PROSPECTUS SUPPLEMENT Filed pursuant to Rule 424(b((5)
(TO PROSPECTUS DATED SEPTEMBER 9, 1997) Registration Statement No. 333-29381
(LOGO)
NEW CENTURY MORTGAGE CORPORATION
NEW CENTURY HOME EQUITY LOAN TRUST, SERIES 1997-NC6
$170,000,000
ASSET BACKED PASS-THROUGH CERTIFICATES
$42,335,000 CLASS A-1 VARIABLE PASS-THROUGH RATE*
$32,000,000 CLASS A-2 6.60% PASS-THROUGH RATE
$17,200,000 CLASS A-3 6.59% PASS-THROUGH RATE
$20,000,000 CLASS A-4 6.73% PASS-THROUGH RATE
$11,200,000 CLASS A-5 6.76% PASS-THROUGH RATE
$27,600,000 CLASS A-6 7.01% PASS-THROUGH RATE*
$19,665,000 CLASS A-7 7.19% PASS-THROUGH RATE*
NOTIONAL BALANCE CLASS A-8IO 0.50% PASS-THROUGH RATE
*Subject to adjustment, as described herein.
Distributions payable on the 25th day of each month,
commencing in January 1998
FINANCIAL ASSET SECURITIES CORP.
Depositor
NEW CENTURY MORTGAGE CORPORATION
Seller and Servicer
------------------------
The New Century Home Equity Loan Trust, Series 1997-NC6, Asset Backed
Pass-Through Certificates will consist of (i) the Class A-1 Certificates,
Class A-2 Certificates, Class A-3 Certificates, Class A-4 Certificates, Class
A-5 Certificates, Class A-6 Certificates, Class A-7 Certificates and Class
A-8IO Certificates (collectively, the "Offered Certificates") and the Class R
Certificates (the "Residual Certificates"). The Offered Certificates and the
Residual Certificates are collectively referred to herein as the
"Certificates." Only the Offered Certificates are offered hereby.
Financial Asset Securities Corp. (the "Depositor") will cause Financial
Security Assurance Inc. (the "Certificate Insurer") to issue a financial
guaranty insurance policy (the "Certificate Insurance Policy") for the
benefit of holders of the Offered Certificates pursuant to which the
Certificate Insurer will guarantee certain payments to the holders of the
Offered Certificates as described herein.
(Bond Insurer logo)
The Certificates will represent the entire beneficial ownership interest
in a trust fund (the "Trust Fund") to be created pursuant to a Pooling and
Servicing Agreement, dated as of December 1, 1997, among the Depositor, New
Century Mortgage Corporation ("New Century"), as seller and servicer (in such
capacities, the "Seller" and the "Servicer," respectively), and U.S. Bank
National Association, dba First Bank National Association, as trustee (the
"Trustee"). The Trust Fund will consist primarily of a group of 15-year, 20-
year and 30-year fixed-rate mortgage loans (the "Mortgage Loans") secured by
first and second liens on one- to four-family residential properties.
Distributions on each class of Offered Certificates (each, a "Class") will be
made primarily from collections on the Mortgage Loans. As of December 1,
1997, the Trust Fund consisted of Mortgage Loans (collectively, the "Initial
Mortgage Loans") having aggregate principal balances of approximately
$132,842,283.98 after application of scheduled payments due on or before the
Cut-Off Date, whether or not received. On or prior to December 31, 1997,
additional mortgage loans (the "Subsequent Mortgage Loans") in an amount not
to exceed approximately $37,157,716.02 in aggregate Cut-Off Date Loan Balance
may be purchased by the Trust Fund with amounts on deposit in an account (the
"Pre-Funding Account") to be established for such purpose on or about
December 12, 1997, which is the date the Initial Mortgage Loans are expected
to be conveyed to the Trust Fund and the Certificates are expected to be
issued (the "Closing Date").
The aggregate original principal balance of each Class of Offered
Certificates (each such balance, an "Original Certificate Principal Balance"
and, as such balance is reduced from time to time, the "Certificate Principal
Balance") is set forth above. The Class A-8IO Certificates have no principal
balance and accrue interest on their notional balance (the "Certificate
Notional Balance") equal to the aggregate Loan Balance of the Mortgage Loans
then outstanding. The Offered Certificates will evidence a senior beneficial
ownership interest in the Trust Fund, with the remaining beneficial ownership
interest in the Trust Fund being evidenced by the Residual Certificates.
Distributions to holders of the Offered Certificates will be made on the 25th
day of each month or, if such 25th day is not a Business Day, on the first
Business Day thereafter (each, a "Distribution Date"), commencing in January
1998.
Under the limited circumstances described herein, the Majority Residual
Interestholders (as defined herein) have the option (but not the obligation)
to purchase the Mortgage Loans, and the Servicer has the option (but not the
obligation) to purchase the Mortgage Loans. Such purchase would result in an
early retirement of the Offered Certificates.
The interests of the owners of the Offered Certificates will be
represented by book-entries on the records of The Depository Trust Company
(the "Depository") and participating members thereof. No person acquiring a
beneficial interest in an Offered Certificate will be entitled to receive a
physical certificate representing such Certificate, except in the limited
circumstances described herein. See "Description of the Certificates--Book-
Entry Certificates" herein.
Except for certain representations and warranties relating to the
Mortgage Loans, New Century's obligations with respect to the Certificates
are limited to its contractual servicing obligations. The Offered
Certificates evidence interests in the Trust Fund only and are payable solely
from amounts received with respect thereto.
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
OFFERED CERTIFICATES, SEE THE INFORMATION UNDER "RISK FACTORS"
BEGINNING ON PAGE S-12 HEREIN AND IN THE PROSPECTUS BEGINNING
ON PAGE 11.
--------------------
THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
DEPOSITOR, THE SELLER, THE SERVICER, THE SERVICING AGENT, THE TRUSTEE, THE
CERTIFICATE INSURER OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THE
CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL ENTITY, THE DEPOSITOR, THE SELLER, THE SERVICER, THE SERVICING
AGENT, THE TRUSTEE OR ANY OF THEIR AFFILIATES OR ANY OTHER PERSON, EXCEPT AS
DESCRIBED HEREIN WITH RESPECT TO THE CERTIFICATE INSURER, DISTRIBUTIONS ON
THE CERTIFICATES WILL BE PAYABLE SOLELY FROM THE ASSETS TRANSFERRED TO THE
TRUST FUND FOR THE BENEFIT OF THE CERTIFICATEHOLDERS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
(Greenwich Logo)
------------------------------
December 11, 1997
THE YIELDS TO MATURITY OF THE OFFERED CERTIFICATES MAY VARY FROM THE
ANTICIPATED YIELDS TO THE EXTENT ANY SUCH OFFERED CERTIFICATES ARE PURCHASED
AT A DISCOUNT OR PREMIUM AND TO THE EXTENT THE RATE AND TIMING OF PAYMENTS
THEREON DIFFER FROM THOSE ASSUMED IN CALCULATING ANTICIPATED YIELDS. THE
YIELD TO INVESTORS ON THE CLASS A-1 CERTIFICATES WILL ALSO VARY DEPENDING
UPON, AMONG OTHER THINGS, THE LEVEL OF THE LONDON INTERBANK OFFERED RATE FOR
ONE-MONTH UNITED STATES DOLLAR DEPOSITS ("ONE-MONTH LIBOR").
CERTIFICATEHOLDERS SHOULD CONSIDER, IN THE CASE OF THE OFFERED CERTIFICATES
PURCHASED AT A DISCOUNT, THE RISK THAT A SLOWER THAN ANTICIPATED RATE OF
PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN THE
ANTICIPATED YIELD AND, IN THE CASE OF THE CLASS A-8IO CERTIFICATES AND ANY
OTHER CLASSES OF OFFERED CERTIFICATES PURCHASED AT A PREMIUM, THE RISK THAT A
FASTER THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL
YIELD THAT IS LOWER THAN THE ANTICIPATED YIELD. SEE "RISK FACTORS--YIELD,
PREPAYMENT AND MATURITY CONSIDERATIONS" HEREIN.
An election will be made to treat the Trust Fund as a real estate
mortgage investment conduit (the "REMIC") for federal income tax purposes.
Greenwich Capital Markets, Inc. (the "Underwriter") intends to make a
secondary market in the Offered Certificates but has no obligation to do so.
There is currently no secondary market for the Offered Certificates and there
can be no assurance that such a market will develop or, if it does develop,
that it will continue.
-------------------
The Offered Certificates will be purchased by the Underwriter from the
Depositor and will be 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 from the sale of the Offered
Certificates are expected to be approximately $172,191,576.62 plus accrued
interest, before deducting expenses payable by the Depositor.
The Offered Certificates are offered by the Underwriter, subject to
prior sale, when, as and if delivered to and accepted by the Underwriter and
subject to approval of certain legal matters by counsel. It is expected that
delivery of the Offered Certificates will be made in book-entry form only
through the facilities of The Depository Trust Company on or about December
15, 1997.
---------------------
This Prospectus Supplement does not contain complete information about
the offering of the Offered Certificates. Additional information is contained
in the Prospectus dated September 9, 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
Certificates may not be consummated unless the purchaser has received both
this Prospectus Supplement and the Prospectus.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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 yields of, the
Offered Certificates, which risks and uncertainties are discussed under "Risk
Factors" and "Prepayment and Yield Considerations." As a consequence, no
assurance can be given as to the actual amounts and timing of distributions
on, or the yield of, any Class of Offered Certificates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference all documents filed by the
Depositor with the Securities and Exchange Commission (the "Commission")
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
of 1934, as amended, on or subsequent to the date of this Prospectus
Supplement and prior to the termination of the offering of the Offered
Certificates. The Depositor will provide without charge to each
person to whom this Prospectus Supplement and Prospectus are delivered,
on request of such person, a copy of any or all of the documents
incorporated herein by reference other than the exhibits to such
documents (unless such exhibits are specifically incorporated by
reference in such documents). Requests should be made in writing to Mr.
Peter McMullin, Vice President, Financial Asset Securities Corp., at 600
Steamboat Road, Greenwich, Connecticut 06830.
In addition to the documents described above, the consolidated financial
statements of Financial Security Assurance Inc. and Subsidiaries included in,
or as exhibits to, the following documents, which have been filed with the
Commission by Financial Security Assurance Holdings Ltd. ("Holdings"), are
hereby incorporated by reference in this Prospectus Supplement:
(a) Annual Report on Form 10-K for the period ended December 31, 1996;
and
(b) Quarterly Report on Form 10-Q for the period ended September 30,
1997.
All financial statements of Financial Security Assurance Inc. and
Subsidiaries included in documents filed by Holdings pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Offered Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing of such documents.
The Depositor hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, as amended, each filing of the
financial statements of Financial Security Assurance Inc. included in or as
an exhibit to the documents of Holdings referred to above and filed pursuant
to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as
amended, that is incorporated by reference in the Registration Statement of
which this Prospectus Supplement and related Prospectus is a part shall be
deemed to be a new registration statement relating to the Offered
Certificates and the offering of such Offered Certificates at that time shall
be deemed to be the initial bona fide offering thereof.
SUMMARY OF TERMS
This Summary of Terms is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms used in this Summary
of Terms are defined elsewhere in this Prospectus Supplement or in the
Prospectus.
