the
weighted average remaining term to stated maturity was 211 months and the
weighted average number of months that have elapsed since origination was
approximately 3 months. As of the Cut-Off Date, the weighted average combined
loan-to-value ratio was approximately 113.64% and ranged from 0% to 131%.
Combined loan-to-value ratios are not available for the FHA Loans.
Approximately 100% of the Loans are fully amortizing Loans having original
stated maturities of not more than 25 years. No Loan is scheduled to mature
later than January 8, 2022.
Approximately 93.45% of the Loans are Secured Conventional Loans and one
loan of $11,154.00 is a Secured FHA Loan. As of the Cut-Off Date,
approximately 0.44%, 92.83% and 0.20% of the Loans are secured by first liens,
second liens and third liens, respectively, on the related Mortgaged
Properties. As of the Cut-Off Date, approximately 100% of the Mortgaged
Properties were owner-occupied. Approximately 58.69% and 41.31% of the
Unsecured Loans are Unsecured FHA Loans and Unsecured Conventional Loans,
respectively.
As of the Cut-Off Date, 0.30% of the Loans were between 30 and 59 days past
due, and no Loan was 59 or more days past due. The weighted average FICO score
for Loans with a FICO score greater than zero was 666. See "Empire Funding--
Underwriting Criteria" herein.
The sum of the percentages in the following tables may not equal the total
due to rounding.
S-25
<PAGE>
GEOGRAPHIC DISTRIBUTION OF LOANS
<TABLE>
<CAPTION>
AGGREGATE CUT-
OFF DATE % OF ORIGINAL
NUMBER OF PRINCIPAL POOL PRINCIPAL
STATE LOANS BALANCE BALANCE
- ---------------------------------------- --------- -------------- --------------
<S> <C> <C> <C>
Arizona................................ 142 $ 2,848,621.87 3.97%
Arkansas............................... 61 409,021.60 0.57
California............................. 1,320 37,725,897.79 52.52
Colorado............................... 83 1,747,995.55 2.43
Connecticut............................ 5 118,207.56 0.16
Delaware............................... 3 78,510.17 0.11
District of Columbia................... 6 188,835.58 0.26
Florida................................ 146 3,045,530.27 4.24
Georgia................................ 51 1,070,802.32 1.49
Idaho.................................. 37 917,378.59 1.28
Illinois............................... 37 402,639.53 0.56
Indiana................................ 55 750,930.09 1.05
Iowa................................... 7 62,466.83 0.09
Kansas................................. 15 89,955.58 0.13
Kentucky............................... 39 647,798.25 0.90
Louisiana.............................. 44 549,256.89 0.76
Maryland............................... 153 4,978,758.83 6.93
Massachusetts.......................... 1 23,326.30 0.03
Michigan............................... 94 462,416.03 0.64
Minnesota.............................. 1 24,894.47 0.03
Mississippi............................ 16 119,157.75 0.17
Missouri............................... 27 342,668.28 0.48
Montana................................ 3 56,443.24 0.08
Nebraska............................... 10 51,094.28 0.07
Nevada................................. 58 1,451,177.13 2.02
New Jersey............................. 6 128,103.53 0.18
New Mexico............................. 11 128,917.62 0.18
New York............................... 24 510,657.17 0.71
North Carolina......................... 51 750,433.59 1.04
Ohio................................... 33 143,410.98 0.20
Oklahoma............................... 66 433,586.99 0.60
Oregon................................. 96 2,425,816.20 3.38
Pennsylvania........................... 43 757,064.08 1.05
South Carolina......................... 11 76,759.29 0.11
Tennessee.............................. 20 148,162.45 0.21
Texas.................................. 154 809,480.61 1.13
Utah................................... 46 1,294,623.09 1.80
Virginia............................... 64 1,816,332.20 2.53
Washington............................. 200 4,173,712.64 5.81
West Virginia.......................... 3 56,793.47 0.08
Wyoming................................ 1 9,506.00 0.01
<CAPTION>
- ---------------------------------------- --------- -------------- --------------
<S> <C> <C> <C>
TOTAL 3,243 $71,827,144.69 100.00%
</TABLE>
S-26
<PAGE>
LIEN PRIORITY
<TABLE>
<CAPTION>
AGGREGATE CUT-
OFF DATE % OF ORIGINAL
LIEN NUMBER OF PRINCIPAL POOL PRINCIPAL
PRIORITY LOANS BALANCE BALANCE
- ------------ --------- -------------- --------------
<S> <C> <C> <C>
Second Lien 2,352 $66,675,642.71 92.83%
Unsecured 872 4,693,024.20 6.53
First Lien 14 316,286.34 0.44
Third Lien 5 142,191.44 0.20
<CAPTION>
- ------------ --------- -------------- --------------
<S> <C> <C> <C>
TOTAL 3,243 $71,827,144.69 100.00%
</TABLE>
CUT-OFF DATE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
AGGREGATE CUT-
RANGE OF CUT-OFF OFF DATE % OF ORIGINAL
DATE LOAN NUMBER OF PRINCIPAL POOL PRINCIPAL
PRINCIPAL BALANCES LOANS BALANCE BALANCE
- -------------------- --------- -------------- --------------
<S> <C> <C> <C>
$531 - $10,000 849 $ 4,118,868.03 5.73%
10,001 - 20,000 472 7,624,410.21 10.61
20,001 - 30,000 1,029 26,341,503.41 36.67
30,001 - 40,000 764 27,492,296.15 38.28
40,001 - 50,000 108 5,041,593.16 7.02
50,001 - 60,000 19 1,059,493.15 1.48
60,001 - 70,000 1 68,801.58 0.10
80,001 - 80,179 1 80,179.00 0.11
<CAPTION>
- -------------------- --------- -------------- --------------
<S> <C> <C> <C>
TOTAL 3,243 $71,827,144.69 100.00%
</TABLE>
As of the Cut-Off Date, the average Cut-Off Date Principal Balance of the
Loans was $22,148.36.
LOAN RATES
<TABLE>
<CAPTION>
AGGREGATE CUT-
OFF DATE % OF ORIGINAL
RANGE OF LOAN NUMBER OF PRINCIPAL POOL PRINCIPAL
RATES LOANS BALANCE BALANCE
- ------------------ --------- -------------- --------------
<S> <C> <C> <C>
8.99 - 9.00% 1 $ 44,110.01 0.06%
9.51 - 10.00 6 163,892.24 0.23
10.01 - 10.50 3 50,247.25 0.07
10.51 - 11.00 11 224,437.34 0.31
11.01 - 11.50 14 404,103.28 0.56
11.51 - 12.00 102 2,590,246.88 3.61
12.01 - 12.50 121 3,319,929.67 4.62
12.51 - 13.00 482 9,675,078.52 13.47
13.01 - 13.50 138 3,428,682.08 4.77
13.51 - 14.00 1,086 25,078,835.82 34.92
14.01 - 14.50 208 3,615,705.63 5.03
14.51 - 15.00 772 17,877,946.89 24.89
15.01 - 15.50 79 1,531,730.53 2.13
15.51 - 16.00 182 3,003,546.10 4.18
16.01 - 16.50 18 457,693.98 0.64
16.51 - 17.00 18 332,198.33 0.46
17.51 - 18.00 1 24,944.11 0.03
18.51 - 18.99 1 3,816.03 0.01
<CAPTION>
- ------------------ --------- -------------- --------------
<S> <C> <C> <C>
TOTAL 3,243 $71,827,144.69 100.00%
</TABLE>
As of the Cut-Off Date, the weighted average Loan Rate of the Loans was
14.04% per annum.
S-27
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
AGGREGATE CUT-
RANGE OF COMBINED OFF DATE % OF ORIGINAL
LOAN- TO-VALUE NUMBER OF PRINCIPAL POOL PRINCIPAL
RATIOS LOANS BALANCES BALANCE
- -------------------- --------- -------------- --------------
<S> <C> <C> <C>
0.00 - 0.00% 873 $ 4,704,178.20 6.55%
10.01 - 15.00 1 9,269.00 0.01
20.01 - 25.00 2 38,971.04 0.05
30.01 - 35.00 1 7,699.60 0.01
35.01 - 40.00 3 85,224.77 0.12
40.01 - 45.00 2 44,899.93 0.06
45.01 - 50.00 3 72,027.95 0.10
60.01 - 65.00 4 89,067.91 0.12
65.01 - 70.00 4 120,587.16 0.17
70.01 - 75.00 4 76,328.99 0.11
75.01 - 80.00 3 65,798.01 0.09
80.01 - 85.00 18 453,624.65 0.63
85.01 - 90.00 80 2,097,659.66 2.92
90.01 - 95.00 48 1,278,053.00 1.78
95.01 - 100.00 90 2,387,963.43 3.32
100.01 - 105.00 132 3,318,345.72 4.62
105.01 - 110.00 336 9,289,267.03 12.93
110.01 - 115.00 525 14,646,455.17 20.39
115.01 - 120.00 436 12,668,914.43 17.64
120.01 - 125.00 660 19,818,307.15 27.59
125.01 - 130.00 17 529,543.20 0.74
130.01 - 131.00 1 24,958.69 0.03
<CAPTION>
- -------------------- --------- -------------- --------------
<S> <C> <C> <C>
TOTAL 3,243 $71,827,144.69 100.00%
</TABLE>
As of the Cut-Off Date, the weighted average Combined loan-to-value ratio was
113.64%.
MONTHS SINCE ORIGINATION
<TABLE>
<CAPTION>
AGGREGATE CUT-
OFF DATE % OF ORIGINAL
LOAN AGE NUMBER OF PRINCIPAL POOL PRINCIPAL
(IN MONTHS) LOANS BALANCE BALANCE
- ------------- --------- -------------- --------------
<S> <C> <C> <C>
0 549 $ 9,868,002.07 13.74%
1 - 3 1,688 35,886,363.45 49.96
4 - 6 870 22,773,073.19 31.71
7 - 9 72 1,612,708.55 2.25
10 - 12 11 262,995.97 0.37
13 - 15 8 287,695.32 0.40
16 - 18 10 207,570.52 0.29
19 - 21 19 486,649.57 0.68
22 - 24 5 188,287.59 0.26
25 - 27 7 155,817.66 0.22
28 - 30 3 74,590.61 0.10
31 1 23,390.19 0.03
<CAPTION>
- ------------- --------- -------------- --------------
<S> <C> <C> <C>
TOTAL 3,243 $71,827,144.69 100.00%
</TABLE>
As of the Cut-Off Date, the weighted average months since origination of the
Loans was 3 months.
S-28
<PAGE>
REMAINING TERMS TO MATURITY
<TABLE>
<CAPTION>
RANGE OF
REMAINING
TERMS AGGREGATE CUT-
TO OFF DATE % OF ORIGINAL
MATURITY NUMBER OF PRINCIPAL POOL PRINCIPAL
(MONTHS) LOANS BALANCE BALANCE
- ---------- --------- -------------- --------------
<S> <C> <C> <C>
11 - 12 3 $ 7,594.49 0.01%
19 - 24 27 58,368.28 0.08
25 - 30 2 3,962.00 0.01
31 - 36 61 190,207.43 0.26
37 - 42 6 22,560.23 0.03
43 - 48 61 220,502.00 0.31
49 - 54 6 34,372.11 0.05
55 - 60 208 1,028,234.84 1.43
61 - 66 3 13,084.13 0.02
67 - 72 62 276,536.24 0.39
73 - 78 3 16,059.75 0.02
79 - 84 134 634,584.23 0.88
85 - 90 2 18,658.57 0.03
91 - 96 33 192,900.96 0.27
97 - 102 1 23,010.74 0.03
103 - 108 8 44,046.33 0.06
109 - 114 10 148,826.03 0.21
115 - 120 296 3,398,249.76 4.73
127 - 132 1 3,965.96 0.01
133 - 138 3 44,766.48 0.06
139 - 144 70 736,325.32 1.03
145 - 150 3 65,423.01 0.09
151 - 156 9 192,626.01 0.27
157 - 162 27 750,193.96 1.04
163 - 168 18 475,476.56 0.66
169 - 174 44 891,567.42 1.24
175 - 180 454 12,204,427.69 16.99
229 - 234 249 6,613,957.16 9.21
235 - 240 1,436 43,405,948.80 60.43
295 - 299 3 110,708.20 0.15
<CAPTION>
- ---------- --------- -------------- --------------
<S> <C> <C> <C>
TOTAL 3,243 $71,827,144.69 100.00%
</TABLE>
As of the Cut-Off Date, the weighted average remaining term to maturity of
the Loans was 211 months.
LOAN TYPES
<TABLE>
<CAPTION>
AGGREGATE CUT-
OFF DATE % OF ORIGINAL
NUMBER OF PRINCIPAL POOL PRINCIPAL
LOAN TYPE LOANS BALANCE BALANCE
- ------------- --------- -------------- --------------
<S> <C> <C> <C>
Conventional 2,650 $69,061,813.17 96.15%
FHA Title I 593 2,765,331.52 3.85
<CAPTION>
- ------------- --------- -------------- --------------
<S> <C> <C> <C>
TOTAL 3,243 $71,827,144.69 100.00%
</TABLE>
S-29
<PAGE>
ORIGINAL TERM TO MATURITY
<TABLE>
<CAPTION>
ORIGINAL AGGREGATE CUT-
TERM TO OFF DATE % OF ORIGINAL
MATURITY NUMBER OF PRINCIPAL POOL PRINCIPAL
(MONTHS) LOANS BALANCE BALANCE
- --------- --------- -------------- --------------
<S> <C> <C> <C>
12 3 $ 7,594.49 0.01%
24 27 58,368.28 0.08
30 2 3,962.00 0.01
36 61 190,207.43 0.26
42 5 20,026.40 0.03
46 1 7,526.60 0.01
48 61 215,509.23 0.30
54 1 2,216.47 0.00
60 213 1,060,390.48 1.48
66 1 2,859.13 0.00
72 64 286,761.24 0.40
84 137 650,643.98 0.91
96 35 211,559.53 0.29
108 8 44,046.33 0.06
120 307 3,570,086.53 4.97
132 1 3,965.96 0.01
144 73 781,091.80 1.09
156 1 4,250.56 0.01
176 1 25,750.67 0.04
180 553 14,549,713.42 20.26
236 3 79,954.77 0.11
237 1 23,764.29 0.03
238 1 23,747.62 0.03
239 1 22,460.97 0.03
240 1,679 49,869,978.31 69.43
300 3 110,708.20 0.15
<CAPTION>
- --------- --------- -------------- --------------
<S> <C> <C> <C>
TOTAL 3,243 $71,827,144.69 100.00%
</TABLE>
As of the Cut-Off Date, the weighted average original term to maturity of the
Loans was 214 months.
FICO SCORE
<TABLE>
<CAPTION>
AGGREGATE CUT-
OFF DATE % OF ORIGINAL
RANGE OF FICO NUMBER OF PRINCIPAL POOL PRINCIPAL
SCORES LOANS BALANCE BALANCE
- ---------------- --------- -------------- --------------
<S> <C> <C> <C>
0.00 - 0.00 28 $ 272,097.96 0.38%
200.01 - 300.00 1 9,506.00 0.01
400.01 - 500.00 1 4,634.00 0.01
500.01 - 600.00 161 2,178,720.03 3.03
600.01 - 700.00 2,363 57,799,261.57 80.47
700.01 - 800.00 675 11,453,290.33 15.95
800.01 - 819.00 14 109,634.80 0.15
<CAPTION>
- ---------------- --------- -------------- --------------
<S> <C> <C> <C>
TOTAL 3,243 $71,827,144.69 100.00%
</TABLE>
S-30
<PAGE>
REPURCHASE OR SUBSTITUTION OF LOANS
The Transferor is required (i) within 60 days after discovery or notice
thereof to cure in all material respects any breach of the representations or
warranties made with respect to any Loan or as to which a document deficiency
exists (each, a "DEFECTIVE LOAN") or (ii) on or before the Determination Date
next succeeding the end of such 60 day period, to repurchase such Defective
Loan at a price (the "PURCHASE PRICE") equal to the Principal Balance of such
Defective Loan as of the date of repurchase, plus all accrued and unpaid
interest on such Defective Loan to and including the date of repurchase
computed at the Loan Rate. In lieu of repurchasing a Defective Loan, the
Transferor may replace such Defective Loan with one or more Qualified
Substitute Loans. If the aggregate outstanding principal balance of the
Qualified Substitute Loan(s) is less than the outstanding Principal Balance of
the Defective Loan(s), the Transferor will also remit for distribution to the
holders of the Offered Securities an amount (a "SUBSTITUTION ADJUSTMENT")
equal to such shortfall which will result in a prepayment of principal on the
Offered Securities for the amount of such shortfall. As used herein, a
"QUALIFIED SUBSTITUTE LOAN" is a home loan that (i) has an interest rate which
differs from the Loan Rate for the Defective Loan which it replaces (each, a
"DELETED LOAN") by no more than two percentage points more than such Loan
Rate, (ii) has a principal balance (after application of all payments received
on or prior to the date of such substitution) equal to or less than the
Principal Balance of the Deleted Loan as of such date, (iii) has a lien
priority no lower than the Deleted Loan, (iv) complies as of the date of
substitution with each representation and warranty set forth in the Sale and
Servicing Agreement with respect to the Loans, and (v) has a borrower with a
comparable credit grade classification to that of the borrower with respect to
the Deleted Loan.
No assurance can be given that, at any particular time, the Transferor will
be capable, financially or otherwise, of repurchasing Defective Loans or
substituting Qualified Substitute Loans for Defective Loans in the manner
described above. If the Transferor repurchases, or is obligated to repurchase,
Defective Loans from any additional series of asset backed securities, the
financial ability of the Transferor to repurchase Defective Loans from the
Trust may be adversely affected. In addition, other events relating to the
Transferor and its mortgage lending and consumer finance operations can occur
that would adversely affect the financial ability of the Transferor to
repurchase Defective Loans from the Trust, including without limitation the
sale or other disposition of all or any significant portion of its assets. If
the Transferor is unable to repurchase or replace a Defective Loan, the
Servicer, on behalf of the Trust, will pursue other customary and reasonable
efforts, if any, to recover the maximum amount possible with respect to such
Defective Loan. If the Servicer is unable to collect all amounts due to the
Trust with respect to such Defective Loan, the resulting loss will be borne by
the holders of the Offered Securities to the extent that such loss is not
otherwise covered by amounts available from the credit enhancement provided
for the Offered Securities. See "Risk Factors--Adequacy of Credit Enhancement"
and "--Limitations on Repurchase or Replacement of Defective Loans by
Transferor" herein.
S-31
<PAGE>
EMPIRE FUNDING
GENERAL
Empire Funding Corp. ("EMPIRE FUNDING"), the Transferor, Servicer and Claims
Administrator under the Sale and Servicing Agreement, is an Oklahoma
corporation that is a mortgage lender engaged in the business of originating,
selling and servicing home loans on one- to four-family residential
properties, with an emphasis on non-conforming junior lien loans. Empire
Funding was incorporated in Oklahoma in 1987 and currently is licensed as a
mortgage lender or registered, as required, in 35 States.
Empire Funding has its principal offices at 9737 Great Hills Trail, Austin,
Texas 78759 (telephone number (800) 261-4898). It currently has 399 employees
including professionals and support staff. As an FHA Title I lender, Empire
Funding is and has been subject to oversight and/or examination by HUD with
respect to the origination and servicing of loans such as the FHA Loans.
As of December 31, 1996, the Servicer was servicing a loan portfolio of
approximately $562,344,959. This loan portfolio consisted of 47,879 loans with
an average principal balance of approximately $11,745.
The Servicer may resign only in accordance with the terms of the Sale and
Servicing Agreement. No removal or resignation will become effective until the
Indenture Trustee or a successor servicer has assumed the Servicer's
responsibilities and obligations in accordance therewith.
The Servicer may not assign its obligations under the Sale and Servicing
Agreement unless it first obtains the written consent of the Indenture
Trustee; provided, however, that any assignee must meet the eligibility
requirements for a successor servicer set forth in the Sale and Servicing
Agreement. Notwithstanding anything in the preceding sentence to the contrary,
the Servicer may delegate certain of its obligations to a sub-servicer
pursuant to a sub-servicing agreement. A sub-servicer must meet certain
eligibility requirements, as set forth in the Sale and Servicing Agreement,
and each sub-servicing agreement shall require servicing of the Loans
consistent with the terms of the Sale and Servicing Agreement.
SERVICING EXPERIENCE
The Servicer commenced servicing Title I loans in 1993 and conventional home
loans in 1995. Since 1995, the Servicer has substantially increased the volume
of conventional home loans, as well as other types of home loans that it has
originated and serviced. Accordingly, neither the Transferor nor the Servicer
has representative historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of estimating the future
delinquency and loss experience of the Loans.
UNDERWRITING CRITERIA--GENERAL
All secured and unsecured loan applications with respect to FHA Loans are
underwritten by the Transferor pursuant to the underwriting requirements of
the FHA and the Transferor, and all mortgage loan applications with respect to
other Loans are underwritten by the Transferor to the underwriting
requirements of the Transferor. Generally, the Transferor's standards are more
stringent than those of the FHA.
The underwriting decision is generally based on four criteria: (i) the
length of time the Obligor has been in the house; (ii) the length of time the
Obligor has been in the current job; (iii) the Obligor's credit history and
(iv) the Obligor's debt ratio. The first two criteria indicate an overall
stability on the part of the Obligor. The third criteria provides an objective
view of the Obligor's tendency, or lack thereof, to pay debts. Analysis is
based upon underwriter experience, credit scores (as described below) and,
where justified, direct investigation. Debt ratio calculation entails a
careful review of all debts listed on both the credit report and the loan
application as well as verification of total gross income by current check
stubs, verifications of employment, W-2's or other acceptable documentation.
The debt ratio is calculated to determine if a borrower demonstrates
sufficient income levels to satisfy all debt repayment requirements.
S-32
<PAGE>
Borrower loan applications are reviewed through a combination of reviews of
credit bureau reports and/or individual certifications. Income is verified
through various means, including applicant interviews, written verifications
with employers, review of pay stubs, tax returns, etc., or in the manners as
set forth in the following program descriptions. The borrower must demonstrate
sufficient levels of gross income to satisfy debt repayment requirements.
The FHA guidelines are set forth under "The Title I Loan Program--
Requirements for Title I Loans" herein. The Transferor's underwriting
guidelines for conventional loans are set forth below.
UNDERWRITING CRITERIA FOR CONVENTIONAL LOANS
The Transferor believes that all Loans underwritten by it will have been
underwritten in conformity with the Transferor's underwriting requirements.
Generally, the underwriting standards of the Transferor place a greater
emphasis on the creditworthiness of the borrower than on the underlying
collateral in evaluating the likelihood that a borrower will be able to repay
a Conventional Loan.
Generally, the Loans originated or purchased by the Transferor will have
been made to borrowers that typically have limited access to consumer
financing for a variety of reasons, such as high levels of debt service-to-
income, unfavorable past credit experience, insufficient home equity value,
lower income or a limited credit history. With respect to the loans originated
or purchased by the Transferor, the collection of loan payments from the
related borrowers is subject to various risks from these borrowers, including
without limitation the risk that a borrower will not satisfy their debt
service payments, including payments of interest and principal on the loan,
and that in the case of a secured loan the realizable value of the related
mortgaged property will not be sufficient to repay the outstanding interest
and principal owed on the loan. The Transferor uses criteria including, as a
significant component, the credit evaluation score methodology (the "FICO
Score") developed by Fair, Issac and Company, a consulting firm specializing
in creating default predictive models through scoring mechanisms to classify
borrowers. Additional criteria includes the borrower's debt-to-income ratio,
mortgage credit history, consumer credit history, bankruptcies, foreclosures,
notice of defaults, deeds in lieu and repossessions. The Transferor believes
that the most important credit characteristics are the borrower's FICO Score
and debt-to-income ratio, the latter of which, generally may not exceed 50% of
the borrower's gross income.
The Transferor has put into place a credit policy that provides a number of
guidelines to assist underwriters in the credit review and decision process.
Such underwriting guidelines provide for the evaluation of a loan applicant's
creditworthiness through the use of a consumer credit report, verification of
employment and a review of the debt service-to-income ratio of the applicant.
Income is verified through various means, including without limitation
applicant interviews, written or verbal verifications with employers, review
of pay stubs or tax returns. The borrower must demonstrate sufficient levels
of gross income to satisfy debt repayment requirements.
In response to changes and developments in the consumer finance area as well
as the refinement of the Transferor's credit evaluation methodology, the
Transferor's underwriting requirements for certain types of home loans may
change from time to time, which in certain instances may result in more
stringent and in other instances less stringent underwriting requirements.
Depending upon the date on which the Loans were originated or purchased by the
Transferor, such Loans included in the Pool may have been originated or
purchased by the Transferor under different underwriting requirements, and
accordingly, certain Loans included in the Pool may be of a different credit
quality and have different loan characteristics from other Loans. Furthermore,
to the extent that certain Loans were originated or purchased by the
Transferor under less stringent underwriting requirements, such Loans may be
more likely to experience higher rates of delinquencies, defaults and losses
than those Loans originated or purchased under more stringent underwriting
requirements.
S-33
<PAGE>
DELINQUENCY EXPERIENCE
Certain information concerning the delinquency and loss experience on home
improvements mortgage loans purchased and serviced by Empire Funding is set
forth below. The delinquency and loss experience percentages set forth herein
are calculated on the basis of the total mortgage loans serviced as of the end
of the periods indicated.
<TABLE>
<CAPTION>
MONTH
QUARTERS ENDED ENDED
------------------------------------------------------------ ------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, FEBRUARY 28,
1995 1996 1996 1996 1996 1997
------------ --------- -------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FHA TITLE 1 SERVICING
PORTFOLIO(1)
Delinquency Period(2)
30-59 days delinquent.. 4.67% 4.24% 3.94% 4.62% 5.88% 4.83%
60-89 days delinquent.. 1.08% 1.12% 1.33% 1.38% 1.70% 1.66%
90+ days delinquent.... 1.99% 1.66% 1.79% 2.25% 2.62% 2.62%
Total................... 7.74% 7.02% 7.06% 8.26% 10.20% 9.11%
FHA Title 1 servicing
portfolio at end of
period................. $295,035 $366,681 $405,439 $438,193 $461,976 $469,829
FHA Title 1 losses
during period(3)....... $ 230 $ 322 $ 214 $ 202 $ 194 (4)
CONVENTIONAL SERVICING
PORTFOLIO(1)
Delinquency Period(2)
30-59 days delinquent.. 0.60% 0.24% 0.09% 0.39% 0.80% 0.63%
60-89 days delinquent.. 0.00% 0.00% 0.03% 0.15% 0.20% 0.30%
90+ days delinquent.... 0.00% 0.00% 0.00% 0.04% 0.24% 0.25%
Total................... 0.60% 0.24% 0.12% 0.58% 1.24% 1.17%
Conventional servicing
portfolio at end of
period................. $ 3,319 $ 13,277 $ 31,498 $ 68,276 $100,369 $132,899
TOTAL SERVICING
PORTFOLIO(1)
Delinquency Period(2)
30-59 days delinquent.. 4.62% 4.10% 3.66% 4.05% 4.98% 3.90%
60-89 days delinquent.. 1.07% 1.08% 1.23% 1.22% 1.43% 1.36%
90+ days delinquent.... 1.97% 1.60% 1.66% 1.96% 2.19% 2.10%
Total................... 7.67% 6.79% 6.56% 7.22% 8.60% 7.36%
Total servicing
portfolio at end of
period................. $298,354 $379,958 $436,937 $506,469 $562,345 $602,728
</TABLE>
- --------
(1) Totals may not add due to rounding.
(2) The dollar amount of delinquent loans as a percentage of total dollar
amount of loans serviced by Empire Funding (including loans owned by
Empire Funding) as of the date indicated.
(3) A loss is recognized upon receipt of payment of a claim or final rejection
thereof. Claims paid may relate to a claim filed in an earlier period.
(4) Not Available.
S-34
<PAGE>
THE TITLE I LOAN PROGRAM AND THE CONTRACT OF INSURANCE
GENERAL
The National Housing Act of 1934, as amended (the "HOUSING ACT"), authorized
the creation of the FHA and the Title I Program. Under the Title I Program,
the FHA is authorized to insure qualified lending institutions against losses
on certain types of loans, including loans to finance actions or items that
substantially protect or improve the basic livability or utility of several
types of properties ("home improvement loans"). All of the FHA Loans are home
improvement loans for single family residences that have been originated under
the Title I Program and will be partially insured under the Title I Program.