Title of Certificates .... New Century Home Equity Loan Trust, Series
1997-NC6, Asset Backed Pass-Through
Certificates, consisting of (i) the Class A-1
Certificates, Class A-2 Certificates, Class A-3
Certificates, Class A-4 Certificates, Class A-5
Certificates, Class A-6 Certificates, Class A-7
Certificates and Class A-8IO Certificates
(collectively, the "Offered Certificates") and
the Class R Certificates (the "Residual
Certificates"). The Offered Certificates and
the Residual Certificates are collectively
referred to herein as the "Certificates." Only
the Offered Certificates are offered hereby.
The 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. ("Greenwich"). See "The
Depositor" in the Prospectus and "Method of
Distribution" herein. None of the Depositor,
National Westminster Bank Plc or any of their
respective affiliates or any other person
or entity will insure or guarantee or
otherwise be obligated with respect to the
Certificates.
Servicer and Seller...... New Century Mortgage Corporation ("New
Century"), a California Corporation, will
serve as the servicer (in such capacity,
the "Servicer"). See "The Pooling and
Servicing Agreement--The Seller and Servicer"
herein. The Mortgage Loans were originated
or purchased by New Century (in such capacity,
the "Seller") and subsequently sold to the
Depositor pursuant to a mortgage loan purchase
agreement (the "Mortgage Loan Purchase
Agreement") dated December 1, 1997 between the
Seller and the Depositor.
Servicing Agent.......... Comerica Mortgage Corporation (in such
capacity, the "Servicing Agent"), a Michigan
corporation. See "Pooling and Servicing
Agreement--The Servicing Agent" herein.
Trustee ................. U.S. Bank National Association, dba
First Bank National Association, a
national banking association, not in its
individual capacity but solely as trustee
on behalf of the holders of the Certificates
(the "Trustee").
Certificate Insurer...... Financial Security Assurance Inc. (the
"Certificate Insurer" or "Financial Security").
See "Financial Security Assurance Inc." herein.
Cut-Off Date ............ With respect to any Initial Mortgage Loan (as
defined herein), December 1, 1997 (the "Initial
Cut-Off Date"). With respect to any Subsequent
Mortgage Loan, the date identified as the
Cut-Off Date in the related Subsequent Transfer
Agreement.
Closing Date ............. On or about December 12, 1997.
Description of Certificates
A. General............. The Certificates will be issued pursuant to
a Pooling and Servicing Agreement, dated as of
December 1, 1997 (the "Pooling and Servicing
Agreement"), among the Depositor, the Seller,
the Servicer and the Trustee.
The holders of the Certificates (the
"Certificateholders") will be entitled to
receive collections on the Mortgage Loans
included in the Trust Fund. The Mortgage
Loans that have been designated for inclusion
in the Trust Fund as of December 1, 1997 are
referred to herein as the "Initial Mortgage
Loans" and those additional Mortgage Loans to
be acquired by the Trust Fund on or before
December 31, 1997 are referred to herein as the
"Subsequent Mortgage Loans."
B. Form of Certificates.. The Offered Certificates initially will be
issued in book-entry form. So long as such
Certificates are Book-Entry Certificates
(as defined herein), such Certificates will
be evidenced by one or more certificates
registered in the name of Cede & Co.
("Cede"), as nominee of The Depository
Trust Company (the "Depository"). No person
acquiring a beneficial ownership interest
in such Certificates will be entitled to
receive a Definitive Certificate (as
defined herein) representing such person's
interest, except in the event Definitive
Certificates are issued under the limited
circumstances described herein.
C. Distributions....... Distributions on the Offered Certificates
will be made on the 25th day of each month
or, if such day is not a Business Day, on
the first Business Day thereafter, commencing
in January 1998 (each, a "Distribution
Date"). Distributions on each
Distribution Date will be made to holders of the
Certificates of record as of the last Business
Day of the month preceding the month of
such Distribution Date (each, a "Record Date"),
except that the final distribution on
an Offered Certificate will be made only upon
presentation and surrender of such Offered
Certificate at the office or agency of the
Trustee in St. Paul, Minnesota. Distributions
with respect to the Mortgage Loans will be
applied to the payment of principal and
interest on the Certificates in accordance with
the priorities described below.
1. Interest ..... On each Distribution Date, to
to the extent funds (including
Insured Payments (as defined
herein)) are available
therefor, the holders of
each Class of Offered
Certificates will be
entitled to receive interest
in an amount equal to the
sum of (i) interest accrued
during the related Accrual
Period (as defined herein) at
the related Pass-Through
Rate (as defined herein)
on the Certificate Principal
Balance or Certificate
Notional Balance, as the
case may be, of such Class
and (ii) that portion of the
Class A Carry-Forward Amount
(as defined here-in)
allocable to such Class
less the sum of such
Class' share of any
Prepayment Interest Shortfalls
not covered by the Servicing
Fee as described herein and
any shortfalls in interest
as a result of the
application of the Civil
Relief Act. See
"Description of the Certif-
icates--Allocation of
Available Funds" herein.
2. Principal... Amounts distributable as
principal of the Offered
Certificates (other than
the Class A-8IO Certificates)
will be allocated first to
the Class of Offered
Certificates having the
lowest numerical designation
until the Certificate
Principal Balance thereof
is reduced to zero, and
thereafter will be
allocated sequentially to
each successive Class
of Offered Certificates,
in numerical order,
such that no Class of
Offered Certificates having
a higher numerical Class
designation will be entitled
to distributions of principal
until the Certificate
Principal Balance of each
Class of Offered
Certificates having a lower
numerical Class designation
has been reduced to zero,
as described in
"Description of the
Certificates--Allocation of
Available Funds" herein.
The Class A-8IO Certificates
are notional certificates
and holders thereof are
not entitled to receive
distributions of principal.
On each Distribution Date,
to the extent funds are
available therefor after
distributions of interest
on the Offered Certificates,
holders of the Offered
Certificates then entitled
to receive principal
distributions will receive
as principal the excess
of (a) the sum (without
duplication) of (i) all
scheduled installments of
Mortgage Loan principal due
during the related Due
Period and all unscheduled
collections and recoveries of
principal to the extent
actually received by the
Servicer during the
preceding calendar month
and (ii) the Subordination
Increase Amount (as defined
herein), over (b) the
Subordination Reduction
Amount (as defined herein),
if any, for such
Distribution Date (the
"Principal Distribution
Amount"). See "Description
of the Certificates--
Allocation of Available
Funds" herein.
Pass-Through Rates..... The Pass-Through Rate for the Class A-1 Certificates
for a particular Distribution Date is equal to the
lesser of (a) One-Month LIBOR on the related LIBOR
Determination Date (as defined herein) plus 0.17%
and (b) the Weighted Average Rate Cap. The Pass-
Through Rate on the Class A-1 Certificates for the
first Distribution Date will be equal to 6.17%. The
"Weighted Average Rate Cap" is a rate per annum
equal to the weighted average of the interest rates
(the "Mortgage Rates") of the Mortgage Loans
outstanding as of the first day of the preceding
calendar month (or, with respect to the first
Distribution Date, as of the Initial Cut-Off Date),
reduced by the sum of (i) the Servicing Fee Rate (as
defined herein), (ii) the Trustee fee rate of
0.0125% per annum (the "Trustee Fee Rate"), (iii)
the rate at which the premium is payable to the
Certificate Insurer and (iv) the Pass-Through Rate
on the Class A-8IO Certificates. The Pass-Through
Rates for the Class A-2, Class A-3, Class A-4, Class
A-5 and Class A-8IO Certificates will be equal to
the respective rates set forth on the cover page
hereof. The Pass-Through Rates for the Class A-6
and Class A-7 Certificates will be equal to the
lesser of (a) the Weighted Average Rate Cap and (b)
the respective rates set forth on the cover page
hereof (the "Stated Rate") for such Classes of
Certificates; provided, however, that on any
Distribution Date after the Call Option Date (as
defined below), the Stated Rate for the Class A-7
Certificates will be increased by 0.50% (50 basis
points). The "Call Option Date" is the first
Distribution Date on which the aggregate Loan
Balance (as defined herein) of the Mortgage
Loans is less than or equal to 10% of the
Maximum Collateral Amount (as defined herein). See
"Calculation of One-Month LIBOR" herein.
Credit Enhancement... The credit enhancement provided for the benefit of
the holders of the Offered Certificates consists
solely of (a) any overcollateralization resulting
from the allocation of the internal cash flows of
the Trust Fund and (b) the Certificate Insurance
Policy (as defined below).
Overcollateralization. The Pooling and Servicing
Agreement provides for limited acceleration of
principal distributions on the Offered
Certificates relative to the amortization of
the Mortgage Loans. This acceleration of
principal distributions is achieved by the
application of certain excess cashflow as a
payment of principal of the Offered Certificates
(other than the Class A-8IO Certificates),
thereby creating overcollateralization to the
extent the aggregate Loan Balances (as defined
herein) of the Mortgage Loans and the Pre-
Funded Amount exceeds the aggregate Certificate
Principal Balance of the Offered Certificates.
Once the required level of over-collateralization
is reached, and subject to the provisions
described in the next paragraph, further
application of such acceleration feature will
cease, unless necessary to maintain the required
level of overcollateralization.
As described herein, subject to certain trigger
tests, the required levels of
overcollateralization may increase or decrease.
An increase would result in a temporary
period of accelerated amortization of the
Offered Certificates relative to the Mortgage
Loans in the Trust Fund to increase the
actual level of overcollateralization to its
required level; a decrease would result in a
temporary period of decelerated amortization to
reduce the actual level of overcollateralization
to its required level.
The Certificate Insurance Policy. The Offered
Certificates will be entitled to the benefit
of a financial guaranty insurance policy
(the "Certificate Insurance Policy") to be issued by
the Certificate Insurer. The Certificate Insurance
Policy is being issued as a means of providing
additional credit enhancement to the Offered
Certificates. Under the Certificate
Insurance Policy, the Certificate Insurer will
irrevocably and unconditionally guarantee payment
to the Trustee, for the benefit of holders of
the Offered Certificates, as further described
herein, an amount that will cover any interest
shortfalls (except for Prepayment Interest
Shortfalls not covered by the Servicing Fee and
shortfalls in respect of the Civil Relief Act)
allocated to the Offered Certificates plus the
amount of any Subordination Deficit. A payment
by the Certificate Insurer under the Certificate
Insurance Policy is referred to herein as an
"Insured Payment." See "Description of the
Certificates--Credit Enhancement--The Certificate
Insurance Policy" herein.
The Mortgage Loans..... The Initial Mortgage Loans will be conveyed to the
Trust Fund by the Depositor on or about December 12,
1997 (the "Closing Date"). The aggregate Loan
Balances of the Mortgage Loans as of the Initial
Cut-Off Date (the "Initial Cut-Off Date Pool
Balance") were approximately $132,842,283.98 after
application of scheduled payments due on or before
the Initial Cut-Off Date, whether or not received.
The Initial Mortgage Loans will consist of
approximately 1,630 Mortgage Loans relating to
Mortgaged Properties located in 37 states.
Subsequent Mortgage Loans in an amount not to
exceed approximately $37,157,716.02 in aggregate
Cut-Off Date Loan Balance may, subject to
availability, also be included in the Trust Fund on
or before December 31, 1997.
Each Mortgage Loan is evidenced by a promissory
note (a "Mortgage Note") and secured by a
mortgage, deed of trust or other similar
security instrument creating a first or second
lien on the related Mortgaged Property.
Each Mortgage Note provides for the amortization
of the amount financed under such Mortgage
Loan over a series of substantially equal
monthly payments, except for Balloon Mortgage
Loans, for which the monthly payments are
based on an amortization schedule that
would extend beyond the stated maturity date and
which provide for a payment at maturity that is
substantially larger than any other scheduled
payment.
All weighted averages specified herein are
weighted based on the Cut-Off Date Loan Balances
of the Initial Mortgage Loans. All Mortgage
Loan statistics set forth herein are based on
principal balances, interest rates, terms to
maturity, mortgage loan counts and similar
statistics as of the Initial Cut-Off Date,
unless indicated to the contrary herein.
References to percentages of the Mortgage Loans
mean percentages of the Initial Cut-Off Date Pool
Balance.
The statistical information presented in this
Prospectus Supplement is based solely on the Initial
Mortgage Loans and does not take into account any
Subsequent Mortgage Loans that may be added to
Trust Fund during the Funding Period through
application of amounts on deposit in the Pre-Funding
Account. As a result of the foregoing, the
statistical information presented herein regarding
the Initial Mortgage Loans may vary in certain
respects from comparable information after
giving effect to the acquisition of any
Subsequent Mortgage Loans. See "The Trust Fund."
The Initial Mortgage Loans bear interest at
fixed rates (the "Mortgage Rates") which range
from approximately 6.75% to 16.75% per annum.
The weighted average Mortgage Rate of the
Initial Mortgage Loans was approximately 9.62%
per annum. The Cut-Off Date Loan Balances of
the Initial Mortgage Loans ranged from
approximately $10,031.69 to $749,784.92. The
average Cut-Off Date Loan Balance of the Initial
Mortgage Loans was approximately $81,498.33.
The weighted average original term to stated
maturity of the Initial Mortgage Loans was
approximately 328 months. The weighted average
remaining term to stated maturity of the Initial
Mortgage Loans was approximately 327 months.
As of the Initial Cut-Off Date, the weighted
average number of months that had elapsed since
origination of the Initial Mortgage Loans was
approximately 2 months.
Initial Mortgage Loans representing approximately
94.61% of the Initial Cut-Off Date Pool Balance
are secured by mortgages which are first liens.
The remainder of the Initial Mortgage
Loans are second in lien priority (together with
any Subsequent Mortgage Loan that is second in lien
priority, the "Second Mortgage Loans") to mortgage
loans that are secured by senior liens of the
related Mortgage Properties (any such
senior lien, a "First Lien"). Except with respect
to four Initial Mortgage Loans (which are Second
Mortgage Loans) representing 0.08% of the Initial
Cut-Off Date Pool Balance, the First Liens relating
to such Second Mortgage Loans will not be
included in the Trust Fund.
The lowest and highest Combined Loan-to-
Value Ratios, at origination, of the Initial
Mortgage Loans were approximately 7.00%
and 100.00% respectively. The weighted average
Combined Loan-to-Value Ratio of the Initial
Mortgage Loans at origination was approximately
70.68%. "Combined Loan-to-Value Ratio" means,
with respect to any Mortgage Loan, the
fraction, expressed as a percentage, the
numerator of which is the principal balance of such
Mortgage Loan at origination plus, in the case of a
Second Mortgage Loan, the outstanding principal
balance of the related First Lien on the date of
origination of such Mortgage Loan, and the
denominator of which is the appraised value of the
related Mortgaged Property at the time of
origination of such Mortgage Loan or, in the case
of a purchase money Mortgage Loan, the lesser of
the purchase price or the appraised value. See
"The Trust Fund."
Initial Mortgage Loans representing approximately
1.21% of the Initial Cut-Off Date Pool Balance
require monthly payments of principal that have
been determined based on amortization schedules
significantly longer than the respective original
terms of such Mortgage Loans (each, a "Balloon
Mortgage Loan"), leaving a substantial portion
of the original principal amount due and payable
as a significantly larger single payment on the
maturity date (each such payment, together with
accrued interest on the related Balloon Mortgage
Loan, a "Balloon Payment"). Each Mortgage Loan
that is not a Balloon Mortgage Loan provides for
a schedule of equal monthly payments which are
sufficient to amortize fully the principal
balance of such Mortgage Loans over its original
term. See "Risk Factors-Balloon Mortgage Loans."
The Mortgage Loans are not insured or guaranteed by
any governmental entity, private mortgage insurer
or by any other person or entity.
See "The Trust Fund."
Pre-Funding Account... On the Closing Date, approximately $37,157,716.02
(the "Pre-Funded Amount") will be deposited in an
account (the "Pre-Funding Account") that will be in
the name of and maintained by the Trustee as part of
the Trust Fund for the benefit of the holders of the
Offered Certificates and will be used to acquire
Subsequent Mortgage Loans. See "The Trust Fund"
herein. The Pre-Funding Account will not be an
asset of the REMIC. Any investment earnings on
amounts in the Pre-Funding Account will be taxable
to the Seller. During the period beginning on the
Closing Date and generally terminating on the
earlier to occur of (i) the date on which the amount
on deposit in the Pre-Funding Account (exclusive of
any investment earnings) is less than $100,000 and
(ii) December 31, 1997 (the "Funding Period"), the
Pre-Funded Amount will be maintained in the Pre-
Funding Account. The Pre-Funded Amount will be
reduced during the Funding Period by the amount
thereof used to purchase Subsequent Mortgage Loans
in accordance with the Pooling and Servicing
Agreement. Any Unutilized Funding Amount (as
defined herein) will be distributed to holders of
the Classes of Offered Certificates on the related
Distribution Date in reduction of the related
Certificate Principal Balances, thus resulting in
an unscheduled distribution of principal in respect
of such Classes of Offered Certificates on such
date. The allocation of such distribution to
the various Classes of Offered Certificates will
depend on the size of the Unutilized Funding
Amount. If the Unutilized Funding Amount equals
or exceeds $100,000, holders of the Offered
Certificates will be entitled to a pro rata
distribution of such Unutilized Funding Amount,
on the basis of the respective Original
Certificate Principal Balances of such
Classes, as described herein. If the Unutilized
Funding Amount is less than $100,000, it will be
distributed pursuant to the allocation of the
Principal Distribution Amount for the related
Distribution Date, as described in "Description
of the Certificates--Allocation of Available
Funds."
Capitalized Interest
Account..... On the Closing Date, the Seller will deposit into an
account (the "Capitalized Interest Account"), to be
maintained with and in the name of the Trustee on
behalf of the Trust Fund, a portion of the
proceeds of the sale of the Offered
Certificates. The amount deposited therein will be
used by the Trustee on the Distribution Date in
January 1998 to cover shortfalls in interest
on the Offered Certificates that may arise as a
result of the utilization of the Pre-Funding
Account for the purchase by the Trust Fund of
Subsequent Mortgage Loans after the Closing
Date. Any amounts not needed to cover such
shortfalls will be paid directly to the Seller
at the end of the Funding Period. The Capitalized
Interest Account will not be an asset of the
REMIC. Any investment earnings on amounts
in the Capitalized Interest Account will be
taxable to the Seller.
Underwriting Standards.. The Seller's underwriting standards are
primarily intended to assess the value of the
Mortgaged Property and to evaluate the adequacy
of such property as collateral for the mortgage
loans. In addition to the value of the
Mortgaged Property, the Seller also considers,
among other things, a Mortgagor's credit
history, repayment ability and debt service-to-
income ratio. The Mortgage Loans may
experience higher rates of delinquencies and
foreclosures than mortgage loans underwritten
in a more traditional manner. See "New
Century's Portfolio of Mortgage Loans--
Underwriting Guidelines of New Century" herein.
Servicing .............. New Century will act as the Servicer under the
Pooling and Servicing Agreement. The Servicer will
be responsible for providing for the servicing
of the Mortgage Loans and will receive from
interest collected on the Mortgage Loans a
monthly servicing fee on each Mortgage Loan equal
to the Loan Balance thereof multiplied by
one-twelfth of the Servicing Fee Rate (such
product, the "Servicing Fee"). Pursuant to a
servicing agent agreement (the "Servicing
Agent Agreement") between the Servicer and
Comerica Mortgage Corporation (the "Servicing
Agent") dated as of September 15, 1997,
the Servicing Agent will provide certain services
for New Century with respect to all of the Mortgage
Loans. The terms and conditions of the
Servicing Agent Agreement are consistent with and
do not violate the terms of the Pooling and
Servicing Agreement. The Servicing Agent Agreement
does not relieve the Servicer from any of its
obligations pursuant to the terms and conditions
of the Pooling and Servicing Agreement. See
"The Pooling and Servicing Agreement" herein.
The Servicer will be obligated to make
advances ("Delinquency Advances") with respect to
delinquent payments of principal and interest on
any Mortgage Loan to the extent described herein.
The Trustee will be obligated to make any such
Delinquency Advances if the Servicer fails in its
obligation to do so, to the extent provided in
the Pooling and Servicing Agreement. See "The
Pooling and Servicing Agreement--Advances" herein.
Payments to Cover
Prepayment Interest
Shortfalls .......... The Servicer will be required to fund in respect of
each Distribution Date, without any right of
reimbursement, an amount equal to the lesser of (a)
the aggregate, for each Mortgage Loan, of the
excess, if any, of a full month's interest on
the amount of each Principal Prepayment at a
rate per annum equal to the related interest
rate (the "Mortgage Rate") applicable to such
Mortgage Loan (or such lower rate as may be in
effect for a Mortgage Loan because of application
of the Civil Relief Act) minus the Servicing
Fee Rate (the "Net Mortgage Rate") over the
amount of interest actually paid by or on behalf
of the Mortgagor in connection with such Principal
Prepayment during the related Due Period
less the Servicing Fee for the related Mortgage
Loan for such month (a "Prepayment Interest
Shortfall") and (b) the aggregate Servicing
Fee received by the Servicer with respect to
the related Due Period. See "The Pooling and
Servicing Agreement--Adjustment to Servicing
Fee in Connection with Certain Prepaid Mortgage
Loans" herein.
Optional Termination... On any Distribution Date on which the aggregate
Loan Balances of the Mortgage Loans is less
than or equal to 10% of the Maximum Collateral
Amount (as defined herein), the holders of the
majority interest in the Residual Certificates
(the "Majority Residual Interestholders") will
have the option (but not the obligation) to
purchase, as a whole, the Mortgage Loans and
the REO Property, if any, and thereby effect
the early retirement of all Certificates. In
addition, on any Distribution Date on which the
aggregate Loan Balances of the Mortgage Loans
is less than or equal to 5% of the Maximum
Collateral Amount, the Servicer (and if New
Century is removed as Servicer, the Certificate
Insurer) will have a similar option with
respect to the Mortgage Loans and REO
Properties in the Trust Fund. An "REO
Property" is any Mortgaged Property acquired by
the Servicer in the name of the Trust through
foreclosure or deed-in-lieu of foreclosure.
See "Description of the Certificates--Optional
Termination" herein.
Certain Federal
Income Tax
Considerations..... An election will be made to treat the Trust Fund
(other than the Pre-Funding Account and the
Capitalized Interest Account) as a "real estate
mortgage investment conduit" ("REMIC") for federal
income tax purposes. The Offered Certificates will
constitute "regular interests" in the REMIC and the
Residual Certificates will constitute the sole Class
of "residual interests" in the REMIC. See "Certain
Material Federal Income Tax Consequences" herein and
"Certain Material Federal Income Tax Consequences"
in the Prospectus.