None of the FHA Loans are Manufactured home loans or Manufactured home
improvement loans (as defined in 24 C.F.R. Section 201.2). The regulations
referenced herein apply only to non-manufactured housing home improvement
loans. See "Certain Legal Aspects of the Loans--The Title I Program" in the
Prospectus.
The Title I Program operates as a coinsurance program in which the FHA
insures up to 90% of certain losses incurred on an individual insured loan,
including the unpaid principal balance thereof, but only to the extent of the
insurance coverage available in the lender's Insurance Coverage Reserve
Account (as defined below). See "--FHA Insurance Coverage" below. The owner of
the loan bears the uninsured loss on each loan. Any references herein to
"Title I Loans" means loans insured under the Title I Program.
There are two basic methods of lending or originating loans which include a
"direct loan" or a "dealer loan." With respect to a direct loan, the borrower
makes application directly to a lender without any assistance from a dealer.
Such application must be executed by the borrower and any co-maker or co-
signer. The lender may disburse the loan proceeds of direct loans solely to
the borrower or jointly to the borrower and other parties to the transaction.
With respect to a dealer loan, the dealer, who has a direct or indirect
financial interest in the loan transaction assists the borrower in preparing
the loan application or otherwise assists the borrower in obtaining the loan
from the lender. The lender may disburse proceeds of dealer loans solely to
the dealer or the borrower or jointly to the borrower and the dealer or other
parties. A dealer may be a seller, a contractor or supplier of goods or
services. The FHA Loans include direct loans purchased by the Transferor and
dealer loans.
Title I Loans are required to have fixed interest rates and generally
provide for equal installment payments due weekly, biweekly, semi-monthly, or
monthly, except that a loan may be payable quarterly or semi-annually in
certain circumstances where the borrower has an irregular flow of income. The
first or last payments (or both) may vary in amount but may not exceed 150% of
the regular installment payment, and the first payment may be due no later
than two (2) months from the date the loan is funded. The note must contain a
provision permitting full or partial prepayment of the loan. The interest rate
must be negotiated and agreed to by the borrower and the lender and must be
fixed for the term of the loan and recited in the note. Interest on a Title I
Loan must accrue from the date of the loan and be calculated according to the
actuarial method. The lender must assure that the note and all other documents
evidencing the loan are in compliance with applicable federal, state and local
laws.
The Title I Program requires each lender to use prudent lending standards in
underwriting loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan.
Generally, the lender must exercise prudence and diligence to determine
whether the borrower and any co-maker is solvent and an acceptable credit
risk, with a reasonable ability to make payments on the loan. The lender's
credit application and review must determine whether the borrower's income
will be adequate to meet the periodic payments required by the loan, as well
as the borrower's other housing and recurring expenses, which determination
must be made in accordance with the debt-to-income ratios established by the
Secretary of HUD unless the lender determines and documents in the loan file
evidence of the existence of compensating factors concerning the borrower's
creditworthiness which support approval of the loan.
UNDER THE TITLE I PROGRAM, THE FHA DOES NOT APPROVE FOR QUALIFICATION FOR
INSURANCE ANY LOAN INSURED THEREUNDER AT THE TIME OF APPROVAL BY THE LENDING
INSTITUTION (AS IS TYPICALLY THE CASE WITH OTHER FEDERAL LOAN INSURANCE
PROGRAMS). If, after a loan has been made and reported for insurance under the
Title I Program, the lender
S-35
<PAGE>
discovers any material misstatement of fact or that the loan proceeds have
been misused by the borrower, dealer or any other party, the lender is
required promptly to report this to the Secretary of HUD. In such case,
provided that the validity of any lien on the property has not been impaired,
the insurance of the loan under the Title I Program will not be affected by
such material misstatement or misuse of loan proceeds unless such material
misstatement of fact or misuse of loan proceeds was caused by (or was
knowingly sanctioned by) the lender or its employees.
REQUIREMENTS FOR TITLE I LOANS
The maximum principal amounts for home improvement loans insured under the
Title I Program must not exceed the actual cost of the project plus any
applicable fees and charges allowed under the Title I Program. The following
is the maximum loan amount for certain types of loans: (i) $25,000 for a home
improvement loan secured by a single family property; (ii) the lesser of
$60,000 or an average of $12,000 per dwelling unit for a home improvement loan
secured by a multifamily property; and (iii) $7,500 for an unsecured home
improvement loan. Prior to June 3, 1996, any Title I home improvement loan
that would result in a single borrower having a total unpaid principal
obligation in excess of $25,000 required the prior approval of the Secretary
of HUD. As of June 3, 1996, HUD has eliminated this requirement. Generally,
the term of a secured Title I home improvement loan may not be less than six
months nor greater than 20 years and 32 days. A borrower may obtain multiple
Title I home improvement loans with respect to multiple properties, and a
borrower may obtain more than one Title I home improvement loan with respect
to a single property, as long as the total outstanding balance of all Title I
home improvement loans on the same property does not exceed the maximum loan
amount for the type of Title I home improvement loans thereon.
Borrower eligibility for a secured Title I home improvement loan requires
that the borrower have at least a one-half interest in either fee simple title
to the real property, a lease thereof for a term expiring at least six months
after the final maturity of the Title I home improvement loan or a properly
recorded land installment contract for the purchase of the real property.
Since August 1994 and prior to June 3, 1996, in the case of a Title I home
improvement loan with a principal balance over $15,000, a borrower was
required to have equity in the property being improved at least equal to the
principal amount of the loan, as demonstrated by a current appraisal, unless
the borrower occupied the property as his/her primary residence and the
structure thereon had been completed and occupied for at least six months
prior to the date of the Title I loan application. As of June 3, 1996, this
equity requirement has been eliminated in its entirety.
Generally, any Title I home improvement loan originated after August 1994 in
excess of $7,500 must be secured by a recorded lien on the improved property
which is evidenced by a mortgage or deed of trust executed by the borrower and
all other owners in fee simple. Prior to August 1994, any Title I home
improvement loan in excess of $5,000 was required to be secured by such a
recorded lien. In order to facilitate the financing of small home improvement
projects, the FHA does not require loans of $7,500 or less, in the case of
Title I Loans originated after August 1994, and $5,000 or less, in the case of
Title I Loans originated prior to August 1994, to be secured by the property
being improved. Notwithstanding the preceding sentence, such loans must be
secured by a recorded lien on the improved property, if, including such loan,
the total amount of all Title I home improvement loans obtained by the
borrower exceeds $7,500 or $5,000, as the case may be.
The proceeds from a Title I home improvement loan may be used only to
finance property improvements which substantially protect or improve the basic
livability or utility of the property as disclosed in the loan application.
The Secretary of HUD has established a list of items and activities which
cannot be financed with proceeds from any Title I home improvement loans which
the Secretary of HUD may amend from time to time. Generally, loan proceeds may
only be used to finance property improvements commenced after the approval of
the loan. With respect to any dealer Title I home improvement loan, prior to
disbursing funds, the lender must have in its possession a completion
certificate on a HUD-approved form, signed by the borrower and the dealer and
must conduct an on-site inspection within sixty (60) days after funding. With
respect to any direct Title I home improvement loan, the lender is required to
conduct an on-site inspection, promptly upon completion of the improvements
but not later than six months after disbursement of the loan proceeds with one
6 month extension if requested.
S-36
<PAGE>
FHA INSURANCE COVERAGE
Under the Title I Program, the FHA establishes an insurance coverage reserve
account (an "INSURANCE COVERAGE RESERVE ACCOUNT") for each lender which has
been granted a Title I contract of insurance. The amount of insurance coverage
in this account is a maximum of 10% of the amount disbursed, advanced or
expended by the lender in originating or purchasing eligible loans registered
with the FHA for Title I insurance, with certain adjustments. The balance in
the Insurance Coverage Reserve Account is the maximum amount of insurance
claims the FHA is required to pay to the Title I lender. Loans to be insured
under the Title I Program will be registered for insurance by the FHA and the
insurance coverage attributable to such loans will be included in the
Insurance Coverage Reserve Account for the originating or purchasing lender
following the receipt and acknowledgment by the FHA of a loan report on the
prescribed form pursuant to the Title I regulations. For each eligible loan
reported and acknowledged for insurance, the FHA charges a fee (the "INSURANCE
PREMIUM"). For loans having a maturity of 25 months or less, the FHA bills the
lender for the entire Insurance Premium in an amount equal to the product of
0.50% of the original loan amount and the loan term. For home improvement
loans with a maturity greater than 25 months, each year that a loan is
outstanding the FHA bills the lender for an Insurance Premium in an amount
equal to 0.50% of the original loan amount. If a loan is prepaid during the
year, the FHA will not refund or abate the Insurance Premium paid for such
year.
Originations and acquisitions of new eligible loans will continue to
increase a lender's Insurance Coverage Reserve Account balance by the lesser
of (a) the amount of the FHA Insurance available for transfer at the time of
transfer from the qualified lender selling the loans and (b) 10% of the amount
disbursed, advanced or expended in originating or acquiring such eligible
loans registered with the FHA for insurance under the Title I Program. As
described under the caption "The Title I Loan Program--The Contract of
Insurance," the FHA Insurance in the FHA Reserve Account will not be earmarked
by the Secretary of HUD solely for the Trust or any other Related Series
Trust.
The lender may transfer (except as collateral in a bona fide loan
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an
insured loan is transferred with recourse or with a guarantee or repurchase
agreement, the FHA, upon receipt of written notification of the transfer of
such loan in accordance with the Title I regulations, will transfer from the
transferor's Insurance Coverage Reserve Account to the transferee's Insurance
Coverage Reserve Account an amount, if available, equal to 10% of the actual
purchase price or the net unpaid principal balance of such loan (whichever is
less). However, under the Title I Program not more than $5,000 in insurance
coverage shall be transferred to or from a lender's Insurance Coverage Reserve
Account during any October 1 to September 30 fiscal year without the prior
approval of the Secretary of HUD. Amounts which may be recovered by the
Secretary of HUD after payment of an insurance claim are not added to the
amount of insurance coverage in the related lender's Insurance Coverage
Reserve Account.
CLAIMS PROCEDURES UNDER TITLE I
Under the Title I Program the lender may accelerate an insured loan
following a default on such loan only after the lender or its agent has made a
reasonable effort to contact the borrower for a face-to-face or telephone
meeting to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
See "Certain Legal Aspects of the Loans--The Title I Program" in the
Prospectus.
Following acceleration of maturity on a secured Title I home improvement
loan, the lender may either (a) proceed against the related mortgaged property
under any security instrument, or (b) make a claim under the lender's contract
of insurance. Generally lenders make a claim under their contract of
insurance. If the lender
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chooses to proceed against the mortgaged property under a security instrument
(or if it accepts a voluntary conveyance or surrender of the mortgaged
property), the lender can later file an insurance claim only with the prior
approval of the Secretary of HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file, certification of
compliance with applicable state and local laws in carrying out any
foreclosure or repossession, and where the borrower is in bankruptcy or
deceased, evidence that the lender has properly filed proofs of claims.
Generally, a claim for reimbursement for loss on any eligible loan must be
filed with the FHA no later than 9 months after the date of default for home
improvement loans. Concurrently with filing the insurance claim, the lender
must assign to the United States of America the lender's entire interest in
the loan note (or a judgment in lieu of the note), in any security held and in
any claim filed in any legal proceedings. If, at the time the note is assigned
to the U.S., the Secretary of HUD has reason to believe that the note is not
valid or enforceable against the borrower, the FHA may deny the claim and
reassign the note to the lender. If either such defect is discovered after the
FHA has paid a claim, the FHA may require the lender to repurchase the paid
claim and to accept a reassignment of the loan note. If the lender
subsequently obtains a valid and enforceable judgment against the borrower,
the lender may resubmit a new insurance claim with an assignment of the
judgment. Although regulations permit the FHA to contest any insurance claim
and to make a demand for repurchase of the loan at any time up to two years
from the date the claim was certified for payment (and may do so thereafter in
the event of fraud or misrepresentation on the part of the lender), the FHA
has expressed an intention to take such action within one year from the date
the claim was certified for payment.
The Secretary of HUD may deny a claim for insurance in whole or in part for
any violations of the regulations governing the Title I Program; however, the
Secretary of HUD may waive such violations if it determines that enforcement
of the regulations would impose an injustice upon a lender which has
substantially complied with the regulations in good faith. See "Risk Factors--
Limitations on FHA Insurance."
Under the Title I Program, the amount of a FHA insurance claim payment, when
made, is equal to the Claimable Amount, up to the amount of insurance coverage
in the lender's Insurance Coverage Reserve Account established by HUD. The
"CLAIMABLE AMOUNT" for home improvement loans is equal to 90% of the sum of:
(a) the unpaid loan obligation (equal to the net unpaid principal and the
uncollected interest earned to the date of default) with adjustments thereto
if the lender has proceeded against property securing such loan; (b) the
interest on the unpaid amount of the loan obligation from the date of default
to the date of the claim's initial submission for payment plus 15 calendar
days (but not to exceed 9 months from the date of default), calculated at the
rate of 7% per annum; (c) the uncollected court costs; (d) the attorneys' fees
not to exceed $500; and (e) the expenses for recording the assignment of the
security to the United States.
THE CONTRACT OF INSURANCE
The Contract of Insurance will be held by EFC Securitized Assets for the
benefit of the Trust and other Related Series Trusts. The aggregate amount of
insurance provided by the FHA pursuant to the Title I Program that is expected
to be available to the Claims Administrator in respect of the FHA Loans on the
Closing Date is $276,533.15 (the "TRUST DESIGNATED INSURANCE AMOUNT") and for
any date of determination thereafter, the Trust Designated Insurance Amount
will equal such amount less the amount of FHA Insurance proceeds received
since the Closing Date under the Contract of Insurance with respect to the FHA
Loans. Such initial amount represents 10% of the sum of the Loan Balances of
the FHA Loans as of the Cut-Off Date.
The Trust Designated Insurance Amount will be reflected in an insurance
coverage reserve account maintained by the FHA in the name of the Contract of
Insurance Holder (the "FHA RESERVE ACCOUNT"). All proceeds received under the
Contract of Insurance in respect of claims relating to the FHA Loans shall be
deposited into the Note and/or Certificate Distribution Account.
With respect to those FHA Loans for which FHA Insurance coverage reserves
have not been transferred to the FHA Reserve Account by the Closing Date, the
Transferor will be required to take appropriate steps to cause
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the FHA to transfer the appropriate amounts of FHA Insurance coverage reserves
from the Transferor's Insurance Coverage Reserve Account to the FHA Reserve
Account. To accomplish this transfer, on or after the date on which the
Transferor receives the FHA Title I Case Numbers for such FHA Loans, the
Transferor will be required to submit a transfer of note report to the
Secretary of HUD regarding the conveyance of such FHA Loans to the Indenture
Trustee.
The Secretary of HUD will not earmark the insurance coverage in the FHA
Reserve Account for the benefit of the Trust or any other Related Series
Trust; however each of the Contract of Insurance Holder and the Claims
Administrator has agreed in the Sale and Servicing Agreement to earmark the
Trust Designated Insurance Amount exclusively for the benefit of the Trust. In
the event that any portion of the Combined FHA Insurance Amount is
inadvertently applied to loans in a Related Series Trust other than the Trust
in excess of the trust designated amount for such Related Series Trust, the
Combined FHA Insurance Amount available to cover defaults on the FHA Loans may
be reduced below the remaining Trust Designated Insurance Amount for the
Trust.
CONTRACT OF INSURANCE HOLDER
EFC Securitized Assets, L.C., a Texas limited liability company, will be the
Contract of Insurance Holder under the Sale and Servicing Agreement. EFC
Securitized Assets is a special purpose limited liability company and an
affiliate of the Transferor.
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PREPAYMENT AND YIELD CONSIDERATIONS
Except as otherwise provided herein, no principal distributions will be made
on any Class of Senior Notes (other than the Class A-5 Notes) until the Class
Principal Balance of each Class of Senior Notes having a lower numerical
designation has been reduced to zero, and no principal distributions will be
made on the Mezzanine Notes until all required principal distributions have
been made in respect of the Senior Notes. See "Description of the Offered
Securities--Distributions on the Offered Securities" herein. As the rate of
payment of principal of each Class of Notes depends primarily on the rate of
payment (including prepayments) of the Loans and the availability and amount
of Excess Spread, final payment of any Class of Notes could occur
significantly earlier than their respective Final Scheduled Distribution
Dates. Holders of the Offered Securities will bear the risk of being able to
reinvest principal payments on the Offered Securities at yields at least equal
to the yield on their respective Offered Securities. No prediction can be made
as to the rate of prepayments on the Loans in either stable or changing
interest rate environments. Any reinvestment risk resulting from the rate of
prepayment of the Loans and the distribution of such payments to the holders
of the Offered Securities will be borne entirely by the holders of the Offered
Securities.
The subordination of the Class B Certificates to the Notes will provide
limited protection to the Noteholders against losses on the Loans.
Accordingly, the yield on the Class B Certificates will be extremely sensitive
to the delinquency and loss experience of the Loans and the timing of any such
delinquencies and losses as well as the amount of Excess Spread from time to
time. If the actual rate and amount of delinquencies and losses experienced by
the Loans exceed the rate and amount of such delinquencies and losses assumed
by an investor, the yield to maturity on the Class B Certificates may be lower
than anticipated.
The effective yield to the holders of any Class of Offered Securities will
be lower than the yield otherwise produced by the applicable Note Interest
Rate, because the distribution of the interest accrued during each Due Period
(a calendar month consisting of thirty days) will not be made until the
Distribution Date occurring in the month following such Due Period. See
"Description of the Offered Securities--Distributions on the Offered
Securities" herein. This delay will result in funds being passed through to
the holders of the Offered Securities approximately 25 days after the end of
the monthly accrual period, during which 25-day period no interest will accrue
on such funds. As discussed in greater detail below, greater than anticipated
distributions of principal can also affect the yield on Offered Securities
purchased at a price greater or less than par.
The rate of principal payments on the Offered Securities, the aggregate
amount of each interest payment on the Offered Securities and the yield to
maturity on the Offered Securities will be directly related to and affected by
the rate and timing of principal reductions on the Loans, the application of
Excess Spread to reduce the Class Principal Balances of the Offered Securities
to the extent described herein under "Description of Credit Enhancement--
Overcollateralization," and, under certain circumstances, the delinquency rate
experienced by the Loans. The principal reductions on such Loans may be in the
form of scheduled amortization payments or unscheduled payments or reductions,
which may include prepayments, repurchases and liquidations or write-offs due
to default, casualty, insurance or other dispositions. On or after any
Distribution Date on which the Pool Principal Balance declines to 10% or less
of the Original Pool Principal Balance, the Majority Residual Interestholders
may effect an early termination of the Trust, resulting in a redemption of the
Notes and prepayment of the Class B Certificates. See "Description of the
Offered Securities--Optional Termination of the Trust" herein.
The "weighted average life" of an Offered Security refers to the average
amount of time that will elapse from the Closing Date to the date each dollar
in respect of principal of such Offered Security is repaid. The weighted
average life of the Offered Security will be influenced by, among other
factors, the rate at which principal reductions occur on the Loans, the extent
to which high rates of delinquencies on the Loans during any Due Period result
in interest collections on the Loans in amounts less than the amount of
interest distributable on
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the Offered Securities, and the rate at which Excess Spread is distributed to
holders of the Offered Securities as described herein, and the extent to which
any reduction of the Overcollateralization Amount is paid to the holders of
the Residual Interest as described herein. If substantial principal
prepayments on the Loans are received from unscheduled prepayments,
liquidations or repurchases, then the distributions to the holders of the
Offered Securities resulting from such prepayments may significantly shorten
the actual average lives of the Offered Securities. If the Loans experience
delinquencies and certain defaults in the payment of principal, then the
holders of the Offered Securities will similarly experience a delay in the
receipt of principal distributions attributable to such delinquencies and
default which in certain instances may result in a longer actual average lives
of the Offered Securities than would otherwise be the case. However, to the
extent that the Principal Balances from Liquidated Loans are included in the
principal distributions on the Offered Securities, then the holders of the
Offered Securities will experience an acceleration in the receipt of principal
distributions which in certain instances may result in shorter actual average
lives of the Offered Securities than would otherwise be the case. Interest
shortfalls on the Loans due to principal prepayment in full and curtailment
and any resulting shortfall in amounts distributable on the Offered Securities
will be covered to the extent of amounts available from the credit enhancement
provided for the Offered Securities. See "Risk Factors--Adequacy of Credit
Enhancement" herein.
The rate and timing of principal reductions on the Loans will be influenced
by a variety of economic, geographic, social and other factors. These factors
may include changes in borrowers' housing needs, job transfers, unemployment,
borrowers' net equity, if any, in the mortgaged properties, servicing
decisions, homeowner mobility, the existence and enforceability of "due-on-
sale" clauses, seasoning of loans, market interest rates for similar types of
loans and the availability of funds for such loans. Each of the Loans may be
assumed, with the Servicer's consent, upon the sale of the Mortgaged Property.
The Loans may be prepaid in full or in part at any time without penalty. As
with fixed rate obligations, generally, the rate of prepayment on a pool of
loans is affected by prevailing market interest rates for similar types of
loans of a comparable term and risk level. If prevailing interest rates were
to fall significantly below the respective Loan Rates on the Loans, the rate
of prepayment (and refinancing) would be expected to increase. Conversely, if
prevailing interest rates were to rise significantly above the respective Loan
Rates on the Loans, the rate of prepayment on the Loans would be expected to
decrease. In addition, depending on prevailing market interest rates, the
future outlook for market interest rates and economic conditions generally,
some borrowers may sell or refinance mortgaged properties in order to realize
their equity in the mortgaged properties, if any, to meet cash flow needs or
to make other investments. In addition, any future limitations on the rights
of borrowers to deduct interest payments on mortgage loans for Federal income
tax purposes may result in a higher rate of prepayment on the Loans. The
Transferor makes no representations as to the particular factors that will
affect the prepayment of the Loans, as to the relative importance of such
factors, or as to the percentage of the Principal Balances of the Loans that
will be paid as of any date.
Distributions of principal to holders of the Offered Securities at a faster
rate than anticipated will increase the yields on Offered Securities purchased
at discounts but will decrease the yields on Offered Securities purchased at
premiums, which distributions of principal may be attributable to scheduled
payments and prepayments of principal on the Loans and to the application of
Excess Spread. The effect on an investor's yield due to distributions of
principal to the holders of the Offered Securities (including without
limitation prepayments on the Loans) occurring at a rate that is faster (or
slower) than the rate anticipated by the investor during any period following
the issuance of the Offered Securities will not be entirely offset by a
subsequent like reduction (or increase) in the rate of such distributions of
principal during any subsequent period.
The rate of delinquencies and defaults on the Loans, and the recoveries, if
any, on Defaulted Loans and foreclosed properties, will also affect the rate
and timing of principal payments on the Loans, and accordingly, the weighted
average lives of the Offered Securities, and could cause a delay in the
payment of principal or a slower rate of principal amortization to the holders
of Offered Securities. Certain factors may influence such delinquencies and
defaults, including origination and underwriting standards, loan-to-value
ratios and delinquency history. In general, defaults on home loans are
expected to occur with greater frequency in their
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early years, although little data is available with respect to the rate of
default on home loans similar to the Loans. The rate of default on Loans with
high loan-to-value ratios, secured by junior liens may be higher than that of
home loans with lower loan-to-value ratios or secured by first liens on
comparable properties. Furthermore, the rate and timing of prepayments,
defaults and liquidations on the Loans will be affected by the general
economic condition of the region of the country in which the related Mortgaged
Properties are located or the related borrower is residing. See "The Pool"
herein. The risk of delinquencies and loss is greater and voluntary principal
prepayments are less likely in regions where a weak or deteriorating economy
exists, as may be evidenced by, among other factors, increasing unemployment
or falling property values.
Because principal distributions generally are paid to certain Classes of
Offered Securities before other Classes, holders of the Classes of Mezzanine
Notes bear a greater risk of losses from delinquencies and defaults on the
Loans than holders of the Classes of Notes having earlier priorities for
payment of principal. In addition, because principal distributions generally
are paid to the Noteholders before the Certificateholders, the
Certificateholders will bear a greater risk of such delinquencies and losses
than holders of the Notes. See "Description of Credit Enhancement--
Subordination and Allocation of Losses" herein.
Although certain data have been published with respect to the historical
prepayment experience of certain residential mortgage loans, such mortgage
loans may differ in material respects from the Loans and such data may not be
reflective of conditions applicable to the Loans. No prepayment history is
generally available with respect to the Loans or similar types of loans, and
there can be no assurance that the Loans will achieve or fail to achieve any
particular rate of principal prepayment. A number of factors suggest that the
prepayment experience of the Pool may be significantly different from that of
a pool of conventional first-lien, single family mortgage loans with
equivalent interest rates and maturities. One such factor is that the
Principal Balance of the average Loan is substantially smaller than that of
the average conventional first-lien mortgage loan. A smaller principal balance
may be easier for a borrower to prepay than a larger balance and, therefore, a
higher prepayment rate may result for the Pool than for a pool of first-lien
mortgage loans, irrespective of the relative average interest rates and the
general interest rate environment. In addition, in order to refinance a first-
lien mortgage loan, the borrower must generally repay any junior liens.
However, a small Principal Balance may make refinancing a Loan at a lower
interest rate less attractive to the borrower as the perceived impact to the
borrower of lower interest rates on the size of the monthly payment may not be
significant. Other factors that might be expected to affect the prepayment
rate of the Pool include general economic conditions, the amounts of and
interest rates on the underlying senior mortgage loans, and the tendency of
borrowers to use real property mortgage loans as long-term financing for home
purchase and junior liens as shorter-term financing for a variety of purposes,
which may include the direct or indirect financing of home improvement,
education expenses, debt consolidation, purchases of consumer durables such as
automobiles, appliances and furnishings and other consumer purposes.
Furthermore, because at origination a substantial majority of the Loans had
combined loan-to-value ratios that exceeded 100% or were unsecured, the
related borrowers for these Loans will generally have significantly less
opportunity to refinance the indebtedness secured by the related Mortgaged
Properties and, therefore, a lower prepayment rate may result from the Pool
than for a pool of mortgage (including first or junior lien) loans that have
combined loan-to-value ratios less than 100%. Given these characteristics, the
Loans may experience a higher or lower rate of prepayment than first-lien
mortgage loans.
EXCESS SPREAD AND REDUCTION OF OVERCOLLATERALIZATION AMOUNT
The overcollateralization feature has been designed to accelerate the
principal amortization of the Offered Securities relative to the principal
amortization of the Loans. If on any Distribution Date, the
Overcollateralization Target Amount exceeds the Overcollateralization Amount,
any Excess Spread will be distributed to the holders of the Classes of Offered
Securities in the order and amounts specified herein under "Description of the
Offered Securities--Distributions on the Offered Securities--Distribution
Priorities." If the Overcollateralization Amount equals the
Overcollateralization Target Amount for such Distribution Date, Excess Spread
otherwise distributable to the holders of the Offered Securities as described
above will instead be distributed in respect of Loss Reimbursement
Deficiencies, if any, and thereafter to the holders of the Class B
Certificates and then to the Residual Interest. On the Stepdown Date and on
each Distribution Date thereafter as
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to which the Overcollateralization Amount is or, after taking into account all
other distributions to be made on such Distribution Date, would be at least
equal to the Overcollateralization Target Amount, amounts otherwise
distributable as principal to the holders of the Offered Securities on such
Distribution Date in reduction of their Class Principal Balances may instead
be distributed in respect of the applicable Classes in payment of their
respective Loss Reimbursement Deficiencies and thereafter to the holders of
the Class B Certificates and then to the Residual Interest, thereby reducing
the rate of and under certain circumstances delaying the principal
amortization with respect to the Offered Securities, until the
Overcollateralization Amount is reduced to the Overcollateralization Target
Amount. In particular, high rates of delinquencies on the Loans during any Due
Period may cause the amount of interest received on the Loans during such Due
Period to be less than the amount of interest distributable on the Offered
Securities on the related Distribution Date. Such an occurrence will cause the
Class Principal Balances of the Offered Securities to decrease at a slower
rate relative to the Pool Principal Balance, resulting in a reduction of the
Overcollateralization Amount and, in some circumstances, an Allocable Loss
Amount. As described herein, the yield to maturity on an Offered Security
purchased at a premium or a discount will be affected by the extent to which
any amounts are paid to the holders of the Class B Certificates and the
Residual Interest in lieu of payment to the holders of the Offered Securities
in reduction of their Class Principal Balances. If the actual distributions of
any such amounts to the holders of the Class B Certificates and the Residual
Interest occur sooner than anticipated by an investor who purchases an Offered
Security at a discount, the actual yield to such investor may be lower than
such investor's anticipated yield. If the actual distributions of any such
amounts to the holders of the Class B Certificates and the Residual Interest
occur later than anticipated by an investor who purchases an Offered Security
at a premium, the actual yield to such investor may be lower than such
investor's anticipated yield. The amount payable to the holders of the Class B
Certificates and the Residual Interest that would otherwise be applied in
reduction of the Overcollateralization Amount or in payment of Loss
Reimbursement Deficiencies on any Distribution Date will be affected by the
Overcollateralization Target Amount, and by the actual default and delinquency
experience of the Pool and the principal amortization of the Pool.