ERISA Considerations.... The acquisition of an Offered Certificate by an
employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as
amended ("ERISA"), or a plan or arrangement
subject to Section 4975 of the Code (as defined
herein) (each of the foregoing, a "Plan")
could, in some instances, result in a
"prohibited transaction" or other violation of
the fiduciary responsibility provisions of
ERISA and Code Section 4975.
Subject to the considerations and conditions
described under "ERISA Considerations" herein,
it is expected that the Offered Certificates
may be purchased by a Plan.
Any Plan fiduciary considering whether to
purchase any Offered Certificates on behalf of
a Plan should consult with its counsel regarding
the applicability of the provisions of ERISA and
the Code. See "ERISA Considerations" herein and
in the Prospectus.
Legal Investment........ The Offered Certificates will not constitute
"mortgage related securities" for purposes of SMMEA.
The appropriate characterization of the Offered
Certificates under various legal investment
restrictions, and thus the ability of investors
subject to these restrictions to purchase Offered
Certificates, may be subject to significant
interpretive uncertainties. All investors whose
investment authority is subject to legal
restrictions should consult their own legal advisors
to determine whether, and to what extent, the
Offered Certificates will constitute legal
investments for them. See "Legal Investment" in the
Prospectus.
Ratings................. It is a condition of the issuance of the Offered
Certificates that the Offered Certificates
(other than the Class A-8IO Certificates) be
rated AAA by Standard & Poor's Ratings Group, a
division of the McGraw-Hill Companies ("S&P"),
and Aaa by Moody's Investors Service, Inc.
("Moody's" and, together with S&P, the
"Rating Agencies") and that the Class A-8IO
Certificates be rated "AAAr" by S&P and "Aaa"
by Moody's. No rating addresses whether
Subsequent Mortgage Loans will be purchased by
the Trust Fund, the amount of any such Mortgage
Loans to be so purchased, or the impact any such
purchase might have on the yields of the Offered
Certificates. The security ratings of the
Offered Certificates should be evaluated
independently from similar ratings on other types
of securities. A security rating is not a
recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any
time by the Rating Agencies. See "Ratings" herein.
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Offered Certificates.
UNDERWRITING STANDARDS, LIMITED OPERATING HISTORY AND POTENTIAL DELINQUENCIES
The Seller's underwriting standards are intended primarily to assess the
value of the mortgaged property underlying the related Mortgage Loan (the
"Mortgaged Property") and to evaluate the adequacy of such Mortgaged Property
as collateral for the Mortgage Loan. The Seller provides loans primarily to
borrowers who do not qualify for mortgage loans conforming to Fannie Mae and
Freddie Mac guidelines but who generally have substantial equity in their
property. While the Seller's primary consideration in underwriting a Mortgage
Loan is the value of the related Mortgaged Property, the Seller also
considers, among other things, a Mortgagor's credit history, repayment
ability and debt service-to-income ratio, as well as the type and use of the
of the Mortgaged Property. The Seller's underwriting standards do not
prohibit a Mortgagor from obtaining secondary financing at the time of the
Seller's origination of a first lien priority Mortgage Loan and in some
instances the Seller will originate such secondary financing. Such secondary
financing would reduce the equity the Mortgagor would otherwise have in the
related Mortgaged Property as indicated in the Seller's Loan-to-Value Ratio
determination.
As a result of the Seller's underwriting standards, the Mortgage Loans
are likely to experience rates of delinquency, foreclosure and bankruptcy
that are higher, and that may be substantially higher, than those experienced
by mortgage loans underwritten pursuant to Fannie Mae and Freddie Mac
guidelines.
Furthermore, since the underwriting standards emphasize the property
value, changes in the values of Mortgaged Properties may have a greater
effect on the loss experience of the Mortgage Loans than on loans originated
in a more traditional manner. No assurance can be given that the values of
the Mortgaged Properties have remained or will remain at the levels which
existed on the dates of origination of the related Mortgage Loans.
The Seller commenced receiving applications for mortgage loans under its
regular lending program in February 1996. During the period from February
1996 through September 1997, the Seller did not perform the primary servicing
function for its portfolio. Accordingly, the Seller, in its capacity as
primary servicer, does not have representative historical delinquency,
bankruptcy, foreclosure or default experience that may be referred to for
purposes of estimating the future delinquency and loss experience of the
Mortgage Loans.
SERVICING TRANSFER
In September 1997, New Century commenced transferring the servicing of
mortgage loans originated or acquired by it from a designated subservicer to
its own servicing system. During the time of such transfer, it is possible
that delays in the receipt of collections on such mortgage loans could occur
resulting in a higher level of delinquencies during such period.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
Yield Generally. The yields to maturity of the Offered Certificates may
vary from the anticipated yields to the extent such Offered Certificates are
purchased at a discount or premium and to the extent the rate and timing of
payments thereon differ from those assumed in calculating the anticipated
yield. Certificateholders should consider, in the case of the Offered
Certificates purchased at a discount, the risk that a slower than anticipated
rate of principal payments could result in an actual yield that is lower than
the anticipated yield and, in the case of the Class A-8IO Certificates and
any other Class of Offered Certificates purchased at a premium, the risk that
a faster than anticipated rate of principal payments with respect to the
Mortgage Loans or such Offered Certificates, as applicable, could result in
an actual yield that is lower than the anticipated yield. In addition, the
timing of changes in the rate of Principal Prepayments (as defined herein) on
the Mortgage Loans may significantly affect an investor's actual yield to
maturity, even if the average rate of Principal Prepayments is consistent
with such investor's expectation. In general, the earlier a Principal
Prepayment on a Mortgage Loan occurs, the greater the effect of such
Principal Prepayment on an investor's yield to maturity. The effect on an
investor's yield of Principal Prepayments occurring faster (or slower) than
the rate anticipated by the investor during the period immediately following
the issuance of the Offered Certificates may not be fully offset by a
subsequent decrease (or increase) in the rate of Principal Prepayments of a
like amount.
Because amounts distributable to the holders of the Class A-8IO
Certificates consist entirely of interest, the yield to maturity of the Class
A-8IO Certificates will be extremely sensitive to the repurchase, prepayment
and default experience of the Mortgage Loans and prospective investors should
fully consider the associated risks, including the risk that such investors
may not fully recover their initial investment. No assurances can be given
as to whether Subsequent Mortgage Loans will be deposited in the Trust Fund
during the Funding Period. In addition, investors in the Class A-8IO
Certificates should be aware that on any Distribution Date on which the
aggregate Loan Balance of the Mortgage Loans is less than or equal to 10% of
the Maximum Collateral Amount, the Majority Residual Interestholders will
have the option (but not the obligation) to purchase, as a whole, the
Mortgage Loans and the REO Property, if any, and thereby effect the early
retirement of all Certificates. In addition, on any Distribution Date on
which the aggregate Loan Balance of the Mortgage Loans is less than or equal
to 5% of the Maximum Collateral Amount, the Servicer (and if New Century is
removed as Servicer, the Certificate Insurer) will have a similar option with
respect to the Mortgage Loans in the Trust Fund.
The Pass-Through Rate on each of the Class A-6 and Class A-7
Certificates is limited to the lesser of the Weighted Average Rate Cap and
the Stated Rate for such Class of Certificates. As of the Initial Cut-Off
Date, the weighted average Mortgage Rate was approximately 9.62%. The
weighted average Mortgage Rate will decline if Mortgage Loans with higher
Mortgage Rates are prepaid faster than Mortgage Loans with lower Mortgage
Rates. If these differing rates of prepayments are substantial enough to
cause the Weighted Average Rate Cap to fall below the Stated Rate of the
Class A-6 and Class A-7 Certificates, the yields on such Classes of
Certificates will be reduced. Such Certificateholders thereof will not be
entitled to interest in excess of the Weighted Average Rate Cap on any given
Distribution Date, nor will those Certificates be able to receive the
difference between its Stated Rate and the Weighted Average Rate Cap on any
future Distribution Date.
Prepayment Considerations and Risks. The rates of principal
distributions on the Offered Certificates, the aggregate amounts of
distributions thereon and the yields to maturity of the Offered Certificates
will be related to, among other things, the rate and timing of payments of
principal on the Mortgage Loans. The rate of principal payments on the
Mortgage Loans will in turn be affected by the amortization schedules of the
Mortgage Loans and by the rate of Principal Prepayments thereon (including
for this purpose, prepayments resulting from (i) refinancing, (ii)
liquidations of the Mortgage Loans due to defaults, casualties and
condemnations and (iii) repurchases by the Seller or the Servicer). In
addition, as described herein, Initial Mortgage Loans representing
approximately 1.21% of the Initial Cut-Off Date Pool Balance are Balloon
Mortgage Loans that generally provide for scheduled amortization over 30
years from their respective dates of origination and a single lump-sum
payment at the end of the fifteenth year. Also, the Mortgage Loans may be
prepaid by the mortgagors (each, a "Mortgagor") at any time; however, with
respect to Mortgage Loans representing approximately 0.07%, 1.72%, 3.56%,
6.38%, 0.47% and 72.08% of the Initial Cut-Off Date Pool Balance, a
prepayment charge will generally apply to certain prepayments by Mortgagors
during the first six months, one year, two years, three years, four years and
five years after origination, respectively. Such prepayment charge may, in
certain limited circumstances, be waived by the Servicer. Any such
prepayment charge will be paid to the holders of the Residual Certificates
(which are not offered hereby). The Mortgage Loans are subject to the "due-
on-sale" provisions included therein (insofar as such provisions are
enforceable under applicable state law). Prepayments, liquidations and
purchases of the Mortgage Loans (including any optional purchase by the
Servicer of a defaulted Mortgage Loan or any purchase by the Majority
Residual Certificateholders or by the Servicer (or, in some cases, the
Certificate Insurer) of the remaining Mortgage Loans and REO Property in
connection with the optional termination of the Trust Fund) will, subject to
certain conditions, result in distributions of principal to holders of the
Offered Certificates then entitled to receive such principal distributions
that would otherwise be distributed over the remaining terms of the Mortgage
Loans. In addition, the overcollateralization provisions of the Trust Fund
will result in a limited acceleration of principal payments to the holders of
the Offered Certificates. Moreover, as described herein, on the Distribution
Date immediately following the calendar month in which the end of the Funding
Period occurs, a principal prepayment will be made to the holders of certain
Classes of Certificates in the amount which represents the excess of the Pre-
Funded Amount over the aggregate Cut-Off Date Loan Balance of all
Subsequent Mortgage Loans acquired by the Trust Fund subsequent to the
Closing Date (i.e., the balance on deposit in the Pre-Funding Account
on such date (net of investment earnings)). See "Description of the
Certificates" herein. Since the rate of payment of principal on the
Mortgage Loans will depend on future events and a variety of factors, no
assurance can be given as to such rate or the rate of Principal Prepayments.
The weighted average life of a pool of loans is the average amount of
time that will elapse from the date such pool is formed until each dollar of
principal is repaid to the investors in such pool. Because it is expected
that there will be principal prepayments and defaults on the Mortgage Loans,
the actual weighted average life of the Mortgage Loans is expected to vary
substantially from the weighted average remaining term to stated maturity of
the Mortgage Loans as set forth herein under "The Trust Fund--Mortgage Loan
Statistics."
Defaults and Delinquent Payments. The yields to maturity of the Offered
Certificates will be sensitive to defaults and delinquent payments on the
Mortgage Loans. If a purchaser of an Offered Certificate calculates its
anticipated yield based on an assumed rate of default and amount of losses
that is lower than the default rate and amount of losses actually incurred
and not covered by overcollateralization or the Certificate Insurance Policy,
its actual yield to maturity will be lower than the yield to maturity so
calculated and could, in the event of substantial losses, be negative. The
timing of Realized Losses that are not covered by overcollateralization or
the Certificate Insurance Policy will also affect an investor's actual yield
to maturity even if the rate of defaults and severity of such losses are
consistent with an investor's expectations. In general, the earlier a loss
occurs, the greater is the effect on an investor's yield to maturity. There
can be no assurance as to the delinquency, foreclosure or loss experience
with respect to the Mortgage Loans.
Payment Delay. Under the Pooling and Servicing Agreement, payments of
principal and interest on the Mortgage Loans in respect of any Due Period
generally will not be passed through to the holders of the Offered
Certificates until the Distribution Date in the calendar month in which the
Due Period ends. As a result, the monthly distributions to the holders of
the Offered Certificates generally will reflect Mortgagor payments during the
period from the second day of the prior calendar month to the first day of
the calendar month of such Distribution Date. Each Distribution Date will be
on the 25th day of each month (or the next succeeding business day),
commencing in January 1998. Thus, the effective yield to the holders of all
Offered Certificates will be below that otherwise produced by the related
Pass-Through Rate and the price paid for such Offered Certificates (other
than the Class A-1 Certificates) by such holders because distributions on
such Certificates in respect of any given month will not be made until on or
about the 25th day of the month in which the related Due Period ends and will
not bear interest during such delay.
Payments on the Mortgage Loans. When a principal prepayment in full is
made on a Mortgage Loan, the Mortgagor is charged interest only up to the
date of such prepayment, rather than for a full month, which may result in a
Prepayment Interest Shortfall. The Servicer is obligated to pay, without any
right of reimbursement, those shortfalls in interest collections that are
attributable to Prepayment Interest Shortfalls, but only to the extent of the
Servicing Fee for the related Due Period (any such payment, "Compensating
Interest"). However, the Servicing Fee will not be available to cover any
shortfalls in interest collections on the Mortgage Loans that are
attributable to a shortfall in interest as a result of the application of the
Civil Relief Act. Moreover, shortfalls in interest as a result of the
application of the Civil Relief Act and Prepayment Interest Shortfalls will
not be covered by payments under the Certificate Insurance Policy.
EFFECT OF MORTGAGE RATES ON THE PASS-THROUGH RATE FOR THE CLASS A-1
CERTIFICATES
As described herein, the Pass-Through Rate for the Class A-1
Certificates adjusts monthly to equal the lesser of (a) One-Month LIBOR plus
0.17% and (b) the Weighted Average Rate Cap. The Mortgage Loans, from which
distributions on the Class A-1 Certificates will primarily be derived, will
bear fixed Mortgage Rates; consequently, the amount of interest that accrues
on the Class A-1 Certificates at the related Pass-Through Rate during any
Accrual Period may be less than the amount that would accrue at One-Month
LIBOR plus 0.17%, in which circumstance the value of the Class A-1
Certificates may be temporarily or permanently reduced.
SUBSEQUENT MORTGAGE LOANS
The ability of the Seller to originate or purchase mortgage loans
subsequent to the date hereof and on or prior to December 31, 1997 that meet
the requirements for transfer to the Trust Fund under the Pooling and
Servicing Agreement (which requirements will include the consent of the
Certificate Issuer) will be affected by a variety of factors, including
interest rates, employment levels, the rate of inflation and consumer
perception of economic conditions generally. On the Distribution Date
immediately following the calendar month in which the end of the Funding
Period occurs, a principal prepayment will be made to the holders of certain
Classes of Certificates in the amount which represents the excess of the Pre-
Funded Amount over the Cut-Off Date Loan Balance of all Subsequent Mortgage
Loans acquired by the Trust Fund subsequent to the Closing Date (i.e., the
balance on deposit in the Pre-Funding Account on such date (net of investment
earnings)). The effect of this payment will be as generally described above
under "Yield, Prepayment and Maturity Considerations." No assurance can be
given as to the magnitude of the portion of the Pre-Funded Amount that will
be so distributed.
BALLOON MORTGAGE LOANS
Initial Mortgage Loans representing approximately 1.21% of the Initial
Cut-Off Date Pool Balance are Balloon Mortgage Loans, which generally have
original terms of 15 years and provide for monthly payments based on a 30
year amortization schedule and final monthly payments substantially greater
than the preceding monthly payments. The existence of a Balloon Payment
generally will necessitate that the related Mortgagor refinance the Mortgage
Loan or sell the Mortgaged Property on or prior to the stated maturity date.
The ability of a Mortgagor to accomplish either of these alternatives will be
affected by a number of factors, including the level of available mortgage
rates at the time of sale or refinancing, the Mortgagor's equity in the
related Mortgaged Property, the financial condition of the Mortgagor, tax
laws and prevailing general economic conditions. None of the Seller, the
Servicer, the Depositor or the Trustee is obligated to refinance any Mortgage
Loan. The Certificate Insurer only insures receipt of the full amount of the
principal portion of a Balloon Payment with respect to a defaulted Balloon
Mortgage Loan if, and only to the extent that, the failure to pay such amount
to the holders of the Offered Certificates creates a Subordination Deficit
after such Balloon Mortgage Loan is liquidated.
SECOND MORTGAGE LOANS
Initial Mortgage Loans representing 94.61% of the Initial Cut-Off Date
Pool Balance are secured by first liens, with the remaining Initial Mortgage
Loans (representing approximately 5.39% of the Initial Cut-Off Date Pool
Balance) being Second Mortgage Loans. Except with respect to four Initial
Mortgage Loans (which are Second Mortgage Loans), representing 0.08% of the
Initial Cut-Off Date Pool Balance, the First Liens related to such Second
Mortgage Loans will not be included in the Trust Fund.
The primary risk to holders of mortgage loans secured by second
mortgages is that the proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the outstanding balance
of a mortgage loan only to the extent that the claims of the related First
Liens have been satisfied in full, including any related foreclosure costs.
In addition, a mortgagee may not foreclose on the property securing a second
mortgage unless it forecloses subject to the first mortgage, in which case it
must either pay the entire amount due on the first mortgage at or prior to
the foreclosure sale or undertake the obligation to make payments on the
first mortgage. In servicing second mortgages in its portfolio, the Servicer
may satisfy the first mortgage at or prior to the foreclosure sale. The
Servicer may also advance funds to keep the first mortgage current until such
time as the first mortgage is satisfied. The Trust Fund will have no direct
source of funds (and may not be permitted under the REMIC provisions of the
Code) to satisfy any First Lien or to make payments due to the First Lien
mortgagee. The Pooling and Servicing Agreement provides that the Servicer
may advance such amounts under the circumstances described therein. See "The
Pooling and Servicing Agreement" herein.
An overall decline in the residential real estate market, the general
condition of a Mortgaged Property or other factors could adversely affect the
values of the Mortgaged Properties such that the outstanding balances of the
Second Mortgage Loans, together with any First Liens on the Mortgaged
Properties, equal or exceed the values of the Mortgaged Properties. Such a
decline could reduce or eliminate any economic interest of the Trust Fund in
a Mortgaged Property before having any effect on the interest of the
related First Lien mortgagee. In a period of such decline, the
rates of delinquencies, foreclosures and losses on the Second Mortgage Loans
could be higher than those heretofore experienced by the Seller or in
the home equity mortgage lending industry in general. In
addition, adverse economic conditions (which may or may not affect
real property values) may affect the timely payment by Mortgagors of
scheduled payments of principal and interest on the Mortgage Loans and,
accordingly, the actual rates of delinquencies, foreclosures and losses.
Information is provided under "The Trust Fund" with respect to the
Combined Loan-to-Value Ratios of the Initial Mortgage Loans. As discussed
above, the value of the Mortgaged Properties securing the payment of Second
Mortgage Loans could be adversely affected by a number of factors. As a
result, despite the amortization of the Mortgage Loans and any related First
Liens on such Mortgaged Properties, there can be no assurance that the
Combined Loan-to-Value Ratios of any Second Mortgage Loans determined as of a
date subsequent to the origination date will be the same or lower than the
Combined Loan-to-Value Ratios for such Mortgage Loans determined as of the
origination date.
DELINQUENT MORTGAGE LOANS
As of November 30, 1997 (the "Delinquency Statistic Date"), Initial
Mortgage Loans representing approximately 1.17% of the Initial Cut-Off Date
Pool Balance were at least 30 days Delinquent (as defined herein) and no
Mortgage Loan was 60 days Delinquent in their scheduled monthly payments of
principal and interest. In addition, it should be noted that Initial
Mortgage Loans representing approximately 92.49% of the Initial Cut-Off Date
Pool Balance have a first scheduled monthly payment due on or after
November 1, 1997, and therefore, it was not possible for such Initial
Mortgage Loans to have had a scheduled monthly payment that was 30 days or
more Delinquent as of the Delinquency Statistic Date. As of the Delinquency
Statistic Date, approximately 4.39% of the Initial Cut-Off Date Pool Balance
had monthly payments due (and not yet received) for November 1, 1997.
GEOGRAPHIC CONCENTRATION
Initial Mortgage Loans representing approximately 50.13%, 5.06%, 4.44%
and 4.23% of the Initial Cut-Off Date Pool Balance are secured by Mortgaged
Properties located in California, Arizona, Hawaii and Florida, respectively.
If these residential real estate markets should experience an overall decline
in property values after the dates of origination of the Initial Mortgage
Loans, the rates of delinquencies, foreclosures, bankruptcies and losses on
the Initial Mortgage Loans may increase substantially. Changes in the values
of Mortgaged Properties may have an effect on the delinquency, foreclosure,
bankruptcy and loss experience of the Initial Mortgage Loans. No assurance
can be given that the values of the Mortgaged Properties have remained or
will remain at the levels in effect on the dates of origination of the
related Mortgage Loans.
REPURCHASES OF CERTAIN MORTGAGE LOANS
Pursuant to the Pooling and Servicing Agreement, the Seller has agreed
to cure in all material respects any breach of the Seller's representations
and warranties set forth in the Pooling and Servicing Agreement with respect
to each Mortgage Loan. If the Seller cannot cure such breach within a
specified period of time, the Seller is required to repurchase such Mortgage
Loans (the "Defective Loans") from the Trust Fund or substitute other loans
for such Defective Loans. For a summary description of the Seller's
representations and warranties, see "The Pooling and Servicing Agreement" in
the Prospectus.
As a result of the substantial growth in its loan origination activity,
the Seller has operated since February 1996 (and expects to continue to
operate for the foreseeable future) on a negative operating cash flow basis.
During the nine months ended September 30, 1997 and the year ended December
31, 1996, the Seller operated on a negative cash flow basis with its
operations having been funded primarily from equity investments, borrowings
and loan sales (including fundings provided by the Underwriter and an
affiliate thereof) and the net proceeds of periodic securities offerings.