REINVESTMENT RISK
The reinvestment risk with respect to an investment in the Offered
Securities will be affected by the rate and timing of principal payments
(including prepayments) in relation to the prevailing interest rates at the
time of receipt of such principal payments. For example, during periods of
falling interest rates, holders of the Offered Securities are likely to
receive an increased amount of principal payments from the Loans at a time
when such holders may be unable to reinvest such payments in investments
having a yield and rating comparable to the Offered Securities. Conversely,
during periods of rising interest rates, holders of the Offered Securities are
likely to receive a decreased amount of principal prepayments from the Loans
at a time when such holders may have an opportunity to reinvest such payments
in investments having a higher yield than, and a comparable rating to, the
Offered Securities.
FINAL SCHEDULED DISTRIBUTION DATES
To the extent not previously paid, the Class Principal Balance of each Class
of Notes will be payable in full on the Final Scheduled Distribution Date for
each Class of Notes set forth in the "Summary of Terms" herein. The actual
maturity of any Class of Notes may be substantially earlier than the Final
Scheduled Distribution Date set forth herein under "Summary of Terms".
WEIGHTED AVERAGE LIVES OF THE OFFERED SECURITIES
The following information is given solely to illustrate the effect of
prepayments of the Loans on the weighted average lives of the Offered
Securities under certain stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the Loans. Weighted
average life refers to the average amount of time that will elapse from the
date of delivery of a security until each dollar of principal of such security
will be repaid to the investor. The weighted average lives of the Offered
Securities will be influenced by the rate at which principal of the Loans is
paid, which may be in the form of scheduled amortization or prepayments (for
this purpose, the term "prepayment" includes reductions of principal,
including without
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limitation those resulting from unscheduled full or partial prepayments,
refinancings, liquidations and write-offs due to defaults, casualties or other
dispositions, substitutions and repurchases by or on behalf of the
Transferor), the rate at which Excess Spread is distributed to holders of the
Offered Securities as described herein, the delinquency rate of the Loans from
time to time and the extent to which any amounts are distributed to the
holders of the Residual Interest as described herein.
Prepayments on loans such as the Loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement is
the prepayment assumption (the "PREPAYMENT ASSUMPTION"), which represents an
assumed rate of prepayment each month relative to the then outstanding
principal balance of the pool of loans for the life of such loans. A 100%
Prepayment Assumption assumes a constant prepayment rate ("CPR") of 3.0% per
annum of the outstanding principal balance of such loans in the first month of
the life of the loans and an additional approximate 1.0% (expressed as a
percentage per annum) in each month thereafter until the twelfth month;
beginning in the twelfth month and in each month thereafter during the life of
the loans, a CPR of 14.0% per annum each month is assumed. As used in the
table below, 0% Prepayment Assumption assumes prepayment rates equal to 0% of
the Prepayment Assumption (i.e., no prepayments). Correspondingly, 75%
Prepayment Assumption assumes prepayment rates equal to 75% of the Prepayment
Assumption, and so forth. The Prepayment Assumption does not purport to be a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the Loans.
Neither the Transferor nor the Depositor makes any representations about the
appropriateness of the Prepayment Assumption or the CPR.
MODELING ASSUMPTIONS. For purposes of preparing the tables below, the
following assumptions (the "MODELING ASSUMPTIONS") have been made:
(i) all scheduled principal payments on the Loans are timely received on
the first day of a Due Period, which will begin on the first day of each
month and end on the thirtieth day of the month, with the first Due Period
commencing on March 1, 1997, no delinquencies or losses occur on the Loans
and all Loans have a first payment date that occurs thirty (30) days after
the origination thereof;
(ii) the scheduled payments on the Loans have been calculated on the
outstanding Principal Balance (prior to giving effect to prepayments), the
Loan Rate and the remaining term to stated maturity such that the Loans
will fully amortize by their remaining term to stated maturity;
(iii) all scheduled payments of interest and principal in respect of the
Loans have been made through the Cut-Off Date;
(iv) all Loans prepay monthly at the specified percentages of the
Prepayment Assumption, no optional or other early termination of the
Offered Securities occurs (except with respect to the calculation of the
"Weighted Average Life--To Call (Years)" figures in the following tables)
and no substitutions or repurchases of the Loans occur;
(v) all prepayments in respect of the Loans include 30 days' accrued
interest thereon;
(vi) the Settlement Date for the Offered Securities is April 8, 1997 and
each year will consist of 360 days;
(vii) cash distributions are received by the holders of the Offered
Securities on the 25th day of each month, commencing in April 1997;
(viii) the Overcollateralization Target Amount will be as defined herein;
(ix) the Note Interest Rate for each Class of Notes is as set forth on
the cover page hereof;
(x) the additional fees deducted from the interest collections in respect
of the Loans include the Indenture Trustee Fee, the Owner Trustee Fee, the
Custodian Fee, the Servicing Fee and in the case of FHA Loans that are not
Invoiced Loans, a premium for FHA Insurance equal to 0.75% per annum on the
Principal Balance of each such Loan;
(xi) no reinvestment income from any Account is earned and available for
distribution; and
(xii) the Pool consists of Loans having the following characteristics:
S-44
<PAGE>
ASSUMED LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
ORIGINAL REMAINING
TERM TO TERM TO
CUT-OFF DATE LOAN MATURITY MATURITY
POOL PRINCIPAL BALANCE RATE (MONTHS) (MONTHS)
---- ----------------- -------- -------- ---------
<S> <C> <C> <C> <C>
1 $ 3,862,588.80 13.7650% 106 104
2 15,081,331.41 13.8343% 179 175
3 50,117,892.96 14.1107% 240 237
4 2,380,238.71 14.3121% 82 81
5 271,262.90 14.0890% 155 154
6 113,829.91 14.3228% 101 100
--------------
$71,827,144.69
==============
</TABLE>
The tables on the following pages indicate at the specified percentages of
the Prepayment Assumption the corresponding weighted average lives of each
Class of Notes.
S-45
<PAGE>
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-1 NOTES
-----------------------------
DATE 0% 50% 75% 100% 150% 200%
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percent................................... 100% 100% 100% 100% 100% 100%
March 1998........................................ 74% 57% 48% 39% 22% 4%
March 1999........................................ 60% 22% 3% 0% 0% 0%
March 2000........................................ 52% 0% 0% 0% 0% 0%
March 2001........................................ 43% 0% 0% 0% 0% 0%
March 2002........................................ 33% 0% 0% 0% 0% 0%
March 2003........................................ 22% 0% 0% 0% 0% 0%
March 2004........................................ 10% 0% 0% 0% 0% 0%
March 2005........................................ 0% 0% 0% 0% 0% 0%
Weighted Average Life--
To Maturity (Years)(2).......................... 3.43 1.26 1.00 0.85 0.67 0.57
To Call (Years)(2).............................. 3.43 1.26 1.00 0.85 0.67 0.57
</TABLE>
- --------
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years
from the date of issuance to the related Distribution Date, (b) summing
the results and (c) dividing the sum by the aggregate distributions of
principal referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Loans
which may differ from the actual characteristics and performance thereof) and
should be read in conjunction therewith.
S-46
<PAGE>
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-2 NOTES
-----------------------------
DATE 0% 50% 75% 100% 150% 200%
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percent................................... 100% 100% 100% 100% 100% 100%
March 1998........................................ 100% 100% 100% 100% 100% 100%
March 1999........................................ 100% 100% 100% 58% 0% 0%
March 2000........................................ 100% 87% 12% 0% 0% 0%
March 2001........................................ 100% 19% 0% 0% 0% 0%
March 2002........................................ 100% 0% 0% 0% 0% 0%
March 2003........................................ 100% 0% 0% 0% 0% 0%
March 2004........................................ 100% 0% 0% 0% 0% 0%
March 2005........................................ 100% 0% 0% 0% 0% 0%
March 2006........................................ 68% 0% 0% 0% 0% 0%
March 2007........................................ 35% 0% 0% 0% 0% 0%
March 2008........................................ 0% 0% 0% 0% 0% 0%
Weighted Average Life--
To Maturity (Years)(2).......................... 9.52 3.55 2.61 2.07 1.49 1.22
To Call (Years)(2).............................. 9.52 3.55 2.61 2.07 1.49 1.22
</TABLE>
- --------
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years
from the date of issuance to the related Distribution Date, (b) summing
the results and (c) dividing the sum by the aggregate distributions of
principal referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Loans
which may differ from the actual characteristics and performance thereof) and
should be read in conjunction therewith.
S-47
<PAGE>
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-3 NOTES
------------------------------
DATE 0% 50% 75% 100% 150% 200%
---- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percent.................................. 100% 100% 100% 100% 100% 100%
March 1998....................................... 100% 100% 100% 100% 100% 100%
March 1999....................................... 100% 100% 100% 100% 64% 0%
March 2000....................................... 100% 100% 100% 50% 0% 0%
March 2001....................................... 100% 100% 40% 0% 0% 0%
March 2002....................................... 100% 61% 0% 0% 0% 0%
March 2003....................................... 100% 12% 0% 0% 0% 0%
March 2004....................................... 100% 0% 0% 0% 0% 0%
March 2005....................................... 100% 0% 0% 0% 0% 0%
March 2006....................................... 100% 0% 0% 0% 0% 0%
March 2007....................................... 100% 0% 0% 0% 0% 0%
March 2008....................................... 96% 0% 0% 0% 0% 0%
March 2009....................................... 54% 0% 0% 0% 0% 0%
March 2010....................................... 3% 0% 0% 0% 0% 0%
March 2011....................................... 0% 0% 0% 0% 0% 0%
Weighted Average Life--
To Maturity (Years)(2)......................... 12.05 5.24 3.87 3.03 2.12 1.63
To Call (Years)(2)............................. 12.05 5.24 3.87 3.03 2.12 1.63
</TABLE>
- --------
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years
from the date of issuance to the related Distribution Date, (b) summing
the results and (c) dividing the sum by the aggregate distributions of
principal referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Loans
which may differ from the actual characteristics and performance thereof) and
should be read in conjunction therewith.
S-48
<PAGE>
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-4 NOTES
-------------------------------
DATE 0% 50% 75% 100% 150% 200%
---- ----- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percent................................. 100% 100% 100% 100% 100% 100%
March 1998...................................... 100% 100% 100% 100% 100% 100%
March 1999...................................... 100% 100% 100% 100% 100% 89%
March 2000...................................... 100% 100% 100% 100% 58% 0%
March 2001...................................... 100% 100% 100% 80% 43% 0%
March 2002...................................... 100% 100% 84% 60% 29% 0%
March 2003...................................... 100% 100% 67% 49% 21% 0%
March 2004...................................... 100% 81% 57% 40% 15% 0%
March 2005...................................... 100% 75% 53% 38% 15% 0%
March 2006...................................... 100% 68% 48% 33% 15% 0%
March 2007...................................... 100% 62% 42% 28% 12% 0%
March 2008...................................... 100% 54% 36% 24% 9% 0%
March 2009...................................... 100% 47% 30% 19% 7% 0%
March 2010...................................... 100% 39% 24% 15% 5% 0%
March 2011...................................... 87% 32% 19% 11% 3% 0%
March 2012...................................... 73% 25% 14% 8% 2% 0%
March 2013...................................... 62% 20% 11% 6% 1% 0%
March 2014...................................... 48% 14% 8% 4% 0% 0%
March 2015...................................... 33% 9% 5% 2% 0% 0%
March 2016...................................... 15% 4% 2% 0% 0% 0%
March 2017...................................... 0% 0% 0% 0% 0% 0%
Weighted Average Life--
To Maturity (Years)(2)........................ 16.69 11.82 9.52 7.71 4.97 2.37
To Call (Years)(2)............................ 16.58 11.43 9.01 7.12 4.44 2.37
</TABLE>
- --------
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years
from the date of issuance to the related Distribution Date, (b) summing
the results and (c) dividing the sum by the aggregate distributions of
principal referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Loans
which may differ from the actual characteristics and performance thereof) and
should be read in conjunction therewith.
S-49
<PAGE>
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-5 NOTES:
-----------------------------
DATE 0% 50% 75% 100% 150% 200%
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percent................................... 100% 100% 100% 100% 100% 100%
March 1998........................................ 100% 100% 100% 100% 100% 100%
March 1999........................................ 100% 100% 100% 100% 100% 100%
March 2000........................................ 100% 100% 100% 100% 100% 75%
March 2001........................................ 98% 92% 88% 82% 91% 75%
March 2002........................................ 95% 83% 74% 74% 81% 75%
March 2003........................................ 90% 67% 63% 63% 64% 71%
March 2004........................................ 83% 50% 53% 52% 48% 49%
March 2005........................................ 62% 34% 32% 28% 26% 33%
March 2006........................................ 45% 23% 19% 15% 10% 23%
March 2007........................................ 32% 15% 11% 8% 4% 15%
March 2008........................................ 20% 10% 7% 4% 2% 10%
March 2009........................................ 10% 6% 4% 2% 1% 7%
March 2010........................................ 4% 3% 2% 1% 0% 4%
March 2011........................................ 2% 2% 1% 0% 0% 0%
March 2012........................................ 1% 1% 0% 0% 0% 0%
March 2013........................................ 1% 0% 0% 0% 0% 0%
March 2014........................................ 0% 0% 0% 0% 0% 0%
Weighted Average Life--
To Maturity (Years)(2).......................... 8.93 7.34 7.02 6.74 6.76 6.97
To Call (Years)(2).............................. 8.93 7.34 7.01 6.72 6.60 5.62
</TABLE>
- --------
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years
from the date of issuance to the related Distribution Date, (b) summing
the results and (c) dividing the sum by the aggregate distributions of
principal referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Loans
which may differ from the actual characteristics and performance thereof) and
should be read in conjunction therewith.
S-50
<PAGE>
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS M-1 NOTES:
--------------------------------
DATE 0% 50% 75% 100% 150% 200%
---- ----- ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percent................................ 100% 100% 100% 100% 100% 100%
March 1998..................................... 100% 100% 100% 100% 100% 100%
March 1999..................................... 100% 100% 100% 100% 100% 100%
March 2000..................................... 100% 100% 100% 100% 100% 100%
March 2001..................................... 100% 100% 100% 100% 74% 88%
March 2002..................................... 100% 100% 100% 85% 57% 50%
March 2003..................................... 100% 100% 88% 70% 43% 25%
March 2004..................................... 100% 97% 75% 57% 32% 17%
March 2005..................................... 100% 86% 64% 47% 24% 12%
March 2006..................................... 100% 75% 54% 38% 18% 8%
March 2007..................................... 100% 66% 45% 31% 13% 5%
March 2008..................................... 100% 57% 38% 24% 10% 4%
March 2009..................................... 100% 48% 31% 19% 7% 2%
March 2010..................................... 100% 40% 24% 15% 5% 0%
March 2011..................................... 86% 32% 19% 11% 3% 0%
March 2012..................................... 72% 25% 14% 8% 2% 0%
March 2013..................................... 61% 19% 11% 6% 0% 0%
March 2014..................................... 48% 14% 7% 4% 0% 0%
March 2015..................................... 32% 9% 5% 2% 0% 0%
March 2016..................................... 15% 4% 1% 0% 0% 0%
March 2017..................................... 0% 0% 0% 0% 0% 0%
Weighted Average Life--
To Maturity (Years)(2)....................... 16.64 12.22 10.25 8.65 6.37 5.63
To Call (Years)(2)........................... 16.53 11.83 9.74 8.08 5.80 5.17
</TABLE>
- --------
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years
from the date of issuance to the related Distribution Date, (b) summing
the results and (c) dividing the sum by the aggregate distributions of
principal referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Loans
which may differ from the actual characteristics and performance thereof) and
should be read in conjunction therewith.
S-51
<PAGE>
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS M-2 NOTES
--------------------------------
DATE 0% 50% 75% 100% 150% 200%
---- ----- ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percent................................ 100% 100% 100% 100% 100% 100%
March 1998..................................... 100% 100% 100% 100% 100% 100%
March 1999..................................... 100% 100% 100% 100% 100% 100%
March 2000..................................... 100% 100% 100% 100% 100% 100%
March 2001..................................... 100% 100% 100% 100% 74% 53%
March 2002..................................... 100% 100% 100% 85% 57% 36%
March 2003..................................... 100% 100% 88% 70% 43% 25%
March 2004..................................... 100% 97% 75% 57% 32% 17%
March 2005..................................... 100% 86% 64% 47% 24% 12%
March 2006..................................... 100% 75% 54% 38% 18% 8%
March 2007..................................... 100% 66% 45% 31% 13% 5%
March 2008..................................... 100% 57% 38% 24% 10% 2%
March 2009..................................... 100% 48% 31% 19% 7% 0%
March 2010..................................... 100% 40% 24% 15% 5% 0%
March 2011..................................... 86% 32% 19% 11% 2% 0%
March 2012..................................... 72% 25% 14% 8% 0% 0%
March 2013..................................... 61% 19% 11% 6% 0% 0%
March 2014..................................... 48% 14% 7% 3% 0% 0%
March 2015..................................... 32% 9% 4% 0% 0% 0%
March 2016..................................... 15% 3% 0% 0% 0% 0%
March 2017..................................... 0% 0% 0% 0% 0% 0%
Weighted Average Life--
To Maturity (Years)(2)....................... 16.63 12.21 10.23 8.63 6.32 5.09
To Call (Years)(2)........................... 16.53 11.83 9.74 8.08 5.80 4.67
</TABLE>
- --------
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years
from the date of issuance to the related Distribution Date, (b) summing
the results and (c) dividing the sum by the aggregate distributions of
principal referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Loans
which may differ from the actual characteristics and performance thereof) and
should be read in conjunction therewith.
S-52
<PAGE>
The paydown scenarios for the Offered Securities set forth in the foregoing
tables are subject to significant uncertainties and contingencies (including
those discussed above under "Prepayment and Yield Considerations"). As a
result, there can be no assurance that any of the foregoing paydown scenarios
and the Modeling Assumptions on which they were made will prove to be accurate
or that the actual weighted average lives of the Offered Securities will not
vary from those set forth in the foregoing tables, which variations may be
shorter or longer, and which variations may be greater with respect to later
years. Furthermore, it is unlikely that the Loans will prepay at a constant
rate or that all of the Loans will prepay at the same rate. Moreover, the
Loans actually included in the Pool, the payment experience of such Loans and
certain other factors affecting the distributions on the Offered Securities
will not conform to the Modeling Assumptions made in preparing the above
tables. In fact, the characteristics and payment experience of the Loans will
differ in many respects from such Modeling Assumptions. See "The Pool" herein.
To the extent that the Loans actually included in the Pool have
characteristics and a payment experience that differ from those assumed in
preparing the foregoing tables, the Offered Securities are likely to have
weighted average lives that are shorter or longer than those set forth in the
foregoing tables. See "Risk Factors--Yield, Prepayment and Maturity
Considerations" herein.
In light of the uncertainties inherent in the foregoing paydown scenarios,
the inclusion of the weighted average lives of the Offered Securities in the
foregoing tables should not be regarded as a representation by the Transferor,
the Servicer, the Depositor, the Underwriter, the Contract of Insurance
Holder, the Claims Administrator or any other person that such weighted
average lives will be achieved or that any of the foregoing paydown scenarios
will be experienced.
S-53
<PAGE>
THE TRUST
GENERAL
The Trust, Empire Funding Home Loan Owner Trust 1997-1, 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. After its
formation, the Trust will not engage in any activity other than (i) acquiring,
holding and managing the Loans and the other assets of the Trust and proceeds
therefrom, (ii) issuing the Offered Securities, the Class B Certificates and
the Residual Interest, (iii) making payments on the Offered Securities, the
Class B Certificates and the Residual Interest and (iv) engaging in other
activities that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto or in connection therewith.
The Class B Certificates represent an undivided ownership interest in the
Trust. The Residual Interest represents the residual interest in the assets of
the Trust. The Trust will initially be capitalized with equity equal to the
Original Class Principal Balance of the Class B Certificates. The equity of
the Trust (including the Class B Certificates and the Residual Interest),
together with the Notes, were delivered by the Trust to the Depositor as
consideration for the Loans pursuant to the Sale and Servicing Agreement.
On the Closing Date, the Trust purchased Loans having an aggregate principal
balance as of the Cut-Off Date of approximately $71,827,144.69 (the "ORIGINAL
POOL PRINCIPAL BALANCE") from the Depositor pursuant to an amended and
restated Sale and Servicing Agreement to be dated as of April 1, 1997 (the
"SALE AND SERVICING AGREEMENT"), among the Trust, the Depositor, the
Transferor, the Servicer, the Claims Administrator, the Contract of Insurance
Holder, the Co-Owner Trustee and the Indenture Trustee. On the Settlement
Date, the Transferor will deposit $44.15 into the Note Distribution Account so
that the Original Pool Principal Balance will be equal to the initial
aggregate Class Principal Balances of the Offered Securities and the Class B
Certificates.
The assets of the Trust consist primarily of the Pool of Loans, which are
either unsecured or secured by Mortgages. See "The Pool" herein. The assets of
the Trust also includes (i) payments of interest in respect of the Loans due
after the Cut-Off Date, principal received after the Cut-Off Date and payments
of premiums on FHA Insurance received in respect of the Loans after the Cut-
Off Date; (ii) amounts on deposit in the Collection Account, Note Distribution
Account, Certificate Distribution Account and FHA Premium Account; (iii) an
assignment of the Depositor's rights under a Home Loan Purchase Agreement
dated as of March 1, 1997 between the Transferor, EFC and the Depositor (the
"PURCHASE AGREEMENT"); (iv) the rights to the premiums on FHA Loans that are
Invoiced Loans; (v) the rights to the FHA Insurance Reserves attributable to
the FHA Loans; and (vi) certain other ancillary or incidental funds, rights
and properties related to the foregoing.
The Trust includes the unpaid Principal Balance of each Loan as of the Cut-
Off Date (the "CUT-OFF DATE PRINCIPAL BALANCE"). The "PRINCIPAL BALANCE" of a
Loan on any day is equal to its Cut-Off Date Principal Balance, minus all
principal reductions credited against the Principal Balance of such Loan since
the Cut-Off Date, including any principal losses recorded by the Servicer on
account of a modification of such Loan. With respect to any date, the "POOL
PRINCIPAL BALANCE" will be equal to the aggregate Principal Balances of all
Loans as of such date.
The Servicer will service the Loans pursuant to the Sale and Servicing
Agreement (collectively with the Indenture, the Administration Agreement and
the Trust Agreement, the "TRANSFER AND SERVICING AGREEMENTS") and will be
compensated for such services as described under "Description of the Transfer
and Servicing Agreements--Servicing" herein.
The Trust's principal offices are located in Wilmington, Delaware, in care
of Wilmington Trust Company, as Owner Trustee, at the address set forth below
under "--The Owner Trustee and Co-Owner Trustee."
THE OWNER TRUSTEE AND CO-OWNER TRUSTEE
Wilmington Trust Company will act as the Owner Trustee under the Trust
Agreement. Wilmington Trust Company is a Delaware banking corporation and its
principal offices are located at Rodney Square North, 1100 North Market
Street, Wilmington, Delaware 19890-0001.
S-54
<PAGE>
Certain functions of the Owner Trustee under the Trust Agreement and the
Sale and Servicing Agreement will be performed by First Bank National
Association, in its capacity as Co-Owner Trustee under the Trust Agreement and
the Sale and Servicing Agreement, including maintaining the Certificate
Distribution Account and making distributions therefrom.
DESCRIPTION OF THE OFFERED SECURITIES
GENERAL
The Empire Funding Home Loan Owner Trust 1997-1 (the "Trust") issued seven
Classes of Home Loan Asset Backed Notes (collectively, the "NOTES" or the
"OFFERED SECURITIES") having the designations and aggregate initial principal
amounts specified on the cover hereof pursuant to an amended and restated
Indenture to be dated as of April 1, 1997 (the "INDENTURE"), between the Trust
and the Indenture Trustee. The Trust also issued one Class of Home Loan Asset
Backed Certificates having an initial principal amount of $1,437,188.84 (the
"CLASS B CERTIFICATES"') and instruments evidencing the residual interest in
the Trust (the "RESIDUAL INTEREST") pursuant to the terms of a Trust Agreement
dated as of March 1, 1997 (the "TRUST AGREEMENT"), between the Transferor, the
Depositor, the Owner Trustee and the Co-Owner Trustee. The Notes are secured
by the assets of the Trust pursuant to the Indenture. The Class B Certificates
and the Residual Interest are not being offered hereby. The Class B
Certificates will represent an undivided ownership interest in the Trust.
On the 25th day of each month or, if such day is not a Business Day, the
first Business Day immediately following, commencing in April 1997 (each such
date, a "DISTRIBUTION DATE"), the Indenture Trustee or its designee and the
Owner Trustee or its designee will distribute to the persons in whose names
the Notes are registered on the last day of the month immediately preceding
the month of the related Distribution Date (the "RECORD DATE"), the portion of
the aggregate distribution to be made to each Noteholder and each
Certificateholder as described below. Prior to any termination of the book-
entry provisions, distributions on the Book Entry Certificates will be made to
Beneficial Owners only through DTC and its DTC Participants. See "Description
of the Securities--Book-Entry Registration of Securities" in the Prospectus.
Beneficial ownership interests in each Class of Notes will be held in
minimum denominations of $25,000 and integral multiples of $1,000 in excess
thereof; provided that one Note of each Class may be issued in such
denomination as may be necessary to represent the remainder of the aggregate
amount of Notes of such Class.
DISTRIBUTIONS ON THE OFFERED SECURITIES
For the definitions of certain of the defined terms used in the following
subsections, See "--Related Definitions" below.
AVAILABLE COLLECTION AMOUNT. Distributions on the Offered Securities on each
Distribution Date will be made from the Available Collection Amount. The
Servicer will calculate the Available Collection Amount on the fourteenth
calendar day of each month or, if such day is not a Business Day, then the
immediately preceding Business Day (each such day, a "DETERMINATION DATE").
With respect to each Distribution Date, the "AVAILABLE COLLECTION AMOUNT" is
the sum of (i) all payments of interest and principal in respect of the Loans
received during the related Due Period; (ii) FHA Insurance premiums in respect
of FHA Loans received during the related Due Period; (iii) all amounts
received on the Loans or required to be paid by the Servicer, the Transferor
or the Depositor (exclusive of amounts not required to be deposited in or
permitted to be withdrawn from the Collection Account) during the related Due
Period (including amounts paid by the Transferor in connection with the
purchase or substitution of a Defective Loan); (iv) Insurance Proceeds
received by the Servicer during such Due Period; (v) payments of FHA Insurance
in respect of FHA Loans received during such Due Period; and (vi) with respect
to the final Distribution Date upon an early retirement of the Offered
Securities arising from an optional termination of the Trust by the Majority
Residual Interestholders, the Termination Price.
DISTRIBUTIONS OF INTEREST. Interest on the Class Principal Balance of each
Class of Notes will accrue thereon at their respective per annum Note Interest
Rates, and will be payable to the holders of the Offered
S-55
<PAGE>
Securities monthly on each Distribution Date, commencing in April 1997.
Interest on each Class of Notes will be calculated on the basis of a 360-day
year of twelve 30-day months.
Interest distributions on the Offered Securities and the Class B
Certificates will be made from the "AVAILABLE DISTRIBUTION AMOUNT", which is
the Available Collection Amount remaining after the payment of the Trust Fees
and Expenses, the FHA Premium Account Deposit and any amounts payable to the
Claims Administrator in reimbursement of the expenses of filing any FHA
Insurance claims pursuant to the FHA Loans. Interest payments will be made,
first, to the Classes of Senior Notes, pro rata, second, to the Classes of
Mezzanine Notes, pro rata, and third, to the Class B Certificates. Under
certain circumstances, the amount available for interest payments could be
less than the amount of interest payable on all Classes of Offered Securities
and the Class B Certificates on any Distribution Date. In such event, each
affected Class will receive its ratable share (based upon the aggregate amount
of interest due to such Class) of the remaining amount available to be
distributed as interest after the payment of all interest due on each Class
having a higher interest payment priority. In addition, any such interest
deficiency will be carried forward as a Noteholders' Interest Carry-Forward
Amount or Certificateholders' Interest Carry-Forward Amount, as applicable,
and will be distributed to holders of each such Class of Notes or the Class B
Certificates, as applicable, on subsequent Distribution Dates to the extent
that sufficient funds are available. Any such interest deficiency could occur,
for example, if delinquencies or losses realized on the Loans were
exceptionally high or were concentrated in a particular month. No interest
will accrue on any Noteholders' Interest Carry-Forward Amount or
Certificateholders' Interest Carry-Forward Amount.
DISTRIBUTIONS OF PRINCIPAL. Principal distributions will be made to the
holders of the Offered Securities and the Class B Certificates on each
Distribution Date in an amount generally equal to (i) the Regular Principal
Distribution Amount plus (ii) to the extent of the Overcollateralization
Deficiency Amount, any Excess Spread for such Distribution Date less (iii) the
excess, if any, of the Overcollateralization Amount over the
Overcollateralization Target Amount. The aggregate distributions of principal
to each Class of Notes and the Class B Certificates will not exceed the
Original Class Principal Balances thereof.
PRIORITY OF DISTRIBUTIONS
A. On each Distribution Date, the Regular Distribution Amount will be
distributed in the following order of priority:
(i) to the holders of the Senior Notes, pro rata, the applicable portion
of the Noteholders' Interest Distribution Amount required to be distributed
in respect of the Senior Notes;
(ii) sequentially, to the holders of the Class M-1 and Class M-2 Notes,
in that order, the remaining portion of the Noteholders' Interest
Distribution Amount;
(iii) to the holders of the Class B Certificates, the Certificateholders'
Interest Distribution Amount for such Distribution Date;
(iv) first (A) to pay as principal of the Class A-5 Notes until the Class
Principal Balance thereof is reduced to zero, an amount equal to the Class
A-5 Priority Principal Distribution Amount and second (B) sequentially, to
the holders of the Class A-1, Class A-2, Class A-3 and Class A-4 Notes, in
that order, until the respective Class Principal Balances thereof are
reduced to zero, the amount necessary to reduce the aggregate Class
Principal Balance of the Senior Notes to the Senior Optimal Principal
Balance for such Distribution Date; provided, however, that on each
Distribution Date occurring on or after any reduction of the Class
Principal Balances of the Class M-1 Notes, Class M-2 Notes and Class B
Certificates to zero through the application of Allowable Loss Amounts,
distributions shall be made among the remaining Senior Notes pro rata and
not sequentially;
(v) sequentially, to the holders of the Class M-1 and the Class M-2
Notes, in that order, until the Class Principal Balances thereof are
reduced to the Class M-1 Optimal Principal Balance and the Class M-2
Optimal Principal Balance, respectively, for such Distribution Date;
(vi) to the holders of the Class B Certificates, until the Class
Principal Balance thereof is reduced to the Class B Optimal Principal
Balance for such Distribution Date;
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(vii) sequentially, to the Class M-1 Notes, Class M-2 Notes and the Class
B Certificates, in that order, until their respective Loss Reimbursement
Deficiencies have been paid in full;
(viii) any remaining amount to the holder(s) of the Residual Interest.
B. On each Distribution Date, the Indenture Trustee will distribute the
Excess Spread, if any, in the following order of priority (in each case after
giving effect to all payments specified in paragraph A. above):
(i) in an amount equal to the Overcollateralization Deficiency Amount, if
any, as follows:
(A) as principal to the Class A-5 Notes until the Class Principal
Balance thereof is reduced to zero, an amount equal to the Class A-5
Priority Excess Spread Distribution Amount;
(B) sequentially, to the holders of the Class A-1, Class A-2, Class
A-3 and Class A-4 Notes, in that order, until the respective Class
Principal Balances thereof are reduced to zero, the amount necessary to
reduce the aggregate Class Principal Balance of the Senior Notes to the
Senior Optimal Principal Balance for such Distribution Date;
(C) sequentially, to the holders of the Class M-1 and Class M-2
Notes, in that order, until the Class Principal Balances thereof are
reduced to the Class M-1 Optimal Principal Balance and Class M-2
Optimal Principal Balance, respectively, for such Distribution Date;
and
(D) to the holders of the Class B Certificates, until the Class
Principal Balance thereof is reduced to the Class B Optimal Principal
Balance for such Distribution Date; and
(ii) sequentially, to the Class M-1 Notes, the Class M-2 Notes and the
Class B Certificates, in that order, until their respective Loss
Reimbursement Deficiencies, if any, have been paid in full; and
(iii) any remaining amount to the holder(s) of the Residual Interest.
RELATED DEFINITIONS
For purposes hereof, the following terms shall have the following meanings:
BUSINESS DAY: Any day other than (i) a Saturday or a Sunday or (ii) a day on
which banking institutions in New York City or in the city in which the
corporate trust office of the Indenture Trustee is located are authorized or
obligated by law or executive order to be closed.
CERTIFICATEHOLDERS' INTEREST CARRY-FORWARD AMOUNT: With respect to any
Distribution Date, the excess, if any, of the Certificateholders' Monthly
Interest Distribution Amount for the preceding Distribution Date plus any
outstanding Certificateholders' Interest Carry-Forward Amount on such
preceding Distribution Date, over the amount in respect of interest that is
actually deposited in the Certificate Distribution Account on such preceding
Distribution Date.
CERTIFICATEHOLDERS' INTEREST DISTRIBUTION AMOUNT: With respect to any
Distribution Date, the sum of the Certificateholders' Monthly Interest
Distribution Amount and the Certificateholders' Interest Carry-Forward Amount;
provided however, that on the Distribution Date, if any, on which the Class
Principal Balance of the Class B Certificates is reduced to zero through
application of the Allocable Loss Amount, the amount of the
Certificateholders' Interest Distribution Amount will be equal to the
Certificateholders' Interest Distribution Amount calculated without giving
effect to this proviso, minus the portion, if any, of the Allocable Loss
Amount that otherwise would be applied to the Classes of Mezzanine Notes on
such date in the absence of this proviso.
CERTIFICATEHOLDERS' MONTHLY INTEREST DISTRIBUTION AMOUNT: With respect to
any Distribution Date, interest accrued for the related Due Period at the
Class B Pass-Through Rate on the related Class Principal Balance on the
immediately preceding Distribution Date (or, in the case of the first
Distribution Date, on the Closing Date).
CLASS A EXCESS SPREAD DISTRIBUTION: With respect to any Distribution Date,
the lesser of (i) the excess of (x) the Class Principal Balance of all Senior
Notes over (y) the Senior Optimal Principal Balance for such Distribution
Date, (ii) the Overcollateralization Deficiency Amount for such Distribution
Date, and (iii) the Excess Spread for such Distribution Date.
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CLASS A PRINCIPAL DISTRIBUTION AMOUNT: With respect to any Distribution
Date, the lesser of (i) the Regular Principal Distribution Amount and (ii) the
excess of (x) the aggregate Class Principal Balance of all Senior Notes over
(y) the Senior Optimal Principal Balance for such Distribution Date.
CLASS A-5 PRIORITY EXCESS SPREAD DISTRIBUTION AMOUNT: With respect to any
Distribution Date, the lesser of (A) the product of (x) the applicable Class
A-5 Priority Percentage for such Distribution Date and (y) the Class A-5 Pro
Rata Excess Spread Distribution Amount for such Distribution Date and (B) the
Class A Excess Spread Distribution Amount.
CLASS A-5 PRIORITY PERCENTAGE: With respect to each Distribution Date, the
percentage specified below:
<TABLE>
<CAPTION>
PRIORITY
DISTRIBUTION DATE PERCENTAGE
----------------- ----------
<S> <C>
April 1997-March 2000....................... 0%
April 2000-March 2002....................... 45%
April 2002-March 2003....................... 80%
April 2003-March 2004....................... 100%
April 2004 and thereafter................... 300%
</TABLE>
CLASS A-5 PRIORITY PRINCIPAL DISTRIBUTION AMOUNT: With respect to any
Distribution Date, the lesser of (A) the product of (x) the applicable Class
A-5 Priority Percentage for such Distribution Date and (y) the Class A-5 Pro
Rata Principal Distribution Amount for such Distribution Date and (B) the
Class A Principal Distribution Amount.
CLASS A-5 PRO RATA EXCESS SPREAD DISTRIBUTION AMOUNT: With respect to any
Distribution Date, an amount equal to the product of (x) a fraction, the
numerator of which is the Class Principal Balance of the Class A-5 Notes
immediately prior to such Distribution Date and the denominator of which is
the aggregate of the Class Principal Balances of all Senior Notes immediately
prior to such Distribution Date and (y) the Class A Excess Spread Distribution
Amount.
CLASS A-5 PRO RATA PRINCIPAL DISTRIBUTION AMOUNT: With respect to any
Distribution Date, an amount equal to the product of (x) a fraction, the
numerator of which is the Class Principal Balance of the Class A-5 Notes
immediately prior to such Distribution Date and the denominator of which is
the aggregate of the Class Principal Balances of all Senior Notes immediately
prior to such Distribution Date and (y) the Class A Principal Distribution
Amount.
CLASS B OPTIMAL PRINCIPAL BALANCE: With respect to any Distribution Date
prior to the Stepdown Date, zero; and with respect to any other Distribution
Date, the Pool Principal Balance as of the related Determination Date minus
the sum of (i) the aggregate Class Principal Balance of the Notes (after
taking into account any distributions made on such Distribution Date in
reduction of the Class Principal Balances of the Notes made prior to such
determination) and (ii) the Overcollateralization Target Amount for such
Distribution Date.
CLASS M-1 OPTIMAL PRINCIPAL BALANCE: With respect to any Distribution Date
prior to the Stepdown Date, zero; and with respect to any other Distribution
Date, the Pool Principal Balance as of the related Determination Date minus
the sum of (i) the aggregate Class Principal Balance of the Senior Notes
(after taking into account distributions made on such Distribution Date in
reduction of the Class Principal Balances of the Classes of Senior Notes made
prior to such determination) and (ii) the greater of (x) 25.50% of the Pool
Principal Balance as of the related Determination Date plus the
Overcollateralization Target Amount (calculated without giving effect to the
proviso in the definition thereof) for such Distribution Date and (y) 0.50% of
the Original Pool Principal Balance.
CLASS M-2 OPTIMAL PRINCIPAL BALANCE: With respect to any Distribution Date
prior to the Stepdown Date, zero; and with respect to any other Distribution
Date, the Pool Principal Balance as of the related Determination Date minus
the sum of (i) the aggregate Class Principal Balance of the Senior Notes
(after taking into account
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any distributions made on such Distribution Date in reduction of the Class
Principal Balances of the Classes of Senior Notes made prior to such
determination) plus the Class Principal Balance of the Class M-1 Notes (after
taking into account any distributions made on such Distribution Date in
reduction of the Class Principal Balance of the Class M-1 Notes made prior to
such determination) and (ii) the greater of (x) 4.00% of the Pool Principal
Balance as of the related Determination Date plus the Overcollateralization
Target Amount (without giving effect to the proviso in the definition thereof)
for such Distribution Date and (y) 0.50% of the Original Pool Principal
Balance.
EXCESS SPREAD: With respect to any Distribution Date, the positive excess,
if any, of (a) the Available Distribution Amount over (b) the Regular
Distribution Amount.
INSURANCE PROCEEDS: With respect to any Distribution Date, the proceeds paid
to the Indenture Trustee or the Servicer by any insurer pursuant to any
insurance policy covering a Loan, Mortgaged Property or REO Property or any
other insurance policy that relates to a Loan, net of any expenses which are
incurred by the Indenture Trustee or the Servicer in connection with the
collection of such proceeds and not otherwise reimbursed to the Indenture
Trustee or the Servicer, but excluding the proceeds of any insurance policy
that are to be applied to the restoration or repair of the Mortgaged Property
or released to the borrower in accordance with accepted loan servicing
procedures.
LIQUIDATED HOME LOAN: Any Loan as to which the Servicer has determined that
all recoverable liquidation and insurance proceeds have been received, which
will be deemed to occur upon the earlier of: (a) in the case of a Loan the
liquidation of the related Mortgaged Property acquired through foreclosure or
similar proceedings, (b) the Servicer's determination in accordance with
customary accepted practices that no further amounts are collectible from the
Loan or (c) any portion of a scheduled monthly payment of principal and
interest is in excess of 180 days past due.
LOSS REIMBURSEMENT DEFICIENCY: As of any date of determination and as to the
Class M-1 Notes, Class M-2 Notes or Class B Certificates, the amount of
Allocable Loss Amounts applied to the reduction of the Class Principal Balance
of such Class plus, in the case of the Class M-1 Notes and Class M-2 Notes,
interest accrued on the unreimbursed portion thereof at the applicable Note
Interest Rates through the end of the Due Period immediately preceding the
date of payment.
NET DELINQUENCY CALCULATION AMOUNT: With respect to any Distribution Date,
the excess, if any, of (x) the product of 2.50 and the Six-Month Rolling
Delinquency Average over (y) the aggregate of the amounts of Excess Spread for
the three preceding Distribution Dates.
NET LIQUIDATION PROCEEDS: With respect to any Distribution Date, any cash
amounts received from Liquidated Home Loans, whether through trustee's sale,
foreclosure sale, disposition of Mortgaged Properties or otherwise (other than
Insurance Proceeds and Released Mortgaged Property Proceeds), and any other
cash amounts received in connection with the management of the Mortgaged
Properties from Defaulted Loans, in each case, net of any reimbursements to
the Servicer made from such amounts for any unreimbursed Servicing
Compensation and Servicing Advances made and any other fees and expenses paid
in connection with the foreclosure, conservation and liquidation of the
related Liquidated Home Loans or Foreclosure Properties.
NOTEHOLDERS' INTEREST CARRY-FORWARD AMOUNT: With respect to any Distribution
Date, the excess, if any, of the Noteholders' Monthly Interest Distribution
Amount for the preceding Distribution Date plus any outstanding Noteholders'
Interest Carry-Forward Amount on such preceding Distribution Date, over the
amount in respect of interest that is actually deposited in the Note
Distribution Account on such preceding Distribution Date.
NOTEHOLDERS' INTEREST DISTRIBUTION AMOUNT: With respect to any Distribution
Date, the sum of the Noteholders' Monthly Interest Distribution Amount and the
Noteholders' Interest Carry-Forward Amount.
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NOTEHOLDERS' MONTHLY INTEREST DISTRIBUTION AMOUNT: With respect to any
Distribution Date, interest accrued for the related Due Period on each Class
of Notes at the respective Note Interest Rate for such Class on the Class
Principal Balance thereof on the immediately preceding Distribution Date (or,
in the case of the first Distribution Date, on the Closing Date), after giving
effect to all payments of principal to the Noteholders of such Class on or
prior to such preceding Distribution Date.
OVERCOLLATERALIZATION AMOUNT: With respect to any Distribution Date, the
amount equal to the excess of (a) the Pool Principal Balance as of the end of
the preceding Due Period over (b) the aggregate of the Class Principal
Balances of the Securities.
OVERCOLLATERALIZATION DEFICIENCY AMOUNT: With respect to any date of
determination, the excess, if any, of the Overcollateralization Target Amount
over the Overcollateralization Amount.
OVERCOLLATERALIZATION TARGET AMOUNT: With respect to any Distribution Date
occurring (A) prior to the Stepdown Date, an amount equal to the greater of
(x) 8% of the Original Pool Principal Balance and (y) the Net Delinquency
Calculation Amount; and (B) with respect to any other Distribution Date, an
amount equal to the greater of (x) 16% of the Pool Principal Balance as of the
end of the related Due Period and (y) the Net Delinquency Calculation Amount;
provided, however, that the Overcollateralization Target Amount will in no
event be less than 0.50% of the Original Pool Principal Balance or greater
than the sum of the aggregate Class Principal Balances of all Classes of
Securities.
REGULAR DISTRIBUTION AMOUNT: With respect to any Distribution Date, the
lesser of (a) the Available Distribution Amount and (b) the sum of (i) the
Noteholders' Interest Distribution Amount, (ii) the Certificateholders'
Interest Distribution Amount and (iii) the Regular Principal Distribution
Amount.
REGULAR PRINCIPAL DISTRIBUTION AMOUNT: On each Distribution Date, an amount
(but not in excess of the aggregate of the Class Principal Balances of the
Offered Securities and the Class B Certificates immediately prior to such
Distribution Date) equal to the sum of (i) each scheduled payment of principal
collected by the Servicer in the related Due Period, (ii) all partial and full
principal prepayments applied by the Servicer during such related Due Period,
(iii) the principal portion of all Net Liquidation Proceeds, FHA Insurance
Payment Amounts, Insurance Proceeds and Released Mortgaged Property Proceeds
received during the related Due Period, (iv) that portion of the purchase
price of any repurchased Loan which represents principal and (v) the principal
portion of any Substitution Adjustments required to be deposited in the
Collection Account as of the related Determination Date.
RELEASED MORTGAGED PROPERTY PROCEEDS: With respect to any Distribution Date,
the proceeds received by the Servicer in connection with (i) a taking of an
entire Mortgaged Property by exercise of the power of eminent domain or
condemnation or (ii) any release of part of the Mortgaged Property from the
lien of the related Mortgage, whether by partial condemnation, sale or
otherwise, which in either case are not released to the borrower in accordance
with applicable law, accepted mortgage servicing procedures and the Sale and
Servicing Agreement.
SENIOR OPTIMAL PRINCIPAL BALANCE: With respect to any Distribution Date
prior to the Stepdown Date, zero; with respect to any other Distribution Date,
an amount equal to the Pool Principal Balance as of the related Determination
Date minus the greater of (a) 50.50% of the Pool Principal Balance as of the
related Determination Date plus the Overcollateralization Target Amount
(without giving effect to the proviso in the definition thereof) for such
Distribution Date and (b) 0.50% of the Original Pool Principal Balance.
SIX-MONTH ROLLING DELINQUENCY AVERAGE: With respect to any Distribution
Date, the average of the applicable 60-Day Delinquency Amounts for each of the
six immediately preceding Due Periods, where the 60-Day Delinquency Amount for
any Due Period is the aggregate of the Principal Balances of all Loans, other
than FHA Loans covered by FHA Insurance, that are 60 or more days delinquent,
in foreclosure or REO Property as of the end of such Due Period.
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STEPDOWN DATE: The first Distribution Date occurring after March 2000 as to
which:
(1) the Pool Principal Balance has been reduced to 50% of the Original
Pool Principal Balance;
(2) the Net Delinquency Calculation Amount is less than 8% of the
Original Pool Principal Balance; and
(3) the aggregate Class Principal Balance of the Senior Notes (after
giving effect to distributions of principal on such Distribution Date) will
be able to be reduced on such Distribution Date (such determination to be
made by the Indenture Trustee prior to giving effect to any distributions
on such Distribution Date) to the excess of (i) the Pool Principal Balance
as of the preceding Determination Date over (ii) the greater of (a) the sum
of (1) 50.50% of the Pool Principal Balance as of the preceding
Determination Date and (2) the Overcollateralization Target Amount for such
Distribution Date (such Overcollateralization Target Amount calculated
without giving effect to the proviso in the definition thereof and
calculated pursuant only to clause (B) in the definition thereof) and (b)
0.50% of the Original Pool Principal Balance.
APPLICATION OF ALLOCABLE LOSS AMOUNTS
Following any reduction of the Overcollateralization Amount to zero, any
Allocable Loss Amounts will be applied, sequentially, in reduction of the
Class Principal Balances of the Class B Certificates, the Class M-2 Notes and
the Class M-1 Notes, in that order, until their respective Class Principal
Balances have been reduced to zero. The Class Principal Balances of the Senior
Notes will not be reduced by any application of Allocable Loss Amounts. The
reduction of the Class Principal Balance of any applicable Class of Offered
Securities or Class B Certificates by the application of Allocable Loss
Amounts entitles such Class to reimbursement in an amount equal to the Loss
Reimbursement Deficiency. Each such Class of Offered Securities and Class B
Certificates will be entitled to receive its Loss Reimbursement Deficiency, or
any portion thereof, in accordance with the payment priorities specified
herein. Payment in respect of Loss Reimbursement Deficiencies will not reduce
the Class Principal Balance of the related Class or Classes. The Loss
Reimbursement Deficiency with respect to any Class will remain outstanding
until the earlier of (x) the payment in full of such amount to the holders of
such Class and (y) the occurrence of the applicable Final Scheduled
Distribution Date (although there is no requirement that such amounts be paid
on such date).
FHA INSURANCE PREMIUM ACCOUNT
An account (the "FHA PREMIUM ACCOUNT") will be established by the Indenture
Trustee into which an initial deposit of $15,155.77 was made on the Closing
Date. No later than the second Business Day preceding each Distribution Date,
the Indenture Trustee will deposit into the applicable FHA Premium Account,
FHA insurance premiums received from Obligors on the Invoiced Loans. The
Indenture Trustee will also deposit into the applicable FHA Premium Account,
to the extent of funds available therefor in the Collection Account, an amount
equal to the greater of (i) 0.75% of the Principal Balance of each outstanding
FHA Loan (determined without including the Loan Balances of any Invoiced
Loans), divided by 12 and (ii) the positive excess, if any, of (A) the amount
of premium and other charges due under the Contract of Insurance in respect of
the FHA Loans (other than Invoiced Loans) for the next succeeding Due Period
over (B) the balance in the related FHA Premium Account as of the related
Determination Date (each a "FHA PREMIUM ACCOUNT DEPOSIT"). "INVOICED LOANS"
are FHA Loans with respect to which the related Obligor is required to pay the
premium on FHA Insurance as a separate amount with respect to such FHA Loan.
OPTIONAL TERMINATION OF THE TRUST
The holders of an aggregate percentage interest in the Residual Interest in
excess of 50% (the "MAJORITY RESIDUAL INTERESTHOLDERS") may, at their option,
effect an early termination of the Trust on or after any Distribution Date on
which the Pool Principal Balance declines to 10% or less of the Original Pool
Principal Balance, by purchasing all of the Loans at a price equal to or
greater than the Termination Price. The
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"TERMINATION PRICE" shall be an amount equal to the sum of (i) the then
outstanding Class Principal Balances of the Classes of Notes plus all accrued
and unpaid interest thereon, (ii) the then outstanding Class Principal Balance
of the Class B Certificates plus all accrued and unpaid interest thereon,
(iii) any Trust Fees and Expenses due and unpaid on such date and (iv) any
unreimbursed Servicing Advances including such Servicing Advances deemed to be
nonrecoverable. The proceeds from such sale will be distributed (i) first, to
the outstanding Trust Fees and Expenses, (ii) second, to the Servicer for
unreimbursed Servicing Advances including such Servicing Advances deemed to be
nonrecoverable, (iii) third, to the Noteholders in an amount equal to the then
outstanding Class Principal Balance of the Notes plus all accrued and unpaid
interest thereon, (iv) fourth, to the Certificateholders in an amount equal to
the then outstanding Class Principal Balance of the Class B Certificates plus
all accrued and unpaid interest thereon, and (v) fifth, to the holders of the
Residual Interest, in an amount equal to the amount of proceeds remaining, if
any, after the distributions specified in clauses (i) through (iv) above.
DESCRIPTION OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Offered Securities will be provided
by (i) with respect to the FHA loans, by the FHA insurance, (ii) the
subordination of the right of the Residual Interest and certain Classes of
Offered Securities to receive distributions with respect to interest and
principal as described below under "--Subordination and Allocation of Losses"
and (iii) the overcollateralization feature described below under "--
Overcollateralization."
SUBORDINATION AND ALLOCATION OF LOSSES
Distributions of interest on the Notes will be made first to the Senior
Notes and then to the Mezzanine Notes, such that no interest will be paid on
the Mezzanine Notes until all required interest payments have been made on the
Senior Notes. In addition, distributions of principal of the Notes generally
will be made sequentially, such that no Class of Notes (other than the Class
A-5 Notes) will receive any distributions of principal until the Class
Principal Balances of all Classes of Notes having lower numerical designations
(and in the case of the Classes of Mezzanine Notes, all Classes of Senior
Notes) have received all required distributions of principal. In addition, all
Allocable Loss Amounts applied in reduction of the Class Principal Balances of
the Mezzanine Notes will be applied first to the Class M-2 Notes and then to
the Class M-1 Notes, until their respective Class Principal Balances have been
reduced to zero. Allocable Loss Amounts will not be applied to the Classes of
Senior Notes. The rights of the holders of the Class B Certificates to receive
distributions of interest and distributions of principal on each Distribution
Date generally will be subordinated to the rights of the holders of the Notes
to receive distributions of interest and distributions of principal,
respectively, on each Distribution Date. In addition, no Allocable Loss
Amounts will be applied to the reduction of the Class Principal Balance of any
Class of Mezzanine Notes until the application thereof to the Class Principal
Balance of the Class B Certificates has reduced such Class Principal Balance
to zero. The rights of the holders of the Residual Interest to receive any
distributions on any Distribution Date generally will be subordinated to the
rights of the holders of the Offered Securities. The subordination described
above is intended to enhance the likelihood of the regular receipt of interest
and principal due to the holders of the Classes of Offered Securities and to
afford such holders protection against losses on the Loans, with the greatest
amount of such enhancement and protection being provided to the Classes of
Senior Notes, a lesser amount of such enhancement and protection being
provided to the Class M-1 and, in particular, the Class M-2 Notes, and the
least amount of such enhancement and protection being provided to the Class B
Certificates. See "Risk Factors--Adequacy of Credit Enhancement Limitations"
herein.
On each Distribution Date, the "ALLOCABLE LOSS AMOUNT" will be equal to the
excess, if any, of (a) the aggregate of the Class Principal Balances of all
Classes of Securities (after giving effect to all distributions on such
Distribution Date) over (b) the Pool Principal Balance as of the end of the
preceding Due Period.
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OVERCOLLATERALIZATION
As of any date of determination, the "OVERCOLLATERALIZATION AMOUNT" will
equal the excess of the Pool Principal Balance as of the end of the previous
Due Period over the aggregate of the sum of the Class Principal Balances of
all Classes of Notes and the Class Principal Balance of the Class B
Certificates. On the Closing Date, the Overcollateralization Amount will be
equal to zero. A limited acceleration of the principal amortization of the
Offered Securities relative to the principal amortization of the Loans has
been designed to increase the Overcollateralization Amount over time by making
additional distributions of principal to the holders of the Offered Securities
from the distribution of Excess Spread until the Overcollateralization Amount
is at least equal to the Overcollateralization Target Amount. The
"OVERCOLLATERALIZATION TARGET AMOUNT" for any Distribution Date occurring
prior to the Stepdown Date will be equal to the greater of (x) 8% of the
Original Pool Principal Balance and (y) the Net Delinquency Calculation
Amount; with respect to any other Distribution Date, the Overcollateralization
Target Amount will be equal to the greater of (x) 16% of the Pool Principal
Balance as of the end of the related Due Period and (y) the Net Delinquency
Calculation Amount; provided, however, that the Overcollateralization Target
Amount will in no event be less than 0.50% of the Original Pool Principal
Balance or greater than the sum of the aggregate Class Principal Balances of
all Classes of Securities.
If on any Distribution Date an Overcollateralization Deficiency exists,
distributions of Excess Spread, if any, will be made as an additional
distribution of principal to the holders of the Offered Securities and the
Class B Certificates, to be allocated among the Classes of Notes and the Class
B Certificates in the order of priority set forth under "Description of the
Offered Securities--Distributions on the Offered Securities" herein. Such
distributions of Excess Spread are intended to accelerate the amortization of
the Class Principal Balances of all Classes of Offered Securities relative to
the amortization of the Loans, thereby increasing the Overcollateralization
Amount. The relative percentage of the aggregate of the Class Principal
Balances of the Securities to the Pool Principal Balance will decrease as a
result of the application of Excess Spread to reduce the Class Principal
Balances of the Securities.
On any Distribution Date with respect to which the Overcollateralization
Deficiency Amount is equal to zero, all or a portion of the Excess Spread may
be distributed to the holders of the Residual Interest rather than as
principal to the holders of the Securities, thereby ceasing the acceleration
of principal amortization of the Securities in relation to the principal
amortization of the Pool, until such time as the Overcollateralization
Deficiency Amount is greater than zero (i.e., due to a reduction in the
Overcollateralization Amount as a result of Net Loan Losses or delinquencies
or due to an increase in the Overcollateralization Target Amount as a result
of the failure to satisfy certain delinquency criteria).