Were such external sources of funding to become unavailable or were they to
prove insufficient to meet the Seller's needs, the financial ability of the
Seller to perform its obligations in connection with the related transaction,
including the obligation to repurchase or replace Defective Loans (as defined
herein) from the Trust Fund, may be adversely affected. In addition, if
the Seller repurchases, or is obligated to repurchase, defective mortgage
loans from any other series of asset-backed securities, the financial
ability of the Seller to repurchase Defective Loans from the Trust Fund
may be adversely affected. Furthermore, other events relating to the Seller
and its lending activities can occur that would adversely affect the
financial ability of the Seller to repurchase Defective Loans from the
Trust Fund, including, without limitation, the sale or other disposition
of all or any significant portion of its assets. If the Seller is unable to
repurchase or replace a Defective Loan, then 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, 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.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Civil Relief Act"), a mortgagor who enters
military service after the origination of such mortgagor's mortgage loan
(including a mortgagor who is a member of the National Guard or is in reserve
status at the time of the origination of the mortgage loan and is later
called to active duty) may not be charged interest (including fees and
charges) above an annual rate of 6% during the period of such mortgagor's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that the application of the Civil Relief Act could
have an effect, for an indeterminate period of time, on the ability of the
Servicer to collect full amounts of interest on certain of the Mortgage
Loans. Any such interest shortfalls will not be covered by the Certificate
Insurance Policy and could result in losses to the holders of the Offered
Certificates. In addition, the Civil Relief Act imposes limitations which
would impair the ability of the Servicer to foreclose on an affected Mortgage
Loan during the Mortgagor's period of active duty status. Thus, in the event
that such a Mortgage Loan goes into default, there may be delays and losses
occasioned by the inability to realize upon the related Mortgaged Property in
a timely fashion. See "Certain Legal Aspects of the Loans--Soldiers' and
Sailors' Civil Relief Act" in the Prospectus.
LEGAL CONSIDERATIONS
The transfer of the Mortgage Loans from the Seller to the Depositor will
be treated by the Seller and the Depositor as a sale of the Mortgage Loans.
The Seller will warrant that such transfer is a sale of its interest in the
Mortgage Loans. In the event of an insolvency of the Seller, the receiver or
bankruptcy trustee of the Seller may attempt to recharacterize the sale of
the Mortgage Loans as a borrowing by the Seller secured by a pledge of the
Mortgage Loans. If the receiver or bankruptcy trustee decided to challenge
such transfer, delays in payments on the Certificates and possible reductions
in the amount of such payments could occur. The Depositor will warrant in
the Pooling and Servicing Agreement that the transfer of the Mortgage Loans
to the Trust Fund is a valid transfer of all of the Depositor's right, title
and interest in the Mortgage Loans to the Trust Fund.
CERTAIN OTHER LEGAL CONSIDERATIONS REGARDING THE MORTGAGE LOANS
Applicable federal and state laws regulate interest rates and other
charges with respect to mortgage loans and require certain disclosures. In
addition, other laws, public policy and general principles of equity relating
to the protection of consumers, unfair and deceptive practices and debt
collection practices may apply to the origination, servicing and collection
of the Mortgage Loans. Depending on the provisions of the applicable law and
the specific facts and circumstances involved, violations of these laws,
policies and principles may limit the ability to collect all or part of the
principal of or interest on the Mortgage Loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the owner
of the Mortgage Loans to damages and administrative enforcement. See "Risk
Factors--Certain Other Legal Considerations Regarding the Loans" in the
Prospectus.
BOOK-ENTRY REGISTRATION
The Offered Certificates initially will be represented by one or more
certificates registered in the name of Cede & Co. ("Cede"), as nominee of The
Depository Trust Company ("DTC"), and will not be registered in the names of
the holders of the Certificate Owners (as defined herein) or their nominees.
Because of this, unless and until Definitive Certificates are issued,
Certificate Owners will not be recognized by the Trustee as
"Certificateholders" (as such term is used herein and in the Pooling and
Servicing Agreement) and will be able to exercise the rights
of the holders of the Offered Certificates only indirectly through DTC and
its participating organizations. See "Description of the Certificates--Form,
Denomination, Exchange, Registration and Title" herein.
ENVIRONMENTAL RISKS
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment. In certain
circumstances, these laws and regulations impose obligations on owners or
operators of residential properties such as Mortgaged Properties. 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 other 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.
NEW CENTURY'S PORTFOLIO OF MORTGAGE LOANS
UNDERWRITING GUIDELINES OF NEW CENTURY
The Mortgage Loans will be acquired by the Depositor from the Seller.
All of the Mortgage Loans were originated or acquired by the Seller generally
in accordance with the underwriting criteria described below. The Seller
revises such criteria from time to time in connection with changing economic
and market conditions.
The information set forth below with regard to the Seller's underwriting
standards has been provided to the Depositor or compiled from information
provided to the Depositor by the Seller. None of the Depositor, the Trustee,
the Servicing Agent or any of their respective affiliates has made any
independent investigation of such information or has made or will make any
representation as to the accuracy or completeness of such information.
The Seller's underwriting standards are primarily intended to assess the
value of the mortgaged property and to evaluate the adequacy of such property
as collateral for the mortgage loan. All of the Mortgage Loans were also
underwritten with a view toward the resale thereof in the secondary mortgage
market. While the Seller's primary consideration in underwriting a mortgage
loan is the value of the mortgaged property, the Seller also considers, among
other things, a mortgagor's credit history, repayment ability and debt
service-to-income ratios as well as the type and use of the mortgaged
property. In the case of first lien Mortgage Loans, there may be second lien
financing of the mortgaged properties provided by the Seller or other lenders
at any time (including, at origination). The Mortgage Loans generally bear
higher rates of interest than mortgage loans that are originated in
accordance with Fannie Mae and Freddie Mac standards. The higher interest
rates and differing underwriting standards and procedures are likely to
result in rates of delinquencies and foreclosures that are higher, and that
may be substantially higher, than those experienced by portfolios of mortgage
loans underwritten in a more traditional manner. Unless prohibited by
state law or otherwise waived by the Seller upon the payment by the
related mortgagor of higher origination fees and a higher Mortgage Rate,
mortgage loans originated by the Seller generally provide for the
payment by the mortgagor of a prepayment penalty.
As a result of the Seller's underwriting criteria, changes in the values
of Mortgaged Properties may have a greater effect on the delinquency,
foreclosure and loss experience on the Mortgage Loans than such changes would
be expected to have on mortgage loans that are originated in a more
traditional manner. No assurance can be given that the values of the related
Mortgaged Properties have remained or will remain at the levels in effect on
the dates of origination of the related Mortgage Loans.
The Mortgage Loans will have been originated generally in accordance
with the underwriting guidelines of the Seller (the "Underwriting
Guidelines"). On a case-by-case basis, exceptions to the Underwriting
Guidelines are made where compensating factors exist.
Each applicant completes an application which includes information with
respect to the applicant's liabilities, income, credit history, employment
history and personal information. The Underwriting Guidelines require a
credit report on each applicant from a credit reporting company. The report
typically contains information relating to such matters as credit history
with local and national merchants and lenders, installment debt payments and
any record of defaults, bankruptcies, repossessions or judgments. Mortgaged
properties that are to secure mortgage loans generally are appraised by
qualified independent appraisers. Such appraisers inspect and appraise the
subject property and verify that such property is in acceptable condition.
Following each appraisal, the appraiser prepares a report which includes a
market value analysis based on recent sales of comparable homes in the area
and, when deemed appropriate, replacement cost analysis based on the current
cost of constructing a similar home. All appraisals are required to conform
to the Uniform Standards of Professional Appraisal Practice adopted by the
Appraisal Standards Board of the Appraisal Foundation and are generally on
forms acceptable to Fannie Mae and Freddie Mac. The Underwriting Guidelines
require a review of the appraisal by a qualified employee of the Seller or by
an appraiser retained by the Seller.
The Mortgage Loans were originated consistent with, and in general
conformity to, the Underwriting Guideline's "Full Documentation", "Limited
Documentation" and "Stated Income Documentation" residential loan programs.
Under each of the programs, the Seller reviews the applicant's source of
income, calculates the amount of income from sources indicated on the loan
application or similar documentation, reviews the credit history of the
applicant, calculates the debt service-to-income ratio to determine the
applicant's ability to repay the loan, reviews the type and use of the
property being financed, and reviews the condition of the property. The
Underwriting Guidelines require that mortgage loans be underwritten in a
standardized procedure which complies with applicable federal and state laws
and regulations and requires the Seller's underwriters to be satisfied that
the value of the property being financed, as indicated by an appraisal and a
review of the appraisal, currently supports the outstanding loan balance. In
general, the maximum loan amount for mortgage loans originated under the
programs is $500,000, except that on a case by case basis, the maximum loan
amount can be up to $1,500,000. The Underwriting Guidelines generally permit
loans on one- to four-family residential properties to have a loan-to-value
ratio ("LTV") at origination of up to 90% for first liens and a combined
loan-to-value ratio ("CLTV") of up to 100% for second liens, depending on,
among other things, the lien priority, the purpose of the mortgage loan, a
mortgagor's credit history, repayment ability and debt service-to-income
ratio, as well as the type and use of the property. With respect to Mortgage
Loans secured by mortgaged properties acquired by a mortgagor under a "lease
option purchase", the LTV of the related mortgage loan is based on the lower
of the appraised value at the time of origination of such mortgage loan or
the sale price of the related mortgaged property if the "lease option
purchase price" was set less than 12 months prior to origination and is based
on the appraised value at the time of origination if the "lease option
purchase price" was set 12 months or more prior to origination.
The Underwriting Guidelines require that the income of each applicant be
verified. The specific income documentation required by the Seller under its
various programs is as follows: under the Full Documentation program,
applicants generally are required to submit two written forms of verification
of stable income for at least 12 months; under the Limited Documentation
programs, one such form of verification is required for 12 months; under the
Stated Income Documentation program, an applicant may be qualified based upon
monthly income as stated on the mortgage loan application if the
applicant meets certain criteria. All the foregoing programs require that,
with respect to salaried employees, there be a telephone verification of
the applicant's employment. Verification of the source of funds (if any)
required to be deposited by the applicant into escrow in the case of a
purchase money loan is generally required under the Full Documentation
program. No such verification is required under the other programs.
The Underwriting Guidelines have the following categories and criteria
for grading the potential likelihood that an applicant will satisfy the
repayment obligations of a mortgage loan:
"A+" Risk. Under the "A+" risk category, the applicant must have
generally repaid installment or revolving debt according to its terms or
must have a FICO score of 640 or higher. A maximum of one 30-day late
payment and no 60-day late payments within the last 12 months is
acceptable on an existing mortgage loan. An existing mortgage loan is
required to be current at the time the application is submitted. No
open collection accounts or open charge-offs may remain open after the
funding of the loan. No bankruptcy or notice of default filings may
have occurred during the preceding three years; provided, however, that
if the borrower's bankruptcy has been discharged during the past three
years and the borrower has re-established a credit history otherwise
complying with the credit parameters set forth in this paragraph, then
the borrower may qualify for a mortgage loan. The mortgaged property
must be in at least average condition. A maximum LTV of 85% is
permitted for a mortgage loan on a single family owner-occupied
property. A maximum LTV of 80% is permitted for a mortgage loan on an
owner-occupied condominium or a two- to four-family residential
properly. In certain instances, a maximum LTV of 90% is permitted for a
mortgage loan secured by a single family owner-occupied property
originated under the Full Documentation program. The debt
service-to-income ratio generally ranges from 42% to 45% or less,
depending on the LTV.