While the application of Excess Spread in the manner specified above has
been designed to produce and maintain a given level of overcollateralization,
there can be no assurance that Excess Spread will be generated in sufficient
amounts to ensure that such overcollateralization level will be achieved or
maintained at all times. In particular, a high rate of delinquencies on the
Loans during any Due Period could cause the amount of interest received on the
Loans during such Due Period to be less than the amount of interest
distributable on the Securities on the related Distribution Date. In such a
case, the Class Principal Balances of the Securities would decrease at a
slower rate relative to the Pool Principal Balance, resulting in a reduction
of the Overcollateralization Amount and, in some circumstances, an Allocable
Loss Amount. See "Risk Factors--Adequacy of Credit Enhancement" herein.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of the Indenture, Sale and
Servicing Agreement, the Administration Agreement and the Trust Agreement
(collectively, the "TRANSFER AND SERVICING AGREEMENTS"). Forms of certain of
the Transfer and Servicing Agreements have been filed as exhibits to the
Registration Statement. Copies of the Transfer and Servicing Agreements will
be filed with the Commission following the issuance of the Offered Securities.
The summary does not purport to be complete and is subject to, and qualified
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in its entirety by reference to, all the provisions of the Transfer and
Servicing Agreements. The following summary supplements, and to the extent
inconsistent therewith replaces, the description of the general terms and
provisions of the Transfer and Servicing Agreements set forth under the
headings "The Agreements" in the Prospectus, to which description reference is
hereby made.
SALE AND ASSIGNMENT OF THE LOANS
On the Closing Date, all right, title and interest in and to the Loans was
simultaneously sold, conveyed, transferred and assigned from the Transferor to
EFC, from EFC to the Depositor, and then from the Depositor to the Trust. The
Trust, concurrently with the sale, conveyance, transfer and assignment of the
Loans, caused to be delivered the Offered Securities to the Depositor in
exchange for the Loans. The Trust pledged and assigned the Loans to the
Indenture Trustee in exchange for the Notes. Each Loan is identified in a
schedule appearing as an exhibit to the Sale and Servicing Agreement delivered
to the Indenture Trustee (the "LOAN SCHEDULE").
In addition, the Depositor will deliver or cause to be delivered, as to each
Loan, to the Indenture Trustee or the Custodian the related Note endorsed to
the order of the Indenture Trustee or the Custodian without recourse, any
assumption and modification agreements and the Mortgage, if any, with evidence
of recording indicated thereon (except for any Mortgage not returned from the
public recording office), an assignment of the Mortgage, if any, in the name
of the Indenture Trustee in recordable form, and any intervening assignments
of the Mortgage (each, an "INDENTURE TRUSTEE'S LOAN FILE"). The Transferor
will deliver to the Indenture Trustee after recordation the assignments to the
Indenture Trustee of the Mortgages. In the event that, with respect to each
Mortgage Loan, the Transferor cannot deliver the Mortgage or any assignment of
Mortgage with evidence of recording thereon concurrently with the conveyance
thereof under the Sale and Servicing Agreement because they have not yet been
returned by the public recording office, the Transferor will deliver or cause
to be delivered to the Indenture Trustee or the Custodian a certified true
photocopy of such Mortgage or assignment of Mortgage. The Transferor will
deliver or cause to be delivered to the Indenture Trustee or the Custodian any
such Mortgage or assignment of Mortgage with evidence of recording indicated
thereon upon receipt thereof from the public recording office. The Indenture
Trustee or the Custodian will agree, for the benefit of the holders of the
Offered Securities, to review (or cause to be reviewed) each Indenture
Trustee's Loan File within 45 days after the conveyance of the related Loan to
the Trust to ascertain that all required documents have been executed and
received, subject to the applicable cure period in the Transfer and Servicing
Agreements.
TRUST FEES AND EXPENSES
As compensation for its services pursuant to the Sale and Servicing
Agreement, the Servicer is entitled to the Servicing Fee and additional
servicing compensation and reimbursement as described under "Servicing" below.
As compensation for their services pursuant to the applicable Transfer and
Servicing Agreements, the Indenture Trustee is entitled to the Indenture
Trustee Fee, the Owner Trustee is entitled to the Owner Trustee Fee and the
Custodian is entitled to the Custodian Fee.
SERVICING
In consideration for the performance of the daily loan servicing functions
for the Loans, the Servicer is entitled to receive from payments in respect of
interest on the Loans, a monthly servicing fee (the "SERVICING FEE") in the
amount equal to 1.00% per annum for FHA Loans and 0.75% per annum for the
Conventional Loans (the "SERVICING FEE RATE") on the Principal Balance of each
such Loan as of the first day of each such Due Period (or as of the Cut Off-
Date, with respect to the first Due Period) as to which such payment was made,
subject to reduction as a result of any additional Indenture Trustee Fee owed
to the Indenture Trustee. See "Risk Factors--Dependence on Servicer for
Servicing Loans" herein. The Servicer will pay the fees of any Subservicer out
of the amounts it receives as the Servicing Fee. In addition to the Servicing
Fee, the Servicer is entitled to retain additional servicing compensation in
the form of assumption and other administrative fees, release fees,
insufficient funds charges, late payment charges and any other servicing-
related penalties and fees (collectively such additional compensation and
Servicing Fee, the "SERVICING COMPENSATION").
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In the event of a delinquency or a default with respect to a Loan, the
Servicer will have no obligation to advance scheduled monthly payments of
principal or interest with respect to such Loan. However, the Servicer will
make reasonable and customary expense advances with respect to the Loans
(each, a "SERVICING ADVANCE") in accordance with its servicing obligations
under the Sale and Servicing Agreement and will be entitled to receive
reimbursement for such Servicing Advances. For example, with respect to a Loan
such Servicing Advances may include costs and expenses advanced for the
preservation, restoration and protection of any Mortgaged Property, including
advances to pay delinquent real estate taxes and assessments. Any Servicing
Advances previously made and determined by the Servicer to be nonrecoverable,
in accordance with accepted servicing practices will be reimbursable from
amounts in the Collection Account prior to distributions to holders of the
Offered Securities.
COLLECTION ACCOUNT, NOTE DISTRIBUTION ACCOUNT AND CERTIFICATE DISTRIBUTION
ACCOUNT
The Servicer is required to use its best efforts to deposit in an Eligible
Account (the "COLLECTION ACCOUNT"), within two Business Days of receipt, all
payments received after the Cut-Off Date on account of principal and all
payments received with respect to interest due after the Cut-Off Date on the
related Loans, all Net Liquidation Proceeds, Insurance Proceeds, Released
Mortgaged Property Proceeds, any amounts received in respect of FHA Loans, any
amounts payable in connection with the repurchase or substitution of any Loan
and any amount required to be deposited in the Collection Account in
connection with the termination of the Offered Securities. The foregoing
requirements for deposit in the Collection Account will be exclusive of
payments on account of principal collected on the Loans on or before the Cut-
Off Date and on account of interest payments due on or prior to the Cut-Off
Date. Withdrawals will be made from the Collection Account only for the
purposes specified in the Sale and Servicing Agreement. The Collection Account
may be maintained at any depository institution which satisfies the
requirements set forth in the definition of Eligible Account in the Sale and
Servicing Agreement.
The Servicer will establish and maintain with the Indenture Trustee an
account, in the name of the Indenture Trustee on behalf of the Noteholders,
into which amounts released from the Collection Account for distribution to
the Noteholders will be deposited and from which all distributions to the
Noteholders will be made (the "NOTE DISTRIBUTION ACCOUNT"). The Servicer will
also establish and maintain with the Indenture Trustee an account, in the name
of the Owner Trustee on behalf of the Certificateholders, into which amounts
released from the Collection Account for distribution to the
Certificateholders will be deposited and from which all distributions to the
Certificateholders will be made (the "CERTIFICATE DISTRIBUTION ACCOUNT" and,
together with the Note Distribution Account, the "DISTRIBUTION ACCOUNTS").
On the second Business Day prior to each Distribution Date, the Indenture
Trustee will deposit into the Distribution Accounts the applicable portions of
the Available Collection Amount by making the appropriate withdrawals from the
Collection Account. On each Distribution Date, the Indenture Trustee will make
withdrawals from the Distribution Accounts for application of the amounts
specified above.
INCOME FROM ACCOUNTS
So long as no Event of Default will have occurred and be continuing, amounts
on deposit in the Distribution Accounts together with the Collection Account,
the "ACCOUNTS") will be invested by the Indenture Trustee, as directed by the
Servicer, in one or more Permitted Investments (as defined in the Sale and
Servicing Agreement) bearing interest or sold at a discount. So long as no
Event of Default is continuing, amounts on deposit in the Collection Account
will be invested at the direction of the Servicer, in one or more Permitted
Investments bearing interest or sold at a discount. No such investment in any
Account will mature later than the Business Day immediately preceding the next
Distribution Date. All income or other gain from investments in any Account
will be deposited in such Account immediately on receipt, unless otherwise
specified herein.
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COLLECTION AND OTHER SERVICING PROCEDURES ON LOANS; CLAIMS ADMINISTRATION
The Servicer has agreed to manage, service, administer and make collections
on the Loans, and perform the other actions required by the Servicer under the
Sale and Servicing Agreement. In performing such obligations, the Servicer is
required to act in good faith in a commercially reasonable manner and in
accordance with all requirements of the FHA applicable to the servicing of the
FHA Loans, and to service and administer such FHA Loans in accordance with the
Title I Program, the terms of the Sale and Servicing Agreement and the
respective FHA Loans. The Servicer has full power and authority, subject only
to the specific requirements and prohibitions of the Title I Program with
respect to the FHA Loans, the Sale and Servicing Agreement and the respective
Loans, to do any and all things in connection with such servicing and
administration which are consistent with the manner in which it services
similar types of loans owned by the Servicer or any of its affiliates or
serviced by the Servicer for others and which are consistent with the ordinary
practices of prudent mortgage lending institutions.
If any payment due under any Loan is not paid when the same becomes due and
payable, or if the related Obligor fails to perform any other covenant or
obligation under the Loan and such failure continues beyond any applicable
grace period, the Servicer must take such action (consistent with Title I, in
the case of the FHA Loans, including efforts to cure the default of such FHA
Loan) as it shall deem to be in the best interest of the Trust. With respect
to the FHA Loans, if the maturity of the related note or obligation has been
accelerated pursuant to the requirements of Title I following the Servicer's
efforts to cure the default of such FHA Loan (and such FHA Loan is not
required to be purchased pursuant to the Sale and Servicing Agreement) and (i)
if the Trust Designated Insurance Amount has not been depleted at that time,
the Claims Administrator, unless not in the best interest of the Trust, shall
initiate, on behalf of the Trust and the Contract of Insurance Holder, a claim
under the Contract of Insurance for reimbursement for loss on such FHA Loan
pursuant to Title I or, (ii) if the Trust Designated Insurance Amount has been
depleted at that time (an "FHA INSURANCE COVERAGE INSUFFICIENCY"), the
Servicer shall determine within 90 days whether or not to proceed against the
property securing the FHA Loan if such FHA Loan is a Mortgage Loan or against
the Obligor if the FHA Loan is unsecured pursuant to the provisions of the
Sale and Servicing Agreement. Thereafter, if an FHA Insurance Coverage
Insufficiency does not exist and the claim period has not expired, the
Servicer may notify the Claims Administrator to seek approval of the Secretary
of HUD to submit a claim under the Contract of Insurance with respect to such
FHA Loan.
In the event that in accordance with clause (ii) above the Servicer
determines not to proceed against the Mortgaged Property or the Obligor, on or
before the Determination Date following such determination the Servicer shall
determine if in good faith in accordance with customary mortgage loan
servicing practices all amounts which it expects to receive with respect to
such FHA Loan have been received. If the Servicer makes such a determination,
it shall include such information in its records.
If the FHA rejects or refuses to pay any claim made under the Contract of
Insurance (including a rejection of a previously paid claim and a demand by
the FHA of a previously paid claim amount for such FHA Loan) for an FHA Loan
(other than a refusal or rejection for clerical error in computing the claim
amount or due to an exhaustion of the Combined FHA Insurance Amount), upon
receipt of the FHA's rejection notice or demand and determination by the
Claims Administrator that the rejection or demand was not due to clerical
error, then (i) the Claims Administrator must promptly notify the Indenture
Trustee (if the Indenture Trustee shall not initially have received such
notice of such fact, and (ii) if the FHA indicates rejection for other than a
failure to service such FHA Loan in accordance with Title I or the exhaustion
of the Combined FHA Insurance Amount, the Transferor shall be liable on or
before the last day of the calendar month next following the date of such
notice from the Claims Administrator to repurchase such FHA Loan for the
Purchase Price thereof. In connection with its rejection or refusal to pay a
claim or demand for payment related to a previously paid but rejected claim,
if the FHA shall have indicated in writing, or if the FHA does not indicate in
writing the reason for its rejection or refusal or demand and it is otherwise
evident that such rejection or refusal or demand is due to a failure to
service such FHA Loan in accordance with Title I, the Claims Administrator
shall notify the Transferor and the Servicer of such determination, and the
Servicer shall on or before the later to occur of (i) the last day of the
calendar
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month next succeeding the date of such rejection or demand and (ii) ten
Business Days from the date on which notice of such rejection is received by
the Claims Administrator from the FHA, either directly or from the Transferor
or the Indenture Trustee, repurchase such FHA Loan from the Trust or the FHA,
as applicable, for the Purchase Price.
The Indenture Trustee will deposit in the Note Distribution Account on the
day of receipt all amounts received from the FHA or any other Person with
respect to the FHA Loans or any other assets of the Trust.
If prior to the liquidation of the last asset of the Trust pursuant to the
Trust Agreement, the FHA rejects an insurance claim, in whole or in part,
under the Contract of Insurance after previously paying such insurance claim
and the FHA demands that the Contract of Insurance Holder repurchase such FHA
Loan from the FHA, the Claims Administrator will pursue such appeals with the
FHA as are reasonable. If the FHA continues to demand that the Contract of
Insurance Holder repurchase such FHA Loan from the FHA after the Claims
Administrator exhausts such administrative appeals as are reasonable, then
notwithstanding that the Transferor, the Claims Administrator or any other
person is required to repurchase such FHA Loan, the Claims Administrator must
notify the Contract of Insurance Holder of such fact and the Contract of
Insurance Holder shall cause the Trust to repurchase such FHA Loan from funds
available in the Note Distribution Account.
The Transferor will reimburse the Contract of Insurance Holder for any
amounts paid by the Contract of Insurance Holder to the FHA in order to
repurchase FHA Loans for which the FHA has rejected an insurance claim for any
reason other than a failure to comply with FHA servicing requirements or the
exhaustion of the Combined FHA Insurance Amount. The Servicer will reimburse
the Contract of Insurance Holder for any amounts paid by the contract of
Insurance Holder to FHA in order to repurchase FHA Loans for which the FHA has
rejected an insurance claim as a result of a failure to service such Loan in
accordance with Title I.
The Servicer may modify any provision of any Loan if, in the Servicer's good
faith judgment, such modification (i) would minimize the loss that might
otherwise be experienced with respect to such Loan and, with respect to FHA
Loans, complies with the requirements of Title I or (ii) with respect to FHA
Loans, is required by Title I and, in either case, only in the event of a
payment default with respect to such Loan or in the event that a payment
default with respect to such Loan is reasonably foreseeable by the Servicer.
The Servicer will agree to subordinate the position of the security interest
in the Mortgaged Property which secures any Loan under conditions approved by
the Secretary of HUD to such subordination and provided such subordination (i)
would permit the borrower to refinance a senior lien to take advantage of a
lower interest rate or (ii) would permit the borrower to extend the term of
the senior lien.
INSURANCE
FHA regulations require borrowers to maintain flood insurance with respect
to the Mortgaged Property securing an FHA Loan where the Mortgaged Property
securing the Loan is located in an area that has been identified by the
Federal Emergency Management Agency ("FEMA") as having special flood hazards
in accordance with FHA regulations. The amount of such insurance shall be at
least equal to the outstanding Principal Balance of such FHA Loan and the
insurance must be maintained by the borrower for the full term of such FHA
Loan or until the Mortgaged Property is either repossessed or foreclosed by
the Servicer. The Servicer will cause to be maintained flood insurance with
respect to each Mortgaged Property located in any such area as having been
identified by FEMA as having special flood hazards in accordance with FHA
regulations in an amount equal to the outstanding Principal Balance of the
related FHA Loan.
FHA Regulations do not require hazard insurance to be maintained on the
Mortgaged Properties and the Servicer will not require such insurance to be
maintained on the Mortgaged Properties.
With respect to each Conventional Loan, the Servicer shall cause to be
maintained such fire and hazard insurance as the Servicer shall deem
reasonable.
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REALIZATION UPON DEFAULTED LOANS
With respect to any Mortgage Loan, the Servicer may institute foreclosure
proceedings, exercise any power of sale to the extent permitted by law, obtain
a deed in lieu of foreclosure, or otherwise acquire possession of or title to
any Mortgaged Property, by operation of law or otherwise, and only in the
event that in the Servicer's reasonable judgment such action is likely to
result in a positive economic benefit to the Trust by creating Net Liquidation
Proceeds (after reimbursement of all amounts owed with respect to such
Mortgage Loan to the Servicer) and provided that prior to taking title to any
Mortgaged Property, the Servicer has requested that the Indenture Trustee
obtain, and the Indenture Trustee shall have obtained, a review to be
performed on the Mortgaged Property by a company having appropriate experience
and otherwise reasonably acceptable to the Indenture Trustee, the scope of
which is limited to the review of public records and documents for information
regarding whether such Mortgaged Property has on it, under it or is near,
hazardous or toxic material or waste. If such review reveals that the
Mortgaged Property has on it, under it or is near hazardous or toxic material
or waste or reveals any other environmental problem, the Indenture Trustee
shall provide a copy of the related report to the Servicer and title shall be
taken to such Mortgaged Property only after obtaining the written consent of
the Servicer. In general, with respect to the FHA Loans, the Servicer will
only institute such foreclosure proceedings if the Trust Designated Insurance
Amount is depleted and the other considerations described in this paragraph
are satisfied.
In connection with any such foreclosure proceeding, power of sale, deed in
lieu of foreclosure or other acquisition of a Mortgaged Property, the Servicer
shall comply with the requirements under Title I, if such Mortgage is an FHA
Loan, and the Sale and Servicing Agreement, shall follow such practices and
procedures in a manner which is consistent with the Servicer's procedure for
foreclosure and operation of the foreclosed property with respect to similar
loans held in the Servicer's portfolio for its own account or, if there are no
such loans, such loans serviced by the Servicer for others, giving due
consideration to accepted servicing practices of prudent lending institutions,
and shall sell or liquidate the Loan or Mortgaged Property. Notwithstanding
the foregoing with respect to any Defaulted Loan that is an FHA Loan assuming
the Trust Designated Insurance Amount has not been depleted, the Claims
Administrator, unless not in the best interest of the Trust, will make a claim
under the Contract of Insurance prior to initiating any foreclosure
proceedings on the related Mortgaged Property. Concurrently with the filing of
any such insurance claim, the Trust will assign its entire interest in the
Loan to the United States of America.
EVIDENCE AS TO COMPLIANCE
The Sale and Servicing Agreement provides for delivery to the Indenture
Trustee and the Rating Agencies of an annual statement signed by an officer of
the Servicer to the effect that the Servicer has fulfilled its obligations
under the Sale and Servicing Agreement throughout the preceding year, except
as specified in such statement.
Each year (within 90 days following the end of the Servicer's fiscal year),
beginning in 1998, the Servicer will furnish a report prepared by a firm of
nationally recognized independent public accountants (who may also render
other services to the Servicer or the Depositor) to the Indenture Trustee to
the effect that such firm has examined certain documents and the records
relating to servicing of the Loans as specified in the Sale and Servicing
Agreement and such firm's conclusion that the Servicer is in compliance with
respect thereto.
The Servicer's fiscal year is the calendar year.
CERTAIN MATTERS REGARDING THE SERVICER
The Sale and Servicing Agreement provides that the Servicer may not resign
from its obligations and duties thereunder except (i) with the consent of the
Indenture Trustee or (ii) upon determination that by reason of a change in
legal requirements the performance of its duties under the Sale and Servicing
Agreement would cause it to be in violation of such legal requirements in a
manner which would result in a material adverse effect on the Servicer. Any
such determination permitting the resignation of the Servicer by reason of a
change in such
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legal requirements shall be evidenced by an opinion of counsel to such effect
delivered and acceptable to the Indenture Trustee. No resignation of the
Servicer shall become effective until a successor servicer shall have assumed
the Servicer's servicing responsibilities and obligations.
The Servicer has agreed not to merge or consolidate with any other company
or permit any other company to become the successor to the Servicer's business
unless, after the merger or consolidation, the successor or surviving entity
(i) shall be an Eligible Servicer (as defined in the Sale and Servicing
Agreement), and (ii) shall be capable of fulfilling the duties of the Servicer
contained in the Sale and Servicing Agreement. Any company into which the
Servicer may be merged or consolidated, shall execute an agreement of
assumption to perform every obligation of the Servicer under the Sale and
Servicing Agreement and, shall be the successor to the Servicer under the Sale
and Servicing Agreement.
The Sale and Servicing Agreement provides that neither the Servicer nor any
of its directors, officers, employees or agents shall be under any liability
to the Trust or to the Certificateholders for any action taken or for
refraining from the taking of any action in good faith pursuant to the Sale
and Servicing Agreement, or for errors in judgment, unless liability would
otherwise be imposed by reason of willful misfeasance, bad faith or negligence
in performing or failing to perform duties.
EVENTS OF DEFAULT
"EVENTS OF DEFAULT" will consist of, among other things: (i) any failure of
the Servicer to deposit in the Collection Account any amount required to be
deposited under the Sale and Servicing Agreement, which failure continues
unremedied for two Business Days; (ii) any failure by the Servicer duly to
observe or perform in any material respect any other of its covenants or
agreements in the Sale and Servicing Agreement, which failure continues
unremedied for thirty Business Days after notice; or (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings relating to the Servicer and certain actions by the
Servicer indicating insolvency, reorganization or inability to pay its
obligations (an "INSOLVENCY EVENT") or the Servicer shall dissolve or
liquidate, in whole or part, in any material respect.
If an Event of Default shall occur and be continuing, the Indenture Trustee
at the direction of the Securityholders, by notice given in writing to the
Servicer (and to the Indenture Trustee if given by the Securityholders) may
terminate all of the rights and obligations of the Servicer under the Sale and
Servicing Agreement. On or after the receipt by the Servicer of such written
notice, and the appointment of and acceptance by a successor Servicer, all
authority, power, obligations and responsibilities of the Servicer under the
Sale and Servicing Agreement shall become obligations and responsibilities of
the successor Servicer. After the Servicer receives a notice of termination or
upon the resignation of the Servicer, the Indenture Trustee shall be the
successor in all respects to the Servicer in its capacity as servicer under
the Sale and Servicing Agreement.
Any successor Servicer shall be entitled to such compensation (whether
payable out of the Collection Account or otherwise) as the Servicer would have
been entitled to under the Sale and Servicing Agreement if the Servicer had
not resigned or been terminated hereunder. In addition, any successor Servicer
shall be entitled to reasonable transition expenses incurred in acting as
successor Servicer.
THE OWNER TRUSTEE, THE CO-OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee, the Co-Owner Trustee, the Indenture Trustee and any of
their respective affiliates may hold Offered Securities in their own names or
as pledgees.
For the purpose of meeting the legal requirements of certain jurisdictions,
the Servicer, the Owner Trustee and the Indenture Trustee acting jointly (or
in some instances, the Owner Trustee or the Indenture Trustee acting alone)
will have the power to appoint co-trustees or separate trustees of all or any
part of the Trust. In the event of such an appointment, all rights, powers,
duties and obligations conferred or imposed upon the Owner Trustee by the Sale
and Servicing Agreement and the Trust Agreement and the Indenture Trustee by
the Sale and
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Servicing Agreement and the Indenture will be conferred or imposed upon the
Owner Trustee and the Indenture Trustee, respectively, and in each such case
such separate trustee or co-trustee jointly, or, in any jurisdiction in which
the Owner Trustee or Indenture Trustee will be incompetent or unqualified to
perform certain acts, singly upon such separate trustee or co-trustee who will
exercise and perform such rights, powers, duties and obligations solely at the
direction of the Owner Trustee or the Indenture Trustee, respectively.
The Owner Trustee, the Co-Owner Trustee and the Indenture Trustee may resign
at any time, in which event the Servicer will be obligated to appoint a
successor thereto. The Servicer may remove the Owner Trustee, the Co-Owner
Trustee or the Indenture Trustee if either ceases to be eligible to continue
as such under the Trust Agreement or the Indenture, as the case may be, or
becomes legally unable to act or becomes insolvent. In such circumstances, the
Servicer will be obligated to appoint a successor Owner Trustee, a successor
Co-Owner Trustee or a successor Indenture Trustee, as applicable. Any
resignation or removal of the Owner Trustee, the Co-Owner Trustee or Indenture
Trustee and appointment of a successor thereto will not become effective until
acceptance of the appointment by such successor.
The Trust Agreement and Indenture will provide that the Owner Trustee, the
Co-Owner Trustee and Indenture Trustee will be entitled to indemnification by
the Transferor, and will be held harmless against, any loss, liability or
expense incurred by the Owner Trustee, the Co-Owner Trustee or Indenture
Trustee not resulting from its own willful misfeasance, bad faith or
negligence (other than by reason of a breach of any of its representations or
warranties to be set forth in the Trust Agreement or Indenture, as the case
may be).
DUTIES OF THE OWNER TRUSTEE, THE CO-OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee and the Co-Owner Trustee will make no representations as
to the validity or sufficiency of the Trust Agreement, the Securities (other
than the execution and authentication thereof) or of any Loans or related
documents, and will not be accountable for the use or application by the
Depositor or the Servicer of any funds paid to the Depositor or the Servicer
in respect of the Notes, the Class B Certificates or the Loans, or the
investment of any monies by the Servicer before such monies are deposited into
the Accounts. So long as no Event of Default has occurred and is continuing,
the Owner Trustee and the Co-Owner Trustee will be required to perform only
those duties specifically required of them under the Trust Agreement.
Generally, those duties will be limited to the receipt of the various
certificates, reports or other instruments required to be furnished to the
Owner Trustee and the Co-Owner Trustee under the Trust Agreement, in which
case they will only be required to examine such certificates, reports or other
instruments to determine whether they conform to the requirements of the Trust
Agreement. The Owner Trustee and the Co-Owner Trustee will not be charged with
knowledge of a failure by the Servicer to perform its duties under the Trust
Agreement or Sale and Servicing Agreement which failure constitutes an Event
of Default unless the Owner Trustee or the Co-Owner Trustee obtains actual
knowledge of such failure as will be specified in the Trust Agreement.
The Owner Trustee and the Co-Owner Trustee will be under no obligation to
exercise any of the rights or powers vested in them by the Trust 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 Owner Trustee and the Co-Owner Trustee
reasonable security or indemnity against the costs, expenses and liabilities
that may be incurred therein or thereby. Subject to the rights or consent of
the Noteholders, and Indenture Trustee, no Certificateholder will have any
right under the Trust Agreement to institute any proceeding with respect to
the Trust Agreement, unless such holder previously has given to the Owner
Trustee and the Co-Owner Trustee written notice of the occurrence of an Event
of Default and (i) the Event of Default arises from the Servicer's failure to
remit payments when due or (ii) the holders of Class B Certificates evidencing
not less than 50% of the voting interests of the Class B Certificates have
made written request upon the Owner Trustee and the Co-Owner Trustee to
institute such proceeding in their own name as the Owner Trustee and Co-Owner
Trustee thereunder and have offered to the Owner Trustee and the Co-Owner
Trustee reasonable indemnity and the Owner Trustee and the Co-Owner Trustee
for 30 days has neglected or refused to institute any such proceedings.
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The Indenture Trustee will make no representations as to the validity or
sufficiency of the Indenture, the Securities (other than the execution and
authentication thereof) or of any Loans or related documents, and will not be
accountable for the use or application by the Depositor or the Servicer of any
funds paid to the Depositor or the Servicer in respect of the Notes, the Class
B Certificates or the Loans, or the investment of any monies by the Servicer
before such monies are deposited into any of the Accounts. So long as no Event
of Default under the Indenture has occurred and is continuing, the Indenture
Trustee will be required to perform only those duties specifically required of
it under the Indenture. Generally, those duties will be limited to the receipt
of the various certificates, reports or other instruments required to be
furnished to the Indenture Trustee under the Indenture, in which case it will
only be required to examine them to determine whether they conform to the
requirements of the Indenture. The Indenture Trustee will not be charged with
knowledge of a failure by the Servicer to perform its duties under the Trust
Agreement, Sale and Servicing Agreement or Administration Agreement which
failure constitutes an Event of Default under the Indenture unless the
Indenture Trustee obtains actual knowledge of such failure as will be
specified in the Indenture.
The Indenture Trustee will be under no obligation to exercise any of the
rights or powers vested in it by the Indenture 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 Noteholders, unless such Noteholders have offered to the Indenture Trustee
reasonable security or indemnity against the costs, expenses and liabilities
that may be incurred therein or thereby. No Noteholder will have any right
under the Indenture to institute any proceeding with respect to the Indenture,
unless such holder previously has given to the Indenture Trustee written
notice of the occurrence of an Event of Default and (i) the Event of Default
arises from the Servicer's failure to remit payments when due or (ii)
Noteholders evidencing not less than 25% of the voting interests of each Class
of Notes, acting together as a single class, have made written request upon
the Indenture Trustee to institute such proceeding in its own name as the
Indenture Trustee thereunder and have offered to the Indenture Trustee
reasonable indemnity and the Indenture Trustee for 30 days has neglected or
refused to institute any such proceedings.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
In the opinion of Brown & Wood llp, counsel to the Depositor and the
Underwriter ("TAX COUNSEL") for Federal income tax purposes, the Notes will be
characterized as debt and the Trust will not be characterized as an
association (or a publicly traded partnership) taxable as a corporation. Each
Noteholder, by the acceptance of a Note, will agree to treat the Notes as
indebtedness for Federal income tax purposes. See "Certain Material Federal
Income Tax Considerations" in the Prospectus for additional information
concerning the application of Federal income tax laws to the Trust and the
Offered Securities.
The Offered Securities, depending on their issue prices, may be treated as
having been issued with original issue discount. As a result, holders of the
Offered Securities may be required to recognize income with respect to the
Offered Securities somewhat in advance of the receipt of cash attributable to
that income. The prepayment assumption that will be used for purpose of
computing original issue discount for Federal income tax purposes is 100% of
the Prepayment Assumption.
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 Offered Securities. 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 Offered
Securities.
S-71
<PAGE>
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 Offered
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 Offered 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 Offered
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 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 Servicer 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 Asset 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 Asset Regulation, Labor declined to
provide a precise definition of what features are equity features or the
circumstances under
S-72
<PAGE>
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 llp ("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.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any Notes 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,
a fiduciary of a Plan should make its own determination as to whether the
Trust, as obligor on the Notes, 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.
LEGAL INVESTMENT MATTERS
The Offered Securities will not constitute "mortgage related securities"
under the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") because
a substantial number of the Loans are either unsecured or secured by liens on
real estate that are not first liens. Accordingly, many institutions with
legal authority to invest in "mortgage related securities" may not be legally
authorized to invest in the Offered Securities.
There may be restrictions on the ability of certain investors, including
depository institutions, either to purchase the Offered Securities or to
purchase Offered 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 Offered Securities constitute legal
investments for such investors.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Depositor and the Underwriter (an affiliate of the Depositor), the
Depositor has agreed to sell to the Underwriter, and the Underwriter has
agreed to purchase from the Depositor, the Offered Securities. Distribution of
the Offered 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. In connection with the sale of the Offered Securities, the
Underwriter may be deemed to have received compensation from the Depositor in
the form of underwriting discounts.
There is currently no secondary market for the Offered Securities. There can
be no assurance that a secondary market for the Offered Securities 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.
S-73
<PAGE>
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor and for the
Underwriter by Brown & Wood llp, New York, New York. Certain legal matters
will be passed upon for the Transferor by Dewey Ballantine, New York, New
York.
RATINGS
It is a condition to the issuance of the Offered Securities that each of the
Class A-1 Notes, Class A-2 Notes, Class A-3 Notes, Class A-4 Notes and Class
A-5 Notes be rated "AAA" by Standard & Poor's and DCR, and the Class M-1 Notes
be rated "AA" and the Class M-2 Notes be rated "A-" by Standard & Poor's and
DCR.
The ratings on the Offered Securities address the likelihood of the receipt
by the holders of the Offered Securities of all distributions on the Loans to
which they are entitled. The ratings on the Offered Securities also address
the structural, legal and issuer-related aspects associated with the Offered
Securities, including the nature of the Loans. In general, the ratings on the
Offered Securities address credit risk and not prepayment risk. The ratings on
the Offered Securities do not represent any assessment of the likelihood that
principal prepayments of the Loans will be made by borrowers or the degree to
which the rate of such prepayments might differ from that originally
anticipated. As a result, the initial ratings assigned to the Offered
Securities do not address the possibility that holders of the Offered
Securities might suffer a lower than anticipated yield in the event of
principal payments on the Offered Securities resulting from rapid prepayments
of the Loans or the application of Excess Spread as described herein, or in
the event that the Trust is terminated prior to the Final Scheduled
Distribution Date of the Classes of Notes and the Class B Certificates.
The Depositor has not solicited ratings on the Offered Securities with any
rating agency other than the Rating Agencies. However, there can be no
assurance as to whether any other rating agency will rate the Offered
Securities, or, if it does, what rating would be assigned by any such other
rating agency. Any rating on the Offered Securities by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Offered
Securities by the Rating Agencies.
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 assigning
rating organization. Each security rating should be evaluated independently of
any other security rating. In the event that the ratings initially assigned to
any of the Offered Securities by the Rating Agencies are subsequently lowered
for any reason, no person or entity is obligated to provide any additional
support or credit enhancement with respect to such Offered Securities.
S-74
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Accounts............................................................. S-65
Allocable Loss Amount................................................ S-13, S-62
Available Collection Amount.......................................... S-55
Available Distribution Amount........................................ S-56
Certificate Distribution Account..................................... S-65
Claimable Amount..................................................... S-38
Claims Administrator................................................. S-2, S-4
Class B Certificates................................................. S-1, S-55
Class B Pass-Through Rate............................................ S-6
Collection Account................................................... S-65
Combined FHA Insurance Amount........................................ S-10
Combined loan-to-value ratio......................................... S-9
Commission........................................................... S-2
Contract of Insurance Holder......................................... S-2, S-4
Conventional Loans................................................... S-6, S-24
Co-Owner Trustee..................................................... S-1, S-5
CPR.................................................................. S-44
Custodian............................................................ S-5
Custodian Fee........................................................ S-14
Cut-Off Date Principal Balance....................................... S-8, S-54
DCR.................................................................. S-15
Dealer Loan.......................................................... S-36
Defaulted Loan....................................................... S-7, S-31
Defective Loan....................................................... S-10, S-31
Deleted Loan......................................................... S-31
Depositor............................................................ S-4
Depository........................................................... S-2
Determination Date................................................... S-5, S-55
Direct Loan.......................................................... S-36
Distribution Accounts................................................ S-65
Distribution Date.................................................... S-2, S-5
DTC.................................................................. S-7
Due Period........................................................... S-5
EFC.................................................................. S-2, S-4
EFC Securitized Assets............................................... S-1, S-4
Empire Funding....................................................... S-1, S-4
ERISA................................................................ S-15, S-72
ERISA Counsel........................................................ S-73
Events of Default.................................................... S-69
FEMA................................................................. S-67
FHA.................................................................. S-2, S-9
FHA Insurance Coverage Insufficiency................................. S-66
FHA Loans............................................................ S-9, S-24
FHA Premium Account.................................................. S-61
FHA Premium Account Deposit.......................................... S-64
FHA Reserve Account.................................................. S-10, S-39
Final Scheduled Distribution Date.................................... S-7, S-46
Foreclosure Advances................................................. S-72
Foreclosed Property.................................................. S-72
Home Improvement Loans............................................... S-36
</TABLE>
S-75
<PAGE>
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Home Loan Purchase Agreement......................................... S-2, S-4
Housing Act.......................................................... S-35
HUD.................................................................. S-2, S-9
Indenture............................................................ S-1, S-4
Indenture Trustee.................................................... S-1, S-4
Indenture Trustee Fee................................................ S-13
Indenture Trustee's Loan File........................................ S-64
Insolvency Event..................................................... S-69
Insurance Coverage Reserve Account................................... S-37
Insurance Premium.................................................... S-37
Issuer............................................................... S-4
Loan Rate............................................................ S-24
Loan Schedule........................................................ S-64
Loans................................................................ S-1, S-24
Loss Reimbursement Deficiency........................................ S-13
Majority Residual Interestholders.................................... S-14, S-61
Mezzanine Notes...................................................... S-2, S-5
Modeling Assumptions................................................. S-44
Mortgaged Properties................................................. S-9, S-24
Mortgage Loans....................................................... S-24
Mortgage related securities.......................................... S-13
Mortgages............................................................ S-1, S-8
Note Distribution Account............................................ S-65
Note Interest Rate................................................... S-5
Notes................................................................ S-1, S-55
Obligors............................................................. S-13, S-24
Offered Securities................................................... S-1, S-55
Original Class Principal Balance..................................... S-5
Original Pool Principal Balance...................................... S-8, S-25
Overcollateralization Amount......................................... S-12, S-63
Overcollateralization Target Amount.................................. S-12, S-63
Owner Trustee........................................................ S-1, S-5
Owner Trustee Fee.................................................... S-13
Plan................................................................. S-12, S-80
Plans................................................................ S-72
Pool................................................................. S-1, S-8
Pool Principal Balance............................................... S-9, S-54
Prepayment Assumption................................................ S-44
Principal Balance.................................................... S-8, S-54
Prospectus........................................................... S-2
Purchase Agreement................................................... S-54
Purchase Price....................................................... S-31
Qualified Substitute Loan............................................ S-10, S-31
Rating Agencies...................................................... S-15
Record Date.......................................................... S-5, S-55
Related Series Trust................................................. S-18
Residual Interest.................................................... S-1, S-6
Sale and Servicing Agreement......................................... S-2, S-4
Secured Conventional Loans........................................... S-9, S-24
</TABLE>
S-76
<PAGE>
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Secured FHA Loans.................................................... S-9, S-24
Security Owners...................................................... S-7
Senior Notes......................................................... S-2, S-5
Servicer............................................................. S-2, S-4
Servicing Advance.................................................... S-65
Servicing Compensation............................................... S-13, S-14
Servicing Fee........................................................ S-14, S-64
Servicing Fee Rate................................................... S-64
SMMEA................................................................ S-15, S-73
Standard & Poor's.................................................... S-15
Subservicer.......................................................... S-11
Substitution Adjustment.............................................. S-31
Tax Counsel.......................................................... S-71
Termination Price.................................................... S-62
Transfer and Servicing Agreements.................................... S-54, S-63
Transferor........................................................... S-1, S-2
Trust................................................................ S-1, S-4
Trust Agreement...................................................... S-1, S-4
Trust Designated Insurance Amount.................................... S-10, S-38
Trust Fees and Expenses.............................................. S-14
Underwriter.......................................................... S-4
Unsecured Conventional Loans......................................... S-9, S-24
Unsecured FHA Loans.................................................. S-9, S-24
Unsecured Loans...................................................... S-25
</TABLE>
S-77
<PAGE>
PROSPECTUS
ASSET BACKED SECURITIES
(ISSUABLE IN SERIES)
FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
---------------
This Prospectus relates to the issuance of Asset Backed Certificates (the
"Certificates") and the Asset Backed Notes (the "Notes" and, together with the
Certificates, the "Securities"), which may be sold from time to time in one or
more series (each, a "Series") by Financial Asset Securities Corp. (the
"Depositor") on terms determined at the time of sale and described in this
Prospectus and the related Prospectus Supplement. The Securities of a Series
will evidence beneficial ownership of a trust fund (a "Trust Fund"). As
specified in the related Prospectus Supplement, the Trust Fund for a Series of
Securities will include certain assets (the "Trust Fund Assets") which will
primarily consist of (i) closed-end and/or revolving home equity loans (the
"Home Equity Loans") secured primarily by subordinate liens on one- to four-
family residential properties, (ii) home improvement installment sales
contracts and installment loan agreements (the "Home Improvement Contracts")
that are either unsecured or secured primarily by subordinate liens on one- to
four-family residential properties, or by purchase money security interests in
the home improvements financed thereby (the "Home Improvements") and/or (iii)
Private Asset Backed Securities (as defined herein). The Home Equity Loans and
the Home Improvement Contracts are collectively referred to herein as the
"Loans". The Trust Fund Assets will be acquired by the Depositor, either
directly or indirectly, from one or more institutions (each, a "Seller"),
which may be affiliates of the Depositor, and conveyed by the Depositor to the
related Trust Fund. A Trust Fund also may include insurance policies, reserve
accounts, reinvestment income, guaranties, obligations, agreements, letters of
credit or other assets to the extent described in the related Prospectus
Supplement.
Each Series of Securities will be issued in one or more classes. Each class
of Securities of a Series will evidence beneficial ownership of a specified
percentage (which may be 0%) or portion of future interest payments and a
specified percentage (which may be 0%) or portion of future principal payments
on the Trust Fund Assets in the related Trust Fund. A Series of Securities may
include one or more classes that are senior in right of payment to one or more
other classes of Securities of such Series. One or more classes of Securities
of a Series may be entitled to receive distributions of principal, interest or
any combination thereof prior to one or more other classes of Securities of
such Series or after the occurrence of specified events, in each case as
specified in the related Prospectus Supplement.
Distributions to Securityholders will be made monthly, quarterly, semi-
annually or at such other intervals and on the dates specified in the related
Prospectus Supplement. Distributions on the Securities of a Series will be
made from the assets of the related Trust Fund or Funds or other assets
pledged for the benefit of the Securityholders as specified in the related
Prospectus Supplement.
The related Prospectus Supplement will describe any insurance or guarantee
provided with respect to the related Series of Securities including, without
limitation, any insurance or guarantee provided by the Department of Housing
and Urban Development, the United States Department of Veterans' Affairs or
any private insurer or guarantor. The only obligations of the Depositor with
respect to a Series of Securities will be to obtain certain representations
and warranties from each Seller and to assign to the Trustee for the related
Series of Securities the Depositor's rights with respect to such
representations and warranties. The principal obligations of the Master
Servicer named in the related Prospectus Supplement with respect to the
related Series of Securities will be limited to obligations pursuant to
certain representations and warranties and to its contractual servicing
obligations, including any obligation it may have to advance delinquent
payments on the Trust Fund Assets in the related Trust Fund.
The yield on each class of Securities of a Series will be affected by, among
other things, the rate of payments of principal (including prepayments) on the
Trust Fund Assets in the related Trust Fund and the timing of receipt of such
payments as described herein and in the related Prospectus Supplement. A Trust
Fund may be subject to early termination under the circumstances described
herein and in the related Prospectus Supplement.
If specified in a Prospectus Supplement, one or more elections may be made
to treat the related Trust Fund or specified portions thereof as a "real
estate mortgage investment conduit" ("REMIC") for federal income tax purposes.
See "Certain Material Federal Income Tax Consequences."
---------------
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
SECURITIES, SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE 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.
APRIL 4, 1997
<PAGE>
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus and Prospectus
Supplement when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PROSPECTUS SUPPLEMENT OR CURRENT REPORT ON FORM 8-K
The Prospectus Supplement or Current Report on Form 8-K relating to the
Securities of each Series to be offered hereunder will, among other things,
set forth with respect to such Securities, as appropriate: (i) a description
of the class or classes of Securities and the Pass-Through Rate or method of
determining the rate or the amount of interest, if any, to be passed through
to each such class; (ii) the aggregate principal amount and Distribution Dates
relating to such Series and, if applicable, the initial and final scheduled
Distribution Dates for each class; (iii) information as to the assets
comprising the Trust Fund, including the general characteristics of the Trust
Fund Assets included therein and, if applicable, the insurance policies,
surety bonds, guaranties, letters of credit or other instruments or agreements
included in the Trust Fund or otherwise, and the amount and source of any
reserve account; (iv) the circumstances, if any, under which the Trust Fund
may be subject to early termination; (v) the method used to calculate the
amount of principal to be distributed with respect to each class of
Securities; (vi) the order of application of distributions to each of the
classes within such Series, whether sequential, pro rata, or otherwise; (vii)
the Distribution Dates with respect to such Series; (viii) additional
information with respect to the method of distribution of such Securities;
(ix) whether one or more REMIC elections will be made and designation of the
regular interests and residual interests; (x) the aggregate original
percentage ownership interest in the Trust Fund to be evidenced by each class
of Securities; (xi) information as to the Trustee; (xii) information as to the
nature and extent of subordination with respect to any class of Securities
that is subordinate in right of payment to any other class; and (xiii)
information as to the Master Servicer.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by the Depositor with respect to a Trust Fund pursuant
to Section 13(a), 14 or 15(d) of the Securities and Exchange Act of 1934, as
amended (the "Exchange Act") prior to the termination of the offering of
Securities evidencing interests therein. Upon request by any person to whom
this Prospectus is delivered in connection with the offering of one or more
classes of Securities, the Depositor will provide or cause to be provided
without charge a copy of any such documents and/or reports incorporated herein
by reference, in each case to the extent such documents or reports relate to
such classes of Securities, other than the exhibits to such documents (unless
such exhibits are specifically incorporated by reference in such documents).
Requests to the Depositor should be directed in writing to: 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,
2
<PAGE>
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".
3
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related
Prospectus Supplement with respect to the Series offered thereby and to the
related Agreement (as such term is defined below) which will be prepared in
connection with each Series of Securities. Unless otherwise specified,
capitalized terms used and not defined in this Summary of Terms have the
meanings given to them in this Prospectus and in the related Prospectus
Supplement.
Title of Securities......... Asset Backed Certificates (the "Certificates")
and Asset Backed Notes (the "Notes" and, together
with the Certificates, the "Securities"), which
are issuable in Series.
Depositor................... Financial Asset Securities Corp., a Delaware cor-
poration, 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 Pro-
spectus 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 Agree-
ments--Certain Matters Regarding the Master
Servicer and the Depositor".
Trust Fund Assets........... Assets of the Trust Fund for a Series of Securi-
ties will include certain assets (the "Trust Fund
Assets") which will primarily consist of (a)
Loans or (b) Private Asset Backed Securities, to-
gether with payments in respect of such Trust
Fund Assets and certain other accounts, obliga-
tions 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 re-
lated 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 pur-
chase additional Loans during the period speci-
fied 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 Im-
provement Contracts"). The Home Equity Loans and
the Home Improvement Contracts are collectively
4
<PAGE>
referred to herein as the "Loans". All Loans will
have been purchased by the Depositor, either di-
rectly or through an affiliate, from one or more
Sellers.
As specified in the related Prospectus Supple-
ment, the Home Equity Loans will, and the Home
Improvement Contracts may, be secured by mort-
gages or deeds of trust or other similar security
instruments creating a lien on a mortgaged prop-
erty (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 re-
lated 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) collateral-
ized obligations secured by such loans. Private
Asset Backed Securities may include stripped se-
curities representing an undivided interest in
all or a part of either the principal distribu-
tions (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. Al-
though individual loans underlying a Private As-
set Backed Security may be insured or guaranteed
by the United States or an agency or instrumen-
tality 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 di-
rectly to the Trustee as registered owner of such
Private Asset Backed Securities. See "The Trust
Fund--Private Asset Backed Securities".
Description of the Each Security will represent a beneficial owner-
Securities................. ship interest in, or will be secured by the as-
sets 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 is-
sued in one or more classes as specified in the
related Prospectus Supplement. A Series of Secu-
rities may include one or more classes of senior
Securities (collectively, the "Senior Securi-
ties") and one or more classes of subordinate Se-
curities (collectively, the "Subordinated Securi-
ties"). Certain Series or classes of Securities
may be covered by insurance policies or other
forms of credit enhancement, in each case as de-
scribed herein and in the related Prospectus Sup-
plement.
One or more classes of Securities of each Series
(i) may be entitled to receive distributions al-
locable 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 subor-
dinated in the right to receive distributions of
scheduled payments of principal,
5
<PAGE>
prepayments of principal, interest or any combi-
nation 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 en-
titled to receive distributions in accordance
with a schedule or formula or on the basis of
collections from designated portions of the as-
sets in the related Trust Fund; (vi) as to Secu-
rities entitled to distributions allocable to in-
terest, 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 en-
titled to distributions allocable to interest,
may be entitled to distributions allocable to in-
terest only after the occurrence of events speci-
fied in the related Prospectus Supplement and may
accrue interest until such events occur, in each
case as specified in the related Prospectus Sup-
plement. The timing and amounts of such distribu-
tions may vary among classes, over time, or oth-
erwise as specified in the related Prospectus
Supplement.
Distributions on the Distributions on the Securities entitled thereto
Securities................. will be made monthly or at such other intervals
and on the dates specified in the related Pro-
spectus 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 Secu-
rities 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 distribu-
tions among Securityholders of a single class
shall be set forth in the related Prospectus Sup-
plement.
Unless otherwise specified in the related Pro-
spectus Supplement, the aggregate original prin-
cipal balance of the Securities will not exceed
the aggregate distributions allocable to princi-
pal that such Securities will be entitled to re-
ceive. 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 ag-
gregate 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 Sup-
plement (the "Pass-Through Rate"). If specified
in the related Prospectus Supplement, the aggre-
gate 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 av-
erage, notional amount or other basis, in each
case as described in the related Prospectus Sup-
plement.
6
<PAGE>
Compensating Interest....... If so specified in the related Prospectus Supple-
ment, the Master Servicer will be required to re-
mit 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 re-
ceived 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' inter-
est 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 ac-
crues, over (b) the amount of interest actually
received on such Loan during such Due Period, net
of the Master Servicer's servicing fee or (ii)
such other amount as described in the related
Prospectus Supplement. See "Description of the
Securities--Compensating Interest".
Credit Enhancement..........
The assets in a Trust Fund or the Securities of
one or more classes in the related Series may
have the benefit of one or more types of credit
enhancement as described in the related Prospec-
tus Supplement. The protection against losses af-
forded by any such credit support may be limited.
The type, characteristics and amount of credit
enhancement will be determined based on the char-
acteristics 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 Se-
ries. See "Credit Enhancement."
A. Subordination............ The rights of the holders of the Subordinated Se-
curities 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 Se-
ries to the extent described in the related Pro-
spectus Supplement. This subordination is in-
tended to enhance the likelihood of regular re-
ceipt by holders of Senior Securities of the full
amount of monthly payments of principal and in-
terest 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 avail-
able 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 speci-
fied in the related Prospectus Supplement, subor-
dination 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
7
<PAGE>
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 Subordi-
nated 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 distribu-
tions to holders of Securities of a particular
class or released from the related Reserve Ac-
count.
C. Special Hazard Insurance Certain classes of Securities may have the bene-
Policy..................... fit 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 re-
lated 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 re-
lated Prospectus Supplement.
E. Loan Pool Insurance A mortgage pool insurance policy or policies may
Policy..................... be obtained and maintained for Loans relating to
any Series, which shall be limited in scope, cov-
ering defaults on the related Loans in an initial
amount equal to a specified percentage of the ag-
gregate principal balance of all Loans included
in the Pool as of the Cut-off Date.
F. FHA Insurance............ If specified in the related Prospectus Supple-
ment, (i) all or a portion of the Loans in a Pool
may be insured by the Federal Housing Administra-
tion (the "FHA") and/or (ii) all or a portion of
the Loans may be partially guaranteed by the De-
partment of Veterans' Affairs (the "VA"). See
"Certain Legal Considerations--Title I Program".
G. Cross-Support............ If specified in the related Prospectus Supple-
ment, the beneficial ownership of separate groups
of assets included in a Trust Fund may be evi-
denced by separate classes of the related Series
of Securities. In such case, credit support may
be provided by a cross-support feature which re-
quires 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.
8
<PAGE>
If specified in the related Prospectus Supple-
ment, 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 de-
faults 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 de-
linquent interest and/or principal payments on
such Loan until the date, as specified in the re-
lated Prospectus Supplement, following the date
on which the related Property is sold at a fore-
closure sale or the related Loan is otherwise
liquidated. Any obligation to make Advances may
be subject to limitations as specified in the re-
lated 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 Supple-
ment.
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--Ad-
vances."
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 Se-
curities will specify which, if any, of the clas-
ses of Securities offered thereby constitute
"mortgage related securities" for purposes of the
Secondary Mort-
9
<PAGE>
gage 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 invest-
ments by such institutional investors. Institu-
tions whose investment activities are subject to
review by federal or state authorities should
consult with their counsel or the applicable au-
thorities to determine whether an investment in a
particular class of Securities (whether or not
such class constitutes a "mortgage related secu-
rity") complies with applicable guidelines, pol-
icy statements or restrictions. See "Legal In-
vestment."
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 es-
tate 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 Conse-
quences".
ERISA Considerations........
A fiduciary of any employee benefit plan or other
retirement plan or arrangement subject to the Em-
ployee Retirement Income Security Act of 1974, as
amended ("ERISA"), or the Code should carefully
review with its legal advisors whether the pur-
chase or holding of Securities could give rise to
a transaction prohibited or not otherwise permis-
sible under ERISA or the Code. See "ERISA Consid-
erations". Certain classes of Securities may not
be transferred unless the Trustee and the Deposi-
tor 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".
10
<PAGE>
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".
11
<PAGE>
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,
12
<PAGE>
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."
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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.
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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
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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 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.
THE TRUST FUND
The Certificates of each Series will represent interests in the assets of
the related Trust Fund, and the Notes of each Series will be secured by the
pledge of the assets of the related Trust Fund. The Trust Fund for each Series
will be held by the Trustee for the benefit of the related Securityholders.
Each Trust Fund will consist of certain assets (the "Trust Fund Assets")
consisting of a pool (each, a "Pool") comprised of Loans or Private Asset
Backed Securities, in each case as specified in the related Prospectus
Supplement, together with payments in respect of such Trust Fund Assets and
certain other accounts, obligations or agreements, in each case as specified
in the related Prospectus Supplement./1/ The Pool will be created on the first
day of the month of the issuance of the related Series of Securities or such
other date specified in the Prospectus Supplement (the "Cut-off Date"). The
Securities will be entitled to payment from the assets of the related Trust
Fund or Funds or other assets pledged for the benefit of the Securityholders
as specified in the related Prospectus Supplement and will not be entitled to
payments in respect of the assets of any other trust fund established by the
Depositor.
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/1Whenever/the terms "Pool", "Certificates" and "Notes" are used in this
Prospectus, such terms will be deemed to apply, unless the context indicates
otherwise, to one specific Pool and the Certificates representing certain
undivided interests in, or Notes secured by the assets of, a single trust
fund (the "Trust Fund") consisting primarily of the Loans in such Pool.
Similarly, the term "Pass-Through Rate" will refer to the Pass-Through Rate
borne by the Certificates or Notes of one specific Series and the term
"Trust Fund" will refer to one specific Trust Fund.
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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.
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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.
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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
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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.
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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.
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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
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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.
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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.
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GENERAL
Unless otherwise specified in the related Prospectus Supplement, the
Certificates of each Series will be issued in book-entry or fully registered
form, in the authorized denominations specified in the related Prospectus
Supplement, will evidence specified beneficial ownership interests in the
related Trust Fund created pursuant to each Agreement and will not be entitled
to payments in respect of the assets included in any other Trust Fund
established by the Depositor. Unless otherwise specified in the related
Prospectus Supplement, the Notes of each Series will be issued in book-entry
or fully registered form, in the authorized denominations specified in the
related Prospectus Supplement, will be secured by the pledge of the assets of
the related Trust Fund and will not be entitled to payments in respect of the
assets included in any other Trust Fund established by the Depositor. The
Securities will not represent obligations of the Depositor or any affiliate of
the Depositor. Certain of the Loans may be guaranteed or insured as set forth
in the related Prospectus Supplement. Each Trust Fund will consist of, to the
extent provided in the Agreement, (i) the Trust Fund Assets, as from time to
time are subject to the related Agreement (exclusive of any amounts specified
in the related Prospectus Supplement ("Retained Interest")), including all
payments of interest and principal received with respect to the Loans after
the Cut-off Date (to the extent not applied in computing the Cut-off Date
Principal Balance); (ii) such assets as from time to time are required to be
deposited in the related Security Account, as described below under "The
Agreements--Payments on Loans; Deposits to Security Account"; (iii) property
which secured a Loan and which is acquired on behalf of the Securityholders by
foreclosure or deed in lieu of foreclosure and (iv) any insurance policies or
other forms of credit enhancement required to be maintained pursuant to the
related Agreement. If so specified in the related Prospectus Supplement, a
Trust Fund may also include one or more of the following: reinvestment income
on payments received on the Trust Fund Assets, a Reserve Account, a mortgage
pool insurance policy, a Special Hazard Insurance Policy, a Bankruptcy Bond,
one or more letters of credit, a surety bond, guaranties or similar
instruments or other agreements.