"A-" Risk. Under the "A-" risk category, an applicant must have
generally repaid installment or revolving debt according to its terms or
must have a FICO score of 620 or higher. A maximum of one 30-day late
payment and no 60-day late payments within the last 12 months is
acceptable on an existing mortgage loan where the LTV is 85% or less.
No late payments within the last 12 months is acceptable if the LTV is
over 85%. An existing mortgage loan is not required to be current at
the time the application is submitted. Minor derogatory items are
allowed as to non-mortgage credit, and a letter of explanation may be
required under the Full Documentation program. Not more than $500 in
open collection accounts or open charge-offs affecting title may remain
open after funding of the loan. No bankruptcy or notice of default
filings may have occurred during the preceding three years; provided,
however, that if the borrower's bankruptcy has been discharged during
the past two years and the borrower has re-established a credit history
otherwise complying with the credit parameters set forth in this
paragraph, then the borrower may qualify for a mortgage loan. The
mortgaged property must be in at least average condition. A maximum LTV
of 85% (or 80% and 75% for mortgage loans originated under the Limited
Documentation and Stated Income Documentation programs, respectively) is
permitted for a mortgage loan on a single family owner-occupied
property. A maximum LTV of 75% (or 65% for mortgage loans originated
under the Limited Documentation and Stated Income Documentation
programs) is permitted for a mortgage loan on a non-owner-occupied
property. However, for most refinance mortgage loans under the Full
Documentation program, a maximum LTV of 80% is permitted for a mortgage
loan on an owner-occupied property and a maximum LTV of 75% is permitted
only for a mortgage loan on a non-owner-occupied property. In certain
instances, a maximum LTV of 85% is permitted for a mortgage loan secured
by a single family owner-occupied property originated under the Full
Documentation program. The debt service-to-income ratio is generally
55% or less.
"B" Risk. Under the "B" risk category, an applicant may have
experienced isolated credit problems, but should have generally repaid
installment or revolving debt according to its terms or must have a FICO
score of 600 or higher. A maximum of four 30-day late payments within
the last 12 months is acceptable on an existing mortgage loan, along
with not more than one 60-day late payment if the LTV is 75% or less,
and no 60-day late payments if the LTV is over 75%. An existing
mortgage loan is not required to be current at the time the application
is submitted. As to non-mortgage credit, some prior defaults may have
occurred and a letter of explanation may be required under the Full
Documentation program. Generally, no more than $1,000 in open
charge-offs or collection accounts may remain open after the funding of
the loan. No bankruptcy or notice of default filings by the applicant
may have occurred during the preceding two years; provided,
however, that if the borrower's bankruptcy has been discharged
during the past two years and the borrower has re-established a
credit history otherwise complying with the credit parameters set
forth in this paragraph, the borrower may qualify for a mortgage
loan. The mortgaged property must be in at least
average condition. A maximum LTV of 80% (or 75% and 70% for mortgage
loans originated under the Limited Documentation and Stated Income
Documentation programs, respectively) is permitted for a mortgage loan
on an owner-occupied detached property originated under the Full
Documentation program. A maximum LTV of 75% (or 70% and 65% for
mortgage loans originated under the Limited Documentation and Stated
Income Documentation programs, respectively) is permitted for a mortgage
loan on a non-owner-occupied property. The debt service-to-income ratio
is generally 60% or less.
"C" Risk. Under the "C" risk category, an applicant may have
experienced significant credit problems in the past. An unlimited
number of 30-day and 60-day late payments and a maximum of two 90-day
late payments within the last 12 months is acceptable on an existing
mortgage loan if the LTV is 70% or less. A maximum of either two 60-day
late payments or one 90-day late payment is acceptable if the LTV is
over 70%. An existing mortgage loan is not required to be current at
the time the application is submitted. As to non-mortgage credit,
significant prior defaults may have occurred. No more than $2,500 in
open charge-offs or collection accounts may remain open after the
funding of the loan. Allowances will be made, however, for numerous
open medical accounts with individual balances equal to or less than
$2,500. No bankruptcy or notice of default filings by the applicant may
have occurred during the preceding 18 months; provided, however, that if
the borrower's bankruptcy has been discharged during the past 18 months
and the borrower has re-established a credit history otherwise complying
with the credit parameters set forth in this paragraph, the borrower may
qualify for a mortgage loan. The mortgaged property must be in adequate
condition. Generally, a maximum LTV of 75% for a mortgage loan on a
single family, owner-occupied property for a Full Documentation program
(or 70% for mortgage loans originated under the Limited Documentation
and Stated Income Documentation programs) is permitted. The debt
service-to income ratio is generally 60% or less.
"C-" Risk. Under the "C-" risk category, an applicant may have
experienced significant credit problems in the past. An unlimited
number of 30-day and 60-day late payments and a maximum of two 90-day
late payments and one 120-day late payment is acceptable on an existing
mortgage loan if the LTV is more than 65%. For a loan with a LTV of 65%
or less, there may be a current notice of default. An existing mortgage
loan is not required to be current at the time the application is
submitted. As to non-mortgage credit, significant prior defaults may
have occurred. Open charge-offs or collection accounts may remain open
after the funding of the loan. A bankruptcy, notice of sale filing,
notice of default filing or foreclosure may be permitted on a case
by-case basis. The mortgaged property may exhibit some deferred
maintenance. A maximum LTV of 70% is permitted for a mortgage loan on
an owner-occupied property. The maximum LTV for either a
non-owner-occupied property or a condominium is 65%. The debt
service-to-income ratio is generally 65% or less.
Mortgage Credit Only. The Mortgage Credit Only program allows for
only two risk grade categories, A+ and A-. A maximum of zero 30-day
late payments for A+, or three 30-day late payments for A-, and no
60-day late payments within the last 12 months is acceptable on an
existing mortgage loan if the LTV is 80% for A+ or 75% for A-, or less.
An existing mortgage loan is not required to be current at the time the
application is submitted. Derogatory items are allowed as to
non-mortgage credit, and a letter of explanation may be required under
the Full Documentation program. No bankruptcy or notice of default
filings may have occurred during the preceding three years for A+ or two
years for A-; provided, however, that if the borrower's bankruptcy has
been discharged during the past two years and the borrower has
re-established a credit history otherwise complying with the credit
parameters set forth in this paragraph, the borrower may then qualify
for a mortgage loan. The mortgaged property must be in at least average
condition. A maximum LTV of 80% for A+ or 75% for A- (or 75% for
mortgage loans originated under the Limited Documentation program) is
permitted for a mortgage loan on a single family owner-occupied
property. The debt service-to-income ratio is generally 55% for A+ or
50% for A-, or less.
Home Saver Program. The Seller originates loans under a program
called "Home Saver" to enable borrowers with an existing delinquent loan
to preserve their home ownership. The existing loan may be over 90 days
delinquent, but any bankruptcy proceeding must be dismissed before the
loan is funded. The LTV may not exceed 65% (60% for loans originated
under the Limited Documentation program). The maximum loan amount is
$250,000 ($200,000 for loans originated under the Limited Documentation
program). Home Saver loans are not made available under the Stated
Documentation Program.
Exceptions. As described above, the foregoing categories and
criteria are guidelines only. On a case-by-case basis, it may be
determined that an applicant warrants a risk category upgrade, a debt
service-to-income ratio exception, a pricing exception, a loan-to-value
exception, an exception from certain requirements of a particular risk
category, etc. (collectively called an "upgrade" or an "exception").
An upgrade or exception may generally be allowed if the application
reflects certain compensating factors, among others: low LTV; pride of
ownership; a maximum of one 30-day late payment on all mortgage loans
during the last 12 months; and stable employment or ownership of current
residence of five or more years. An upgrade or exception may also be
allowed if the applicant places a down payment through escrow of at
least 20% of the purchase price of the mortgaged property or if the new
loan reduces the applicant's monthly aggregate mortgage payment by 25%
or more. Accordingly, certain mortgagors may qualify in a more
favorable risk category that, in the absence of such compensating
factors, would satisfy only the criteria of a less favorable risk
category.
Second Lien Financing. The Seller's program for second lien
mortgage loans permits first-time homebuyers, with a minimum FICO score
of 650, to borrow up to a maximum loan amount of $50,000, based on a
CLTV of up to 100%. For a second lien mortgage loan, other than to a
first-time homebuyer, if the CLTV is between 90% and 100%, the loan may
be up to $100,000, of which not more than $50,000 may be disbursed in
cash. For loans up to $50,000, a drive-by appraisal and a limited title
insurance policy is acceptable. For loans over $50,000, a full
appraisal and an ALTA policy is required.
THE SELLER AND SERVICER
The information set forth in the following paragraphs has been provided
by the Seller and the Servicer. None of the Depositor, the Trustee, the
Servicing Agent or any of their respective affiliates has made or will make
any representation as to the accuracy or completeness of such information.
New Century Mortgage Corporation (the "Company"), a wholly-owned
subsidiary of New Century Financial Corporation ("NCFC"), is a specialty
finance company engaged in the business of originating, purchasing, selling
and servicing sub-prime mortgage loans secured by first and second mortgages
on single-family residences. The Company emphasizes the origination of
mortgage loans that are commonly referred to as non-conforming "B&C" loans.
The Company commenced lending operations on February 26, 1996. It is
headquartered in Irvine, California.
NCFC completed its initial public offering in July 1997. Net proceeds to
NCFC after deducting offering expenses were approximately $31,000,000. Upon
completion of the initial public offering, NCFC had capital of approximately
$49.5 million.
For the nine months ended September 30, 1997, the Company originated
approximately $1.3 billion in mortgage loans, including approximately $574
million in the quarter ended September 30, 1997. As of September 30, 1997,
approximately $1 billion of these loans had been sold, mostly on a
servicing-released basis, with approximately $735.6 million being sold
through securitization.
As of September 30, 1997, the Company had opened retail and wholesale
branch offices in the states of Arizona, California, Colorado, Florida,
Georgia, Hawaii, Illinois, Indiana, Iowa, Minnesota, Missouri, Montana,
Nevada, New Mexico, Ohio, Oregon, Pennsylvania, Texas, Utah, Washington and
Wisconsin, and was originating mortgage loans through 4 regional operating
centers, 32 wholesale sales offices and 62 retail sales offices. As of
September 30, 1997, the Company had approximately 885 employees.
THE COMPANY COMMENCED LENDING OPERATIONS IN FEBRUARY 1996. DURING THE
PERIOD FROM FEBRUARY 1996 THROUGH SEPTEMBER 1997, THE SELLER DID NOT PERFORM
THE PRIMARY SERVICING FUNCTION FOR ITS PORTFOLIO. ACCORDINGLY, THE COMPANY,
IN ITS CAPACITY AS PRIMARY SERVICER, HAS NO REPRESENTATIVE HISTORICAL
DELINQUENCY, BANKRUPTCY, FORECLOSURE OR DEFAULT EXPERIENCE THAT MAY BE
REFERRED TO FOR PURPOSES OF ESTIMATING FUTURE DELINQUENCY AND LOSS EXPERIENCE
OF THE MORTGAGE LOANS.