Each Series of Securities will be issued in one or more classes. Each class
of Securities of a Series will evidence beneficial ownership of a specified
percentage (which may be 0%) or portion of future interest payments and a
specified percentage (which may be 0%) or portion of future principal payments
on the Trust Fund Assets in the related Trust Fund. A Series of Securities may
include one or more classes that are senior in right to payment to one or more
other classes of Securities of such Series. One or more classes of Securities
of a Series may be entitled to receive distributions of principal, interest or
any combination thereof. Distributions on one or more classes of a Series of
Securities may be made prior to one or more other classes, after the
occurrence of specified events, in accordance with a schedule or formula, on
the basis of collections from designated portions of the Trust Fund Assets in
the related Trust Fund or on a different basis, in each case as specified in
the related Prospectus Supplement. The timing and amounts of such
distributions may vary among classes or over time as specified in the related
Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal
only or interest only) on the related Securities will be made by the Trustee
on each Distribution Date (i.e., monthly or at such other intervals and on the
dates as are specified in the Prospectus Supplement) in proportion to the
percentages specified in the related Prospectus Supplement. Distributions will
be made to the persons in whose names the Securities are registered at the
close of business on the dates specified in the related Prospectus Supplement
(each, a "Record Date"). Distributions will be made in the manner specified in
the Prospectus Supplement to the persons entitled thereto at the address
appearing in the register maintained for holders of Securities (the "Security
Register"); provided, however, that the final distribution in retirement of
the Securities will be made only upon presentation and surrender of the
Securities at the office or agency of the Trustee or other person specified in
the notice to Securityholders of such final distribution.
The Securities will be freely transferable and exchangeable at the Corporate
Trust Office of the Trustee as set forth in the related Prospectus Supplement.
No service charge will be made for any registration of exchange or transfer of
Securities of any Series but the Trustee may require payment of a sum
sufficient to cover any related tax or other governmental charge.
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Under current law the purchase and holding of a class of Securities entitled
only to a specified percentage of payments of either interest or principal or
a notional amount of other interest or principal on the related Loans or a
class of Securities entitled to receive payments of interest and principal on
the Loans only after payments to other classes or after the occurrence of
certain specified events by or on behalf of any employee benefit plan or other
retirement arrangement (including individual retirement accounts and
annuities, Keogh plans and collective investment funds in which such plans,
accounts or arrangements are invested) subject to provisions of ERISA or the
Code may result in prohibited transactions within the meaning of ERISA and the
Code. See "ERISA Considerations". Unless otherwise specified in the related
Prospectus Supplement, the transfer of Securities of such a class will not be
registered unless the transferee (i) represents that it is not, and is not
purchasing on behalf of, any such plan, account or arrangement or (ii)
provides an opinion of counsel satisfactory to the Trustee and the Depositor
that the purchase of Securities of such a class by or on behalf of such plan,
account or arrangement is permissible under applicable law and will not
subject the Trustee, the Master Servicer or the Depositor to any obligation or
liability in addition to those undertaken in the Agreements.
As to each Series, an election may be made to treat the related Trust Fund
or designated portions thereof as a "real estate mortgage investment conduit"
or "REMIC" as defined in the Code. The related Prospectus Supplement will
specify whether a REMIC election is to be made. Alternatively, the Agreement
for a Series may provide that a REMIC election may be made at the discretion
of the Depositor or the Master Servicer and may only be made if certain
conditions are satisfied. As to any such Series, the terms and provisions
applicable to the making of a REMIC election, as well as any material federal
income tax consequences to Securityholders not otherwise described herein,
will be set forth in the related Prospectus Supplement. If such an election is
made with respect to a Series, one of the classes will be designated as
evidencing the sole class of "residual interests" in the related REMIC, as
defined in the Code. All other classes of Securities in such a Series will
constitute "regular interests" in the related REMIC, as defined in the Code.
As to each Series with respect to which a REMIC election is to be made, the
Master Servicer or a holder of the related residual certificate will be
obligated to take all actions required in order to comply with applicable laws
and regulations and will be obligated to pay any prohibited transaction taxes.
The Master Servicer, to the extent set forth in the related Prospectus
Supplement, will be entitled to reimbursement for any such payment from the
assets of the Trust Fund or from any holder of the related residual
certificate.
DISTRIBUTIONS ON SECURITIES
General. In general, the method of determining the amount of distributions
on a particular Series of Securities will depend on the type of credit
support, if any, that is used with respect to such Series. See "Credit
Enhancement". Set forth below are descriptions of various methods that may be
used to determine the amount of distributions on the Securities of a
particular Series. The Prospectus Supplement for each Series of Securities
will describe the method to be used in determining the amount of distributions
on the Securities of such Series.
Distributions allocable to principal and interest on the Securities will be
made by the Trustee out of, and only to the extent of, funds in the related
Security Account, including any funds transferred from any Reserve Account (a
"Reserve Account"). As between Securities of different classes and as between
distributions of principal (and, if applicable, between distributions of
Principal Prepayments, as defined below, and scheduled payments of principal)
and interest, distributions made on any Distribution Date will be applied as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, the distributions to any class of
Securities will be made pro rata to all Securityholders of that class.
Available Funds. All distributions on the Securities of each Series on each
Distribution Date will be made from the Available Funds described below, in
accordance with the terms described in the related Prospectus Supplement and
specified in the Agreement. Unless otherwise provided in the related
Prospectus Supplement, "Available Funds" for each Distribution Date will equal
the sum of the following amounts:
(i) the aggregate of all previously undistributed payments on account of
principal (including Principal Prepayments, if any, and prepayment
penalties, if so provided in the related Prospectus Supplement) and
interest on the Loans in the related Trust Fund (including Liquidation
Proceeds and Insurance Proceeds and
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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
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principal balance of a Security will not evidence an interest in or
entitlement to distributions allocable to principal but will be used solely
for convenience in expressing the calculation of interest and for certain
other purposes.
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending two
or more days prior to a Distribution Date, the effective yield to
Securityholders will be reduced from the yield that would otherwise be
obtainable if interest payable on the Security were to accrue through the day
immediately preceding each Distribution Date, and the effective yield (at par)
to Securityholders will be less than the indicated coupon rate.
With respect to any class of Accrual Securities, if specified in the related
Prospectus Supplement, any interest that has accrued but is not paid on a
given Distribution Date will be added to the aggregate Security Principal
Balance of such class of Securities on that Distribution Date. Distributions
of interest on any class of Accrual Securities will commence only after the
occurrence of the events specified in the related Prospectus Supplement. Prior
to such time, the beneficial ownership interest of such class of Accrual
Securities in the Trust Fund, as reflected in the aggregate Security Principal
Balance of such class of Accrual Securities, will increase on each
Distribution Date by the amount of interest that accrued on such class of
Accrual Securities during the preceding interest accrual period but that was
not required to be distributed to such class on such Distribution Date. Any
such class of Accrual Securities will thereafter accrue interest on its
outstanding Security Principal Balance as so adjusted.
Distributions of Principal. The related Prospectus Supplement will specify
the method by which the amount of principal to be distributed on the
Securities on each Distribution Date will be calculated and the manner in
which such amount will be allocated among the classes of Securities entitled
to distributions of principal. The aggregate Security Principal Balance of any
class of Securities entitled to distributions of principal generally will be
the aggregate original Security Principal Balance of such class of Securities
specified in such Prospectus Supplement, reduced by all distributions reported
to the holders of such Securities as allocable to principal and, (i) in the
case of Accrual Securities, increased by all interest accrued but not then
distributable on such Accrual Securities and (ii) in the case of adjustable
rate Securities, subject to the effect of negative amortization, if
applicable.
If so provided in the related Prospectus Supplement, one or more classes of
Securities will be entitled to receive all or a disproportionate percentage of
the payments of principal which are received from borrowers in advance of
their scheduled due dates and are not accompanied by amounts representing
scheduled interest due after the month of such payments ("Principal
Prepayments") in the percentages and under the circumstances or for the
periods specified in such Prospectus Supplement. Any such allocation of
Principal Prepayments to such class or classes of Securityholders will have
the effect of accelerating the amortization of such Securities while
increasing the interests evidenced by other Securities in the Trust Fund.
Increasing the interests of the other Securities relative to that of certain
Securities allocated by the principal prepayments is intended to preserve the
availability of the subordination provided by such other Securities. See
"Credit Enhancement--Subordination".
Unscheduled Distributions. The Securities will be subject to receipt of
distributions before the next scheduled Distribution Date under the
circumstances and in the manner described below and in such Prospectus
Supplement. If applicable, the Trustee will be required to make such
unscheduled distributions on the day and in the amount specified in the
related Prospectus Supplement if, due to substantial payments of principal
(including Principal Prepayments) on the Trust Fund Assets, the Trustee or the
Master Servicer determines that the funds available or anticipated to be
available from the Security Account and, if applicable, any Reserve Account,
may be insufficient to make required distributions on the Securities on such
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, the amount of any such unscheduled distribution that is allocable
to principal will not exceed the amount that would otherwise have been
required to be distributed as principal on the Securities on the next
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, the unscheduled distributions will include interest at the
applicable Pass-Through Rate (if any) on the amount of the unscheduled
distribution allocable to principal for the period and to the date specified
in such Prospectus Supplement.
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Unless otherwise specified in the related Prospectus Supplement, the
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
Securities would have been made on the next Distribution Date, and with
respect to Securities of the same class, unscheduled distributions of
principal will be made on the same basis as such distributions would have been
made on the next Distribution Date on a pro rata basis. Notice of any
unscheduled distribution will be given by the Trustee prior to the date of
such distribution.
ADVANCES
To the extent provided in the related Prospectus Supplement, the Master
Servicer will be required to advance on or before each Distribution Date (from
its own funds, funds advanced by Sub-Servicers or Support Servicers or funds
held in the Security Account for future distributions to the holders of such
Securities), an amount equal to the aggregate of payments of interest and/or
principal that were delinquent on the related Determination Date and were not
advanced by any Sub-Servicer, subject to the Master Servicer's determination
that such advances will be recoverable out of late payments by borrowers,
Liquidation Proceeds, Insurance Proceeds or otherwise. In addition, to the
extent provided in the related Prospectus Supplement, a cash account may be
established to provide for Advances to be made in the event of certain Trust
Fund Assets payment defaults or collection shortfalls.
In making Advances, the Master Servicer will endeavor to maintain a regular
flow of scheduled interest and principal payments to holders of the
Securities, rather than to guarantee or insure against losses. If Advances are
made by the Master Servicer from cash being held for future distribution to
Securityholders, the Master Servicer will replace such funds on or before any
future Distribution Date to the extent that funds in the applicable Security
Account on such Distribution Date would be less than the amount required to be
available for distributions to Securityholders on such date. Any Master
Servicer funds advanced will be reimbursable to the Master Servicer out of
recoveries on the specific Loans with respect to which such Advances were made
(e.g., late payments made by the related borrower, any related Insurance
Proceeds, Liquidation Proceeds or proceeds of any Loan purchased by a Sub-
Servicer or a Seller under the circumstances described hereinabove). Advances
by the Master Servicer (and any advances by a Sub-Servicer or a Support
Servicer) also will be reimbursable to the Master Servicer (or Sub-Servicer or
a Support Servicer) from cash otherwise distributable to Securityholders
(including the holders of Senior Securities) to the extent that the Master
Servicer determines that any such Advances previously made are not ultimately
recoverable as described above. To the extent provided in the related
Prospectus Supplement, the Master Servicer also will be obligated to make
Advances, to the extent recoverable out of Insurance Proceeds, Liquidation
Proceeds or otherwise, in respect of certain taxes and insurance premiums not
paid by borrowers on a timely basis. Funds so advanced are reimbursable to the
Master Servicer to the extent permitted by the Agreement. The obligations of
the Master Servicer to make advances may be supported by a cash advance
reserve fund, a surety bond or other arrangement, in each case as described in
such Prospectus Supplement.
The Master Servicer or Sub-Servicer may enter into an agreement (a "Support
Agreement") with a Support Servicer pursuant to which the Support Servicer
agrees to provide funds on behalf of the Master Servicer or Sub-Servicer in
connection with the obligation of the Master Servicer or Sub-Servicer, as the
case may be, to make Advances. The Support Agreement will be delivered to the
Trustee and the Trustee will be authorized to accept a substitute Support
Agreement in exchange for an original Support Agreement, provided that such
substitution of the Support Agreement will not adversely affect the rating or
ratings then in effect on the Securities.
Unless otherwise specified in the related Prospectus Supplement, in the
event the Master Servicer, a Sub-Servicer or a Support Servicer fails to make
a required Advance, the Trustee will be obligated to make such Advance in its
capacity as successor servicer. If the Trustee makes such an Advance, it will
be entitled to be reimbursed for such Advance to the same extent and degree as
the Master Servicer, a Sub-Servicer or a Support Servicer is entitled to be
reimbursed for Advances. See "Description of the Securities--Distributions on
Securities" herein.
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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.
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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
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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
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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.
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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
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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.
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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
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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.
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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
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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.
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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,
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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
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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
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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.
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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;
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(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
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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
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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
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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
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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
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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.
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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
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to make payments required in the Agreement. The assets of the Trust Fund will
be sold only under the circumstances and in the manner specified in the
related Prospectus Supplement.
So long as an Event of Default under an Agreement remains unremedied, the
Depositor or the Trustee may, and at the direction of holders of Securities of
any class evidencing not less than 51% of the aggregate Percentage Interests
constituting such class and under such other circumstances as may be specified
in such Agreement, the Trustee shall, terminate all of its rights and
obligations of the Master Servicer under the Agreement relating to such Trust
Fund and in and to the Trust Fund Assets, whereupon the Trustee will succeed
to all of the responsibilities, duties and liabilities of the Master Servicer
under the Agreement, including, if specified in the related Prospectus
Supplement, the obligation to make advances, and will be entitled to similar
compensation arrangements. In the event that the Trustee is unwilling or
unable so to act, it may appoint, or petition a court of competent
jurisdiction for the appointment of, a mortgage loan servicing institution
with a net worth of a least $10,000,000 to act as successor to the Master
Servicer under the Agreement. Pending such appointment, the Trustee is
obligated to act in such capacity. The Trustee and any such successor may
agree upon the servicing compensation to be paid, which in no event may be
greater than the compensation payable to the Master Servicer under the
Agreement.
No Securityholder, solely by virtue of such holder's status as a
Securityholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Securities of any class of such Series evidencing not less than 25% of the
aggregate Percentage Interests constituting such class have made written
request upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity, and
the Trustee for 60 days has neglected or refused to institute any such
proceeding.
Indenture. Except as otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for thirty (30) days or more in the payment of any
principal of or interest on any Note of such Series; (ii) failure to perform
any other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of sixty (60) days after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iii) any representation or warranty made by the Depositor or the Trust Fund
in the Indenture or in any certificate or other writing delivered pursuant
thereto or in connection therewith with respect to or affecting such Series
having been incorrect in a material respect as of the time made, and such
breach is not cured within sixty (60) days after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iv) certain events of bankruptcy, insolvency, receivership or liquidation of
the Depositor or the Trust Fund; or (v) any other Event of Default provided
with respect to Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Trustee or the holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount (or, if the Notes of that Series have a Pass-
Through Rate of 0%, such portion of the principal amount as may be specified
in the terms of that Series, as provided in the related Prospectus Supplement)
of all the Notes of such Series to be due and payable immediately. Such
declaration may, under certain circumstances, be rescinded and annulled by the
holders of more than 50% of the Percentage Interests of the Notes of such
Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Trustee
may, in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration
of acceleration if such collateral continues to provide sufficient funds for
the payment of principal of and interest on the Notes of such Series as they
would have become due if there had not been such a declaration. In addition,
the Trustee may not sell or otherwise liquidate the collateral securing the
Notes of a Series following an Event of Default, other than a default in the
payment of any principal or interest on any Note of such Series for thirty
(30) days or more, unless (a) the holders of 100% of the
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Percentage Interests of the Notes of such Series consent to such sale, (b) the
proceeds of such sale or liquidation are sufficient to pay in full the
principal of and accrued interest, due and unpaid, on the outstanding Notes of
such Series at the date of such sale or (c) the Trustee determines that such
collateral would not be sufficient on an ongoing basis to make all payments on
such Notes as such payments would have become due if such Notes had not been
declared due and payable, and the Trustee obtains the consent of the holders
of 66 2/3% of the Percentage Interests of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default for thirty (30) days or more in the
payment of principal of or interest on the Notes of a Series, the Indenture
provides that the Trustee will have a prior lien on the proceeds of any such
liquidation for unpaid fees and expenses. As a result, upon the occurrence of
such an Event of Default, the amount available for distribution to the
Noteholders would be less than would otherwise be the case. However, the
Trustee may not institute a proceeding for the enforcement of its lien except
in connection with a proceeding for the enforcement of the lien of the
Indenture for the benefit of the Noteholders after the occurrence of such an
Event of Default.
Except as otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a Series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par
may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount which is
unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with
respect to a Series of Notes, the Trustee shall be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of Notes of such Series, unless such holders
offered to the Trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying
with such request or direction. Subject to such provisions for indemnification
and certain limitations contained in the Indenture, the holders of a majority
of the then aggregate outstanding amount of the Notes of such Series shall
have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee with respect to the Notes of such Series, and
the holders of a majority of the then aggregate outstanding amount of the
Notes of such Series may, in certain cases, waive any default with respect
thereto, except a default in the payment of principal or interest or a default
in respect of a covenant or provision of the Indenture that cannot be modified
without the waiver or consent of all the holders of the outstanding Notes of
such Series affected thereby.
AMENDMENT
Except as otherwise specified in the related Prospectus Supplement, each
Agreement may be amended by the Depositor, the Master Servicer and the
Trustee, without the consent of any of the Securityholders, (i) to cure any
ambiguity; (ii) to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein; or (iii) to make
any other revisions with respect to matters or questions arising under the
Agreement which are not inconsistent with the provisions thereof, provided
that such action will not adversely affect in any material respect the
interests of any Securityholder. In addition, to the extent provided in the
related Agreement, an Agreement may be amended without the consent of any of
the Securityholders, to change the manner in which the Security Account is
maintained, provided that any such change does not adversely affect the then
current rating on the class or classes of Securities of such Series that have
been rated. In addition, if a REMIC election is made with respect to a Trust
Fund, the related Agreement may be amended to modify, eliminate or add to any
of its provisions to such extent as may be necessary to maintain the
qualification of the related Trust Fund as a REMIC, provided that the Trustee
has received an opinion of counsel to the effect that such action is necessary
or helpful to maintain such qualification. Except as otherwise specified in
the related Prospectus Supplement, each 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
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rights of the holders of the related Securities; provided, however, that no
such amendment may (i) reduce in any manner the amount of or delay the timing
of, payments received on Loans which are required to be distributed on any
Security without the consent of the holder of such Security, or (ii) reduce
the aforesaid percentage of Securities of any class of holders which are
required to consent to any such amendment without the consent of the holders
of all Securities of such class covered by such Agreement then outstanding. If
a REMIC election is made with respect to a Trust Fund, the Trustee will not be
entitled to consent to an amendment to the related Agreement without having
first received an opinion of counsel to the effect that such amendment will
not cause such Trust Fund to fail to qualify as a REMIC.
TERMINATIONS; OPTIONAL TERMINATION
Pooling and Servicing Agreement; Trust Agreement. Unless otherwise specified
in the related Agreement, the obligations created by each Pooling and
Servicing Agreement and Trust Agreement for each Series of Securities will
terminate upon the payment to the related Securityholders of all amounts held
in the Security Account or by the Master Servicer and required to be paid to
them pursuant to such Agreement following the later of (i) the final payment
of or other liquidation of the last of the Trust Fund Assets subject thereto
or the disposition of all property acquired upon foreclosure of any such Trust
Fund Assets remaining in the Trust Fund and (ii) the purchase by the Master
Servicer or, if REMIC treatment has been elected and if specified in the
related Prospectus Supplement, by the holder of the residual interest in the
REMIC (see "Certain Material Federal Income Tax Consequences" below), from the
related Trust Fund of all of the remaining Trust Fund Assets and all property
acquired in respect of such Trust Fund Assets.
Unless otherwise specified by the related Prospectus Supplement, any such
purchase of Trust Fund Assets and property acquired in respect of Trust Fund
Assets evidenced by a Series of Securities will be made at the option of the
Master Servicer or, if applicable, such holder of the REMIC residual interest,
at a price, and in accordance with the procedures, specified in the related
Prospectus Supplement. The exercise of such right will effect early retirement
of the Securities of that Series, but the right of the Master Servicer or, if
applicable, such holder of the REMIC residual interest, to so purchase is
subject to the principal balance of the related Trust Fund Assets being less
than the percentage specified in the related Prospectus Supplement of the
aggregate principal balance of the Trust Fund Assets at the Cut-off Date for
the Series. The foregoing is subject to the provision that if a REMIC election
is made with respect to a Trust Fund, any repurchase pursuant to clause (ii)
above will be made only in connection with a "qualified liquidation" of the
REMIC within the meaning of Section 860F(g)(4) of the Code.
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes
of such Series or, with certain limitations, upon deposit with the Trustee of
funds sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect
of the Notes of such Series (except for certain obligations relating to
temporary Notes and exchange of Notes, to register the transfer of or exchange
Notes of such Series, to replace stolen, lost or mutilated Notes of such
Series, to maintain paying agencies and to hold monies for payment in trust)
upon the deposit with the Trustee, in trust, of money and/or direct
obligations of or obligations guaranteed by the United States of America which
through the payment of interest and principal in respect thereof in accordance
with their terms will provide money in an amount sufficient to pay the
principal of and each installment of interest on the Notes of such Series on
the last scheduled Distribution Date for such Notes and any installment of
interest on such Notes in accordance with the terms of the Indenture and the
Notes of such Series. In the event of any such defeasance and discharge of
Notes of such Series, holders of Notes of such Series would be able to look
only to such money and/or direct obligations for payment of principal and
interest, if any, on their Notes until maturity.
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THE TRUSTEE
The Trustee under each Agreement will be named in the applicable Prospectus
Supplement. The commercial bank or trust company serving as Trustee may have
normal banking relationships with the Depositor, the Master Servicer and any
of their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries, which are general in nature, of
certain legal matters relating to the Loans. Because such legal aspects are
governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Loans is situated. The summaries are qualified in their
entirety by reference to the applicable federal laws and the appropriate laws
of the states in which Loans may be originated.
GENERAL
The Loans for a Series may be secured by deeds of trust, mortgages, security
deeds or deeds to secure debt, depending upon the prevailing practice in the
state in which the property subject to the loan is located. A mortgage creates
a lien upon the real property encumbered by the mortgage, which lien is
generally not prior to the lien for real estate taxes and assessments.
Priority between mortgages depends on their terms and generally on the order
of recording with a state or county office. There are two parties to a
mortgage, the mortgagor, who is the borrower and owner of the mortgaged
property, and the mortgagee, who is the lender. Under the mortgage instrument,
the mortgagor delivers to the mortgagee a note or bond and the mortgage.
Although a deed of trust is similar to a mortgage, a deed of trust formally
has three parties, the borrower-property owner called the trustor (similar to
a mortgagor), a lender (similar to a mortgagee) called the beneficiary, and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the obligation. A
security deed and a deed to secure debt are special types of deeds which
indicate on their face that they are granted to secure an underlying debt. By
executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until such time as the underlying debt is repaid. The trustee's
authority under a deed of trust, the mortgagee's authority under a mortgage
and the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of
the beneficiary.
FORECLOSURE/REPOSSESSION
Foreclosure of a deed of trust is generally accomplished by a non-judicial
sale under a specific provision in the deed of trust which authorizes the
trustee to sell the property at public auction upon any default by the
borrower under the terms of the note or deed of trust. In addition to any
notice requirements contained in a deed of trust, in some states, the trustee
must record a notice of default and send a copy to the borrower-trustor, to
any person who has recorded a request for a copy of any notice of default and
notice of sale, to any successor in interest to the borrower-trustor, to the
beneficiary of any junior deed of trust and to certain other persons. In
general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a statutorily prescribed reinstatement period, cure a
monetary default by paying the entire amount in arrears plus other designated
costs and expenses incurred in enforcing the obligation. Generally, state law
controls the amount of foreclosure expenses and costs, including attorney's
fees, which may be recovered by a lender. After the reinstatement period has
expired without the default having been cured, the borrower or junior
lienholder no longer has the right to reinstate the loan and must pay the loan
in full to prevent the scheduled foreclosure sale. If the deed of trust is not
reinstated, a notice of sale must be posted in a public place and, in most
states, published for a specific period of time in one or more newspapers. In
addition, some state laws require that a copy of the notice of sale be posted
on the property and sent to all parties having an interest in the real
property.
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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.
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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.
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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
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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
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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
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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.
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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
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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
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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.
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Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the
time of approval by the lending institution (as is typically the case with
other federal loan programs). If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the FHA.
In such case, provided that the validity of any lien on the property has not
been impaired, the insurance of the loan under the Title I Program will not be
affected unless such material misstatements of fact or misuse of loan proceeds
was caused by (or was knowingly sanctioned by) the lender or its employees.
Requirements for Title I Loans. The maximum principal amount for Title I
Loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that such maximum
amount does not exceed $25,000 (or the current applicable amount) for a single
family property improvement loan. Generally, the term of a Title I Loan may
not be less than six months nor greater than 20 years and 32 days. A borrower
may obtain multiple Title I Loans with respect to multiple properties, and a
borrower may obtain more than one Title I Loan with respect to a single
property, in each case as long as the total outstanding balance of all Title I
Loans in the same property does not exceed the maximum loan amount for the
type of Title I Loan thereon having the highest permissible loan amount.
Borrower eligibility for a Title I Loan requires that the borrower have at
least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I Loan or a recorded land installment contract for the purchase
of the real property. In the case of a Title I Loan with a total principal
balance in excess of $15,000, if the property is not occupied by the owner,
the borrower must have equity in the property being improved at least equal to
the principal amount of the loan, as demonstrated by a current appraisal. Any
Title I Loan in excess of $7,500 must be secured by a recorded lien on the
improved property which is evidenced by a mortgage or deed of trust executed
by the borrower and all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend such list of items and activities. With respect to any dealer Title I
Loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan, the lender
is required to obtain, promptly upon completion of the improvements but not
later than 6 months after disbursement of the loan proceeds with one 6 month
extension if necessary, a completion certificate, signed by the borrower. The
lender is required to conduct an on-site inspection on any Title I Loan where
the principal obligation is $7,500 or more, and on any direct Title I Loan
where the borrower fails to submit a completion certificate.
FHA Insurance Coverage. Under the Title I Program the FHA establishes an
insurance coverage reserve account for each lender which has been granted a
Title I insurance contract. The amount of insurance coverage in this account
is a maximum of 10% of the amount disbursed, advanced or expended by the
lender in originating or purchasing eligible loans registered with FHA for
Title I insurance, with certain adjustments. The balance in the insurance
coverage reserve account is the maximum amount of insurance claims the FHA is
required to pay. Loans to be insured under the Title I Program will be
registered for insurance by the FHA and the insurance coverage attributable to
such loans will be included in the insurance coverage reserve account for the
originating or purchasing lender following the receipt and acknowledgment by
the FHA of a loan report on the prescribed form pursuant to the Title I
regulations. The FHA charges a fee of 0.50% per annum of the net proceeds (the
original balance) of any eligible loan so reported and acknowledged for
insurance by the originating lender. The FHA bills the lender for the
insurance premium on each insured loan annually, on approximately the
anniversary date of the loan's origination. If an insured loan is prepaid
during the year, FHA will not refund or abate the insurance premium.
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Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect
to loans insured under the lender's contract of insurance by (i) the amount of
the FHA insurance claims approved for payment relating to such insured loans
and (ii) the amount of insurance coverage attributable to insured loans sold
by the lender, and such insurance coverage may be reduced for any FHA
insurance claims rejected by the FHA. The balance of the lender's FHA
insurance coverage reserve account will be further adjusted as required under
Title I or by the FHA, and the insurance coverage therein may be earmarked
with respect to each or any eligible loans insured thereunder, if a
determination is made by the Secretary of HUD that it is in its interest to do
so. Originations and acquisitions of new eligible loans will continue to
increase a lender's insurance coverage reserve account balance by 10% of the
amount disbursed, advanced or expended in originating or acquiring such
eligible loans registered with the FHA for insurance under the Title I
Program. The Secretary of HUD may transfer insurance coverage between
insurance coverage reserve accounts with earmarking with respect to a
particular insured loan or group of insured loans when a determination is made
that it is in the Secretary's interest to do so.
The lender may transfer (except as collateral in a bona fide transaction)
insured loans and loans reported for insurance only to another qualified
lender under a valid Title I contract of insurance. Unless an insured loan is
transferred with recourse or with a guaranty or repurchase agreement, the FHA,
upon receipt of written notification of the transfer of such loan in
accordance with the Title I regulations, will transfer from the transferor's
insurance coverage reserve account to the transferee's insurance coverage
reserve account an amount, if available, equal to 10% of the actual purchase
price or the net unpaid principal balance of such loan (whichever is less).
However, under the Title I Program not more than $5,000 in insurance coverage
shall be transferred to or from a lender's insurance coverage reserve account
during any October 1 to September 30 period without the prior approval of the
Secretary of HUD.
Claims Procedures Under Title I. Under the Title I Program the lender may
accelerate an insured loan following a default on such loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the lender
may either (a) proceed against the property under any security instrument, or
(b) make a claim under the lender's contract of insurance. If the lender
chooses to proceed against the property under a security instrument (or if it
accepts a voluntary conveyance or surrender of the property), the lender may
file an insurance claim only with the prior approval of the Secretary of HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation
of the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims, where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any Title I Loan must be
filed with the FHA no later than 9 months after the date of default of such
loan. Concurrently with filing the insurance claim, the lender shall assign to
the United States of America the lender's entire interest in the loan note (or
a judgment in lien of the note), in any security held and in any claim filed
in any legal proceedings. If, at the time the note is assigned to the United
States, the Secretary has reason to believe that the note is not valid or
enforceable against the borrower, the FHA may deny the claim and reassign the
note to the lender. If either such defect is discovered after the FHA has paid
a claim, the FHA may require the lender to repurchase the paid claim and to
accept a reassignment of the loan note. If the lender subsequently obtains a
valid and enforceable judgment against the borrower, the lender may resubmit a
new insurance claim with an assignment of the judgment. Although the
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FHA may contest any insurance claim and make a demand for repurchase of the
loan at any time up to two years from the date the claim was certified for
payment and may do so thereafter in the event of fraud or misrepresentation on
the part of the lender, the FHA has expressed an intention to limit the period
of time within which it will take such action to one year from the date the
claim was certified for payment.
Under the Title I Program the amount of an FHA insurance claim payment, when
made, is equal to the Claimable Amount, up to the amount of insurance coverage
in the lender's insurance coverage reserve account. For the purposes hereof,
the "Claimable Amount" means an amount equal to 90% of the sum of: (a) the
unpaid loan obligation (net unpaid principal and the uncollected interest
earned to the date of default) with adjustments thereto if the lender has
proceeded against property securing such loan; (b) the interest on the unpaid
amount of the loan obligation from the date of default to the date of the
claim's initial submission for payment plus 15 calendar days (but not to
exceed 9 months from the date of default), calculated at the rate of 7% per
annum; (c) the uncollected court costs; (d) the attorney's fees not to exceed
$500; and (e) the expenses for recording the assignment of the security to the
United States.
OTHER LEGAL CONSIDERATIONS
The Loans are also subject to federal laws, including: (i) Regulation Z,
which requires certain disclosures to the borrowers regarding the terms of the
Loans; (ii) the Equal Opportunity Act and Regulation B promulgated thereunder,
which prohibit discrimination on the basis of age, race, color, sex, religion,
marital status, national origin, receipt of public assistance or the exercise
of any right under the Consumer Credit Protection Act, in the extension of
credit; and (iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
Violations of certain provisions of these federal laws may limit the ability
of the Sellers to collect all or part of the principal of or interest on the
Loans and in addition could subject the Sellers to damages and administrative
enforcement.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of certain anticipated material federal income
tax consequences of the purchase, ownership, and disposition of the Securities
and is based on the opinion of Brown & Wood llp, special counsel to the
Depositor (in such capacity, "Tax Counsel"). The summary is based upon the
provisions of the Code, the regulations promulgated thereunder, including,
where applicable, proposed regulations, and the judicial and administrative
rulings and decisions now in effect, all of which are subject to change or
possible differing interpretations. The statutory provisions, regulations, and
interpretations on which this interpretation is based are subject to change,
and such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances. This summary focuses primarily upon investors who will hold
Securities as "capital assets" (generally, property held for investment)
within the meaning of Section 1221 of the Code. Prospective investors may wish
to consult their own tax advisers concerning the federal, state, local and any
other tax consequences as relates specifically to such investors in connection
with the purchase, ownership and disposition of the Securities.
The federal income tax consequences to holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a real estate mortgage investment conduit ("REMIC") under the
Internal Revenue Code of 1986, as amended (the "Code"); (iii) the Securities
represent an ownership interest in some or all of the assets included in the
Trust Fund for a Series; or (iv) an election is made to treat the Trust Fund
relating to a particular Series of Certificates as a partnership. The
Prospectus Supplement for each Series of Securities will specify how the
Securities will be treated for federal income tax purposes and will discuss
whether a REMIC election, if any, will be made with respect to such Series.
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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
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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
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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
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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
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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
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beginning after December 31, 1990, the amount of itemized deductions otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds the applicable amount (which amount will be adjusted for inflation for
taxable years beginning after 1990) will be reduced by the lesser of (i) 3% of
the excess of adjusted gross income over the applicable amount, or (ii) 80% of
the amount of itemized deductions otherwise allowable for such taxable year.
The reduction or disallowance of this deduction may have a significant impact
on the yield of the Regular Interest Security to such a holder. In general
terms, a single class REMIC is one that either (i) would qualify, under
existing Treasury regulations, as a grantor trust if it were not a REMIC
(treating all interests as ownership interests, even if they would be
classified as debt for federal income tax purposes) or (ii) is similar to such
a trust and which is structured with the principal purpose of avoiding the
single class REMIC rules. Unless otherwise specified in the related Prospectus
Supplement, the expenses of the REMIC will be allocated to holders of the
related residual interest securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, in the opinion of Tax Counsel, a REMIC is not generally subject to
entity-level tax. Rather, the taxable income or net loss of a REMIC is taken
into account by the holders of residual interests. As described above, the
regular interests are generally taxable as debt of the REMIC.
Calculation of REMIC Income. In the opinion of Tax Counsel, the taxable
income or net loss of a REMIC is determined under an accrual method of
accounting and in the same manner as in the case of an individual, with
certain adjustments. In general, the taxable income or net loss will be the
difference between (i) the gross income produced by the REMIC's assets,
including stated interest and any original issue discount or market discount
on loans and other assets, and (ii) deductions, including stated interest and
original issue discount accrued on Regular Interest Securities, amortization
of any premium with respect to Loans, and servicing fees and other expenses of
the REMIC. A holder of a Residual Interest Security that is an individual or a
"pass-through interest holder" (including certain pass-through entities, but
not including real estate investment trusts) will be unable to deduct
servicing fees payable on the loans or other administrative expenses of the
REMIC for a given taxable year, to the extent that such expenses, when
aggregated with such holder's other miscellaneous itemized deductions for that
year, do not exceed two percent of such holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the
Startup Day (generally, the day that the interests are issued). That aggregate
basis will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of Pay-Through Securities
accrue original issue discount (i.e., under the constant yield method taking
into account the Prepayment Assumption). The REMIC will deduct OID on the
Regular Interest Securities in the same manner that the holders of the Regular
Interest Securities include such discount in income, but without regard to the
de minimis rules. See "Taxation of Debt Securities" above. However, a REMIC
that acquires loans at a market discount must include such market discount in
income currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant
yield method. Although the law is somewhat unclear regarding recovery of
premium attributable to loans originated on or before such date, it is
possible that such premium may be recovered in proportion to payments of loan
principal.
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Prohibited Transactions and Contributions Tax. The REMIC will be subject to
a 100% tax on any net income derived from a "prohibited transaction." For this
purpose, net income will be calculated without taking into account any losses
from prohibited transactions or any deductions attributable to any prohibited
transaction that resulted in a loss. In general, prohibited transactions
include: (i) subject to limited exceptions, the sale or other disposition of
any qualified mortgage transferred to the REMIC; (ii) subject to a limited
exception, the sale or other disposition of a cash flow investment; (iii) the
receipt of any income from assets not permitted to be held by the REMIC
pursuant to the Code; or (iv) the receipt of any fees or other compensation
for services rendered by the REMIC. It is anticipated that a REMIC will not
engage in any prohibited transactions in which it would recognize a material
amount of net income. In addition, subject to a number of exceptions, a tax is
imposed at the rate of 100% on amounts contributed to a REMIC after the close
of the three-month period beginning on the Startup Day. The holders of
Residual Interest Securities will generally be responsible for the payment of
any such taxes imposed on the REMIC. To the extent not paid by such holders or
otherwise, however, such taxes will be paid out of the Trust Fund and will be
allocated pro rata to all outstanding classes of Securities of such REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
In the opinion of Tax Counsel, the holder of a Certificate representing a
residual interest (a "Residual Interest Security") will take into account the
"daily portion" of the taxable income or net loss of the REMIC for each day
during the taxable year on which such holder held the Residual Interest
Security. The daily portion is determined by allocating to each day in any
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC for such quarter, and by allocating that amount among the holders (on
such day) of the Residual Interest Securities in proportion to their
respective holdings on such day.
In the opinion of Tax Counsel, the holder of a Residual Interest Security
must report its proportionate share of the taxable income of the REMIC whether
or not it receives cash distributions from the REMIC attributable to such
income or loss. The reporting of taxable income without corresponding
distributions could occur, for example, in certain REMIC issues in which the
loans held by the REMIC were issued or acquired at a discount, since mortgage
prepayments cause recognition of discount income, while the corresponding
portion of the prepayment could be used in whole or in part to make principal
payments on REMIC Regular Interests issued without any discount or at an
insubstantial discount (if this occurs, it is likely that cash distributions
will exceed taxable income in later years). Taxable income may also be greater
in earlier years of certain REMIC issues as a result of the fact that interest
expense deductions, as a percentage of outstanding principal on REMIC Regular
Interest Securities, will typically increase over time as lower yielding
Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond
or instrument.
Limitation on Losses. In the opinion of Tax Counsel, the amount of the
REMIC's net loss that a holder may take into account currently is limited to
the holder's adjusted basis at the end of the calendar quarter in which such
loss arises. A holder's basis in a Residual Interest Security will initially
equal such holder's purchase price, and will subsequently be increased by the
amount of the REMIC's taxable income allocated to the holder, and decreased
(but not below zero) by the amount of distributions made and the amount of the
REMIC's net loss allocated to the holder. Any disallowed loss may be carried
forward indefinitely, but may be used only to offset income of the REMIC
generated by the same REMIC. The ability of holders of Residual Interest
Securities to deduct net losses may be subject to additional limitations under
the Code, as to which such holders should consult their tax advisers.
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Distributions. In the opinion of Tax Counsel, distributions on a Residual
Interest Security (whether at their scheduled times or as a result of
prepayments) will generally not result in any additional taxable income or
loss to a holder of a Residual Interest Security. If the amount of such
payment exceeds a holder's adjusted basis in the Residual Interest Security,
however, the holder will recognize gain (treated as gain from the sale of the
Residual Interest Security) to the extent of such excess.
Sale or Exchange. In the opinion of Tax Counsel, a holder of a Residual
Interest Security will recognize gain or loss on the sale or exchange of a
Residual Interest Security equal to the difference, if any, between the amount
realized and such holder's adjusted basis in the Residual Interest Security at
the time of such sale or exchange. Except to the extent provided in
regulations, which have not yet been issued, any loss upon disposition of a
Residual Interest Security will be disallowed if the selling holder acquires
any residual interest in a REMIC or similar mortgage pool within six months
before or after such disposition.
Excess Inclusions. In the opinion of Tax Counsel, the portion of the REMIC
taxable income of a holder of a Residual Interest Security consisting of
"excess inclusion" income may not be offset by other deductions or losses,
including net operating losses, on such holder's federal income tax return. An
exception applies to organizations to which Code Section 593 applies
(generally, certain thrift institutions); however, such exception will not
apply if the aggregate value of the Residual Interest Securities is not
considered to be "significant," as described below. Further, if the holder of
a Residual Interest Security is an organization subject to the tax on
unrelated business income imposed by Code Section 511, such holder's excess
inclusion income will be treated as unrelated business taxable income of such
holder. In addition, under Treasury regulations yet to be issued, if a real
estate investment trust, a regulated investment company, a common trust fund,
or certain cooperatives were to own a Residual Interest Security, a portion of
dividends (or other distributions) paid by the real estate investment trust
(or other entity) would be treated as excess inclusion income. If a Residual
Security is owned by a foreign person excess inclusion income is subject to
tax at a rate of 30% which may not be reduced by treaty, is not eligible for
treatment as "portfolio interest" and is subject to certain additional
limitations. See "Tax Treatment of Foreign Investors." 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.
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Under the REMIC Regulations, in certain circumstances, transfers of Residual
Securities may be disregarded. See "--Restrictions on Ownership and Transfer
of Residual Interest Securities" and "--Tax Treatment of Foreign Investors"
below.
Restrictions on Ownership and Transfer of Residual Interest Securities. As a
condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any "Disqualified
Organization." Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a
rural electric or telephone cooperative described in Section 1381(a)(2)(C) of
the Code, or any entity exempt from the tax imposed by Sections 1-1399 of the
Code, if such entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Pooling and Servicing Agreement will prohibit
Disqualified Organizations from owning a Residual Interest Security. In
addition, no transfer of a Residual Interest Security will be permitted unless
the proposed transferee shall have furnished to the Trustee an affidavit
representing and warranting that it is neither a Disqualified Organization nor
an agent or nominee acting on behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all
Federal tax purposes unless no significant purpose of the transfer was to
impede the assessment or collection of tax. A Residual Interest Security is a
"noneconomic residual interest" unless, at the time of the transfer (i) the
present value of the expected future distributions on the Residual Interest
Security at least equals the product of the present value of the anticipated
excess inclusions and the highest rate of tax for the year in which the
transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which the taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. If a transfer of a Residual Interest
is disregarded, the transferor would be liable for any Federal income tax
imposed upon taxable income derived by the transferee from the REMIC. The
REMIC Regulations provide no guidance as to how to determine if a significant
purpose of a transfer is to impede the assessment or collection of tax. A
similar type of limitation exists with respect to certain transfers of
residual interests by foreign persons to United States persons. See "--Tax
Treatment of Foreign Investors."
Mark to Market Rules. Prospective purchasers of a REMIC Residual Interest
Security should be aware that the IRS recently released proposed regulations
(the "Proposed Mark-to-Market Regulations") which provide that a REMIC
Residual Interest Security acquired after January 3, 1995 cannot be marked-to-
market. The Proposed Mark-to-Market Regulations change the temporary
regulations discussed below which allowed a REMIC Residual Interest Security
to be marked-to-market provided that it was not a "negative value" residual
interest and did not have the same economic effect as a "negative value"
residual interest. This mark-to-market requirement applies to all securities
of a dealer, except to the extent that the dealer has specifically identified
a security as held for investment. The temporary regulations released on
December 28, 1993 (the "Temporary Mark to Market Regulations") provided that
for purposes of this mark-to-market requirement, a "negative value" REMIC
residual interest is not treated as a security and thus may not be marked to
market. In addition, a dealer was not required to identify such REMIC Residual
Interest Security as held for investment. In general, a REMIC Residual
Interest Security has negative value if, as of the date a taxpayer acquires
the REMIC Residual Interest Security, the present value of the tax liabilities
associated with holding the REMIC Residual Interest Security exceeds the sum
of (i) the present value of the expected future distributions on the REMIC
Residual Interest Security, and (ii) the present value of the anticipated tax
savings associated with holding the REMIC
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Residual Interest Security as the REMIC generates losses. The amounts and
present values of the anticipated tax liabilities, expected future
distributions and anticipated tax savings were all to be determined using (i)
the prepayment and reinvestment assumptions adopted under Section 1272(a)(6),
or that would have been adopted had the REMIC's regular interests been issued
with OID, (ii) any required or permitted clean up calls, or required qualified
liquidation provided for in the REMIC's organizational documents and (iii) a
discount rate equal to the "applicable Federal rate" (as specified in Section
1274(d)(1)) that would have applied to a debt instrument issued on the date of
acquisition of the REMIC Residual Interest Security. Furthermore, the
Temporary Mark to Market Regulations provided the IRS with the authority to
treat any REMIC Residual Interest Security having substantially the same
economic effect as a "negative value" residual interest. The IRS could issue
subsequent regulations, which could apply retroactively, providing additional
or different requirements with respect to such deemed negative value residual
interests. Prospective purchasers of a REMIC Residual Interest Security should
consult their tax advisors regarding the possible application of the Proposed
Mark to Market Regulations.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject
to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS in
a unified administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
General. As further specified in the related Prospectus Supplement, if a
REMIC election is not made and the Trust Fund is not structured as a
partnership, then, in the opinion of Tax Counsel, the Trust Fund relating to a
Series of Securities will be classified for federal income tax purposes as a
grantor trust under Subpart E, Part 1 of Subchapter J of the Code and not as
an association taxable as a corporation (the Securities of such Series, "Pass-
Through Securities"). In some Series there will be no separation of the
principal and interest payments on the Loans. In such circumstances, a holder
will be considered to have purchased a pro rata undivided interest in each of
the Loans. In other cases ("Stripped Securities"), sale of the Securities will
produce a separation in the ownership of all or a portion of the principal
payments from all or a portion of the interest payments on the Loans.
In the opinion of Tax Counsel, each holder must report on its federal income
tax return its share of the gross income derived from the Loans (not reduced
by the amount payable as fees to the Trustee and the Servicer and similar fees
(collectively, the "Servicing Fee")), at the same time and in the same manner
as such items would have been reported under the Holder's tax accounting
method had it held its interest in the Loans directly, received directly its
share of the amounts received with respect to the Loans, and paid directly its
share of the Servicing Fees. In the case of Pass-Through Securities other than
Stripped Securities, such income will consist of a pro rata share of all of
the income derived from all of the Loans and, in the case of Stripped
Securities, such income will consist of a pro rata share of the income derived
from each stripped bond or stripped coupon in which the holder owns an
interest. The holder of a Security will generally be entitled to deduct such
Servicing Fees under Section 162 or Section 212 of the Code to the extent that
such Servicing Fees represent "reasonable" compensation for the services
rendered by the Trustee and the Servicer (or third parties that are
compensated for the performance of services). In the case of a noncorporate
holder, however, Servicing Fees (to the extent not otherwise disallowed, e.g.,
because they exceed reasonable compensation) will be deductible in computing
such holder's regular tax liability only to the extent that such fees, when
added to other miscellaneous itemized deductions, exceed 2% of adjusted gross
income and may not be deductible to any extent in computing such holder's
alternative minimum tax liability. In addition, for taxable years beginning
after December 31, 1990, the amount of itemized deductions otherwise allowable
for the taxable year for an individual whose adjusted gross income exceeds the
applicable amount (which amount will be adjusted for inflation in taxable
years beginning after 1990) will be reduced by the lesser of (i) 3% of the
excess of adjusted gross income over the applicable amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for such taxable year.
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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.
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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
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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.
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Payments to holders of Residual Interest Securities who are foreign persons
will generally be treated as interest for purposes of the 30% (or lower treaty
rate) United States withholding tax. Holders should assume that such income
does not qualify for exemption from United States withholding tax as
"portfolio interest." It is clear that, to the extent that a payment
represents a portion of REMIC taxable income that constitutes excess inclusion
income, a holder of a Residual Interest Security will not be entitled to an
exemption from or reduction of the 30% (or lower treaty rate) withholding tax
rule. If the payments are subject to United States withholding tax, they
generally will be taken into account for withholding tax purposes only when
paid or distributed (or when the Residual Interest Security is disposed of).
The Treasury has statutory authority, however, to promulgate regulations which
would require such amounts to be taken into account at an earlier time in
order to prevent the avoidance of tax. Such regulations could, for example,
require withholding prior to the distribution of cash in the case of Residual
Interest Securities that do not have significant value. Under the REMIC
Regulations, if a Residual Interest Security has tax avoidance potential, a
transfer of a Residual Interest Security to a Nonresident will be disregarded
for all Federal tax purposes. A Residual Interest Security has tax avoidance
potential unless, at the time of the transfer the transferor reasonably
expects that the REMIC will distribute to the transferee residual interest
holder amounts that will equal at least 30% of each excess inclusion, and that
such amounts will be distributed at or after the time at which the excess
inclusions accrue and not later than the calendar year following the calendar
year of accrual. If a Nonresident transfers a Residual Interest Security to a
United States person, and if the transfer has the effect of allowing the
transferor to avoid tax on accrued excess inclusions, then the transfer is
disregarded and the transferor continues to be treated as the owner of the
Residual Interest Security for purposes of the withholding tax provisions of
the Code. See "--Excess Inclusions."
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Tax Counsel is of the opinion that a Trust Fund structured as a partnership
will not be an association (or publicly traded partnership) taxable as a
corporation for federal income tax purposes. This opinion is based on the
assumption that the terms of the Trust Agreement and related documents will be
complied with, and on counsel's conclusions that (1) the Trust Fund will not
have certain characteristics necessary for a business trust to be classified
as an association taxable as a corporation and (2) the nature of the income of
the Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Certificates
has been structured as a private placement under an IRS safe harbor, so that
the Trust Fund will not be characterized as a publicly traded partnership
taxable as a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, in the opinion of Tax Counsel, the Trust Fund would be subject to
corporate income tax on its taxable income. The Trust Fund's taxable income
would include all its income, possibly reduced by its interest expense on the
Notes. Any such corporate income tax could materially reduce cash available to
make payments on the Notes and distributions on the Certificates, and
Certificateholders could be liable for any such tax that is unpaid by the
Trust Fund.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. In such a circumstance, Tax Counsel is,
except as otherwise provided in the related Prospectus Supplement, of the
opinion that the Notes will be classified as debt for federal income tax
purposes. The discussion below assumes this characterization of the Notes is
correct.
OID, Indexed Securities, etc. The discussion below assumes that all payments
on the Notes are denominated in U.S. dollars, and that the Notes are not
Indexed Securities or Strip Notes. Moreover, the discussion assumes that the
interest formula for the Notes meets the requirements for "qualified stated
interest" under the OID regulations, and that any OID on the Notes (i.e., any
excess of the principal amount of the Notes over their issue price) does not
exceed a de minimis amount (i.e., 0.25% of their principal amount multiplied
by the number of full years included in their term), all within the meaning of
the OID regulations. If these conditions are not satisfied with respect to any
given series of Notes, additional tax considerations with respect to such
Notes will be disclosed in the applicable Prospectus Supplement.
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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
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gain is not effectively connected with the conduct of a trade or business in
the United States by the foreign person and (ii) in the case of an individual
foreign person, the foreign person is not present in the United States for 183
days or more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder such
as a corporation, tax-exempt organization, qualified pension and profit-
sharing trust, individual retirement account or nonresident alien who provides
certification as to status as a nonresident) will be required to provide,
under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that
the holder is not subject to backup withholding. Should a nonexempt Noteholder
fail to provide the required certification, the Trust Fund will be required to
withhold 31 percent of the amount otherwise payable to the holder, and remit
the withheld amount to the IRS as a credit against the holder's federal income
tax liability.
Possible Alternative Treatments of the Notes. If, contrary to the opinion of
Tax Counsel, the IRS successfully asserted that one or more of the Notes did
not represent debt for federal income tax purposes, the Notes might be treated
as equity interests in the Trust Fund. If so treated, the Trust Fund might be
taxable as a corporation with the adverse consequences described above (and
the taxable corporation would not be able to reduce its taxable income by
deductions for interest expense on Notes recharacterized as equity).
Alternatively, and most likely in the view of Tax Counsel, the Trust Fund
might be treated as a publicly traded partnership that would not be taxable as
a corporation because it would meet certain qualifying income tests.
Nonetheless, treatment of the Notes as equity interests in such a publicly
traded partnership could have adverse tax consequences to certain holders. For
example, income to certain tax-exempt entities (including pension funds) would
be "unrelated business taxable income", income to foreign holders generally
would be subject to U.S. tax and U.S. tax return filing and withholding
requirements, and individual holders might be subject to certain limitations
on their ability to deduct their share of the Trust Fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase
of Certificates, to treat the Trust Fund as a partnership for purposes of
federal and state income tax, franchise tax and any other tax measured in
whole or in part by income, with the assets of the partnership being the
assets held by the Trust Fund, the partners of the partnership being the
Certificateholders, and the Notes being debt of the partnership. However, the
proper characterization of the arrangement involving the Trust Fund, the
Certificates, the Notes, the Trust Fund and the Servicer is not clear because
there is no authority on transactions closely comparable to that contemplated
herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all payments
on the Certificates are denominated in U.S. dollars, none of the Certificates
are Indexed Securities or Strip Certificates, and that a Series of Securities
includes a single class of Certificates. If these conditions are not satisfied
with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. If the Trust Fund is a partnership, in the opinion of
Tax Counsel, the Trust Fund will not be subject to federal income tax. Rather,
in the opinion of Tax Counsel, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Loans
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of Loans. The Trust Fund's
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees, and losses or deductions upon collection or
disposition of Loans.
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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
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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
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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
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"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.
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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
88
<PAGE>
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.
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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.
90
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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.
91
<PAGE>
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.
92
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMA-
TION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR INCORPO-
RATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURI-
TIES OFFERED HEREBY, NOR AN OFFER OF THE SECURITIES IN ANY STATE OR JURISDIC-
TION IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER WOULD BE UNLAWFUL. THE DE-
LIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AT ANY TIME DOES NOT IM-
PLY THAT INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUPPLEMENT
Incorporation of Certain Documents by Reference............................ S-3
Summary.................................................................... S-4
Risk Factors............................................................... S-16
The Pool................................................................... S-24
Empire Funding............................................................. S-32
The Title I Loan Program and the Contract of Insurance..................... S-35
Contract of Insurance Holder............................................... S-39
Prepayment and Yield Considerations........................................ S-40
The Trust.................................................................. S-54
Description of the Offered Securities...................................... S-55
Description of Credit Enhancement.......................................... S-62
Description of Transfer and Servicing Agreements........................... S-63
Certain Federal Income Tax Consequences.................................... S-71
State Tax Consequences..................................................... S-71
ERISA Considerations....................................................... S-72
Legal Investment Matters................................................... S-73
Method of Distribution..................................................... S-73
Legal Matters.............................................................. S-74
Ratings.................................................................... S-74
PROSPECTUS
Prospectus Supplement or Current Report on Form 8-K........................ 2
Incorporation of Certain Information by Reference.......................... 2
Available Information...................................................... 2
Reports to Securityholders................................................. 3
Summary of Terms........................................................... 4
Risk Factors............................................................... 11
The Trust Fund............................................................. 16
Use of Proceeds............................................................ 22
The Depositor.............................................................. 22
Loan Program............................................................... 22
Description of the Securities.............................................. 24
Credit Enhancement......................................................... 34
Yield and Prepayment Considerations........................................ 39
The Agreements............................................................. 42
Certain Legal Aspects of the Loans......................................... 55
Certain Material Federal Income Tax Consequences........................... 67
State Tax Considerations................................................... 87
ERISA Considerations....................................................... 87
Legal Investment........................................................... 90
Method of Distribution..................................................... 91
Legal Matters.............................................................. 91
Financial Information...................................................... 91
Rating..................................................................... 92
</TABLE>
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EMPIRE FUNDING HOME LOAN
OWNER TRUST 1997-1
$21,750,000 CLASS A-1,
7.00% HOME LOAN ASSET BACKED NOTES
$7,400,000 CLASS A-2,
7.06% HOME LOAN ASSET BACKED NOTES
$8,500,000 CLASS A-3,
7.17% HOME LOAN ASSET BACKED NOTES
$11,791,000 CLASS A-4,
7.77% HOME LOAN ASSET BACKED NOTES
$4,250,000 CLASS A-5,
7.51% HOME LOAN ASSET BACKED NOTES
$8,978,000 CLASS M-1,
7.89% HOME LOAN ASSET BACKED NOTES
$7,721,000 CLASS M-2,
8.08% HOME LOAN ASSET BACKED NOTES
FINANCIAL ASSET
SECURITIES CORP.
(DEPOSITOR)
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PROSPECTUS SUPPLEMENT
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GREENWICH CAPITAL
MARKETS, INC.
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APRIL 4, 1997
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