THE SERVICING AGENT AGREEMENT
The Servicer recently commenced direct servicing of mortgage loans.
Prior to this development, the Servicer engaged another company as a
subservicer to conduct most of its mortgage loan servicing activities. With
respect to the servicing of the Mortgage Loans, the Servicer will conduct the
activities of collection and defaulted loan management. It has engaged a
servicing agent, Comerica Mortgage Corporation, to conduct certain routine
servicing functions, including lock box, impound management, reporting and
recordkeeping. The Servicer will remain responsible for the performance of
these functions.
The terms and conditions of the Servicing Agent Agreement are consistent
with and do not violate the provisions of the Pooling and Servicing
Agreement. The Servicing Agent Agreement does not relieve the Servicer from
any of its obligations to service the Mortgage Loans in accordance with the
terms and conditions of the Pooling and Servicing Agreement.
THE TRUST FUND
GENERAL
The Initial Mortgage Loans are expected to include 1,630 fixed-rate
Mortgage Loans evidenced by Mortgage Notes secured by first or second lien
mortgages or deeds of trust (collectively, the "Mortgages") on the Mortgaged
Properties. This subsection describes generally the characteristics of the
Initial Mortgage Loans. The Mortgaged Properties consist of owner-occupied
properties and non-owner-occupied investment properties. The Mortgaged
Properties do not include mobile homes which are not permanently affixed to
the ground, commercial properties or unimproved land. With respect to each
Initial Mortgage Loan and each Subsequent Mortgage Loan, the "Cut-Off Date
Loan Balance" is the unpaid principal balance of such Mortgage Loan as of the
opening of business on the applicable Cut-Off Date taking into account all
scheduled payments of principal due on or before such Cut-Off Date, whether
or not received.
Mortgage Loans included in the Trust Fund consist of fixed-rate loans
from the Seller's portfolio that are not delinquent in excess of the levels
permitted in the Pooling and Servicing Agreement. Pursuant to the Pooling
and Servicing Agreement, the Seller will make various representations and
warranties regarding the Mortgage Loans. See "The Pooling and Servicing
Agreement -- Assignment of the Mortgage Loans."
CHARACTERISTICS OF THE INITIAL MORTGAGE LOANS
The following is a brief description of certain terms of the Initial
Mortgage Loans expected to be included in the Trust Fund as of the Initial
Cut-Off Date. Prior to the Closing Date, the Seller may remove any of the
Initial Mortgage Loans intended for inclusion in the Trust Fund, substitute
comparable Mortgage Loans therefor, or add comparable Mortgage Loans thereto;
however, the aggregate of the Cut-Off Date Loan Balances of the Initial
Mortgage Loans so replaced, added or removed will not exceed 4.0% of the
Initial Cut-Off Date Pool Balance. To the extent that, prior to the Closing
Date, Initial Mortgage Loans are so replaced, added or removed, an amount
equal to the Cut-Off Date Loan Balance of such Mortgage Loans will be added
to or deducted from the Pre-Funded Amount on the Closing Date, as applicable.
As a result, the statistical information presented below regarding the
Initial Mortgage Loans may vary in certain respects from comparable
information based on the actual composition of the Trust Fund at the Closing
Date.
All Mortgage Loan statistics set forth herein are based on principal
balances, interest rates, terms to maturity, mortgage loan counts and similar
statistics as of the Initial Cut-Off Date, unless indicated to the contrary
herein. All weighted averages specified herein are weighted based on the
Cut-Off Date Loan Balances of the Initial Mortgage Loans. References to
percentages of the Mortgage Loans mean percentages of the Initial Cut-Off
Date Pool Balance.
MORTGAGE LOAN STATISTICS
The Initial Mortgage Loans will consist of 1,630 fixed-rate Mortgage
Loans evidenced by Mortgage Notes secured by Mortgages on Mortgaged
Properties located in 37 states. Additional Mortgage Loans (the "Subsequent
Mortgage Loans") are expected to be acquired by the Trust Fund on or prior to
December 31, 1997. Initial Mortgage Loans representing approximately 94.61%
of the Initial Cut-Off Date Pool Balance are secured by first liens on the
related Mortgaged Properties, and the remainder are secured by second liens
on the related Mortgaged Properties. The aggregate Cut-Off Date Loan
Balances of the Initial Mortgage Loans (the "Initial Cut-Off Date Pool
Balance") totaled approximately $132,842,283.98. The Initial Mortgage Loans
bear interest at fixed Mortgage Rates ranging from approximately 6.75% to
16.75% per annum. The weighted average Mortgage Rate for the Initial
Mortgage Loans was approximately 9.62% per annum. The lowest Cut-Off Date
Loan Balance of any Initial Mortgage Loan was approximately $10,031.69 and
the highest was approximately $749,784.92. The average Cut-Off Date Loan
Balance of the Initial Mortgage Loans was approximately $81,498.33. The
weighted average original term to stated maturity of the Initial Mortgage
Loans was approximately 328 months. The weighted average remaining term to
stated maturity of the Initial Mortgage Loans was approximately 327 months.
As of the Initial Cut-Off Date, the weighted average number of months that
have elapsed since origination of the Mortgage Loans was approximately 2
months. The lowest and highest Combined Loan-to-Value Ratios of the Initial
Mortgage Loans at origination were approximately 7.00% and 100.00%,
respectively. The weighted average Combined Loan-to-Value Ratio of the
Initial Mortgage Loans was approximately 70.68%. The weighted average
Combined Loan-to-Value Ratio of the Initial Mortgage Loans that are Second
Mortgage Loans was approximately 75.82%.
Initial Mortgage Loans representing approximately 12.65% of the Initial
Cut-Off Date Pool Balance are secured by non-owner-occupied (including second
homes) Mortgaged Properties (based solely upon statements made by the related
Mortgagors at the time of origination of the related Mortgage Loans).
Initial Mortgage Loans representing approximately 16.24%, 0.23% and
82.32% of the Initial Cut-Off Date Pool Balance are fully amortizing Mortgage
Loans having original stated maturities of approximately 15 years, 20 years
and 30 years, respectively. Initial Mortgage Loans representing approximately
1.21% of the Initial Cut-Off Date Pool Balance are Balloon Mortgage Loans
that generally provide for scheduled amortization over 30 years from their
respective dates of origination and a balloon payment at the end of the
fifteenth year. No Initial Mortgage Loan, including any Balloon Mortgage
Loan, is scheduled to mature later than January 1, 2028.
As of the Delinquency Statistic Date, approximately 1.17% of the Initial
Mortgage Loans were 30 days Delinquent, and no Initial Mortgage Loan was 60
days Delinquent.
The Combined Loan-to-Value Ratios of the Initial Mortgage Loans were
distributed as follows (the sum of the percentages in the following table may
not equal the total due to rounding):
<TABLE>
<CAPTION>
Percent of
Number of Aggregate Initial Cut-Off
Range of Combined Loan-to-Value Initial Cut-Off Date Date Pool
Ratios (%) Mortgage Loans Loan Balance Balance
- ---------------------------------- -------------- ------------- ---------------
<S> <C> <C> <C>
7.00 - 10.00 3 $ 91,437.35 0.07%
10.01 - 15.00 5 94,550.00 0.07
15.01 - 20.00 12 421,792.53 0.32
20.01 - 25.00 10 465,812.77 0.35
25.01 - 30.00 14 825,617.13 0.62
30.01 - 35.00 25 1,434,889.05 1.08
35.01 - 40.00 39 2,257,332.35 1.70
40.01 - 45.00 42 2,547,571.28 1.92
45.01 - 50.00 59 3,946,266.44 2.97
50.01 - 55.00 81 6,187,354.27 4.66
55.01 - 60.00 89 8,208,026.03 6.18
60.01 - 65.00 126 10,497,245.05 7.90
65.01 - 70.00 204 19,047,446.46 14.34
70.01 - 75.00 328 24,016,861.80 18.08
75.01 - 80.00 313 26,919,656.97 20.26
80.01 - 85.00 201 21,207,455.00 15.96
85.01 - 90.00 55 3,693,213.78 2.78
90.01 - 95.00 11 478,895.97 0.36
95.01 - 100.00 13 500,859.75 0.38
- ------------------------ --------- --------------- --------
TOTAL . . . . . . . . . . . . . 1,630 $132,842,283.98 100.00%
========= =============== =========
</TABLE>
As of the Initial Cut-Off Date, the weighted average Combined Loan-to-
Value Ratio of the Initial Mortgage Loans was approximately 70.68%.
Mortgage Rates of the Initial Mortgage Loans were distributed as follows
(the sum of the percentages in the following table may not equal the total
due to rounding):
<TABLE>
<CAPTION>
Number of Aggregate Percent of Initial
Range of Initial Cut-Off Date Cut-Off Date Pool
Mortgage Rates (%) Mortgage Loans Loan Balance Balance
- ------------------------- ---------------- ------------------ -------------------
<S> <C> <C> <C>
6.7500 - 7.0000 5 $ 734,310.37 0.55%
7.0001 - 7.5000 16 1,894,041.57 1.43
7.5001 - 8.0000 73 7,836,133.37 5.90
8.0001 - 8.5000 146 16,401,533.54 12.35
8.5001 - 9.0000 287 30,924,248.47 23.28
9.0001 - 9.5000 207 17,927,455.21 13.50
9.5001 - 10.0000 269 22,359,318.13 16.83
10.0001 - 10.5000 120 8,000,288.45 6.02
10.5001 - 11.0000 156 9,897,421.58 7.45
11.0001 - 11.5000 89 4,406,249.76 3.32
11.5001 - 12.0000 84 4,503,320.78 3.39
12.0001 - 12.5000 64 2,896,219.02 2.18
12.5001 - 13.0000 66 3,035,824.92 2.29
13.0001 - 13.5000 27 1,133,889.10 0.85
13.5001 - 14.0000 8 451,711.26 0.34
14.0001 - 14.5000 4 152,970.37 0.12
14.5001 - 15.0000 6 173,486.04 0.13
15.0001 - 15.5000 1 17,399.21 0.01
15.5001 - 16.0000 1 34,540.63 0.03
16.5001 - 16.7500 1 61,922.20 0.05
- ------------------------- ---------------- ---------------- -------------------
TOTAL . . . . . . . 1,630 $132,842,283.98 100.00%
================ ================ ===================
</TABLE>
As of the Initial Cut-Off Date, the weighted average Mortgage Rate was
approximately 9.62% per annum.
The original terms to maturity of the Initial Mortgage Loans were
distributed as follows (the sum of the percentages in the following table may
not equal the total due to rounding):
<TABLE>
<CAPTION>
Number of Aggregate Percent of Initial
Original Terms to Initial Cut-Off Date Cut-Off Date
Maturity (months) Mortgage Loans Loan Balance Pool Balance
----------------------------- ---------------- ----------------- -------------------
<S> <C> <C> <C>
180 450 $ 23,189,249.91 17.46%
240 5 300,151.31 0.23
360 1,175 109,352,882.76 82.32
----------------------------- ---------------- ----------------- -------------------
TOTAL . . . . . . . . . . . . 1,630 $132,842,283.98 100.00%
================ ================= ===================
</TABLE>
As of the Initial Cut-Off Date, the weighted average original term to
maturity was approximately 328 months.
The remaining terms to maturity of the Initial Mortgage Loans were
distributed as follows (the sum of the percentages in the following table may
not equal the total due to rounding):
<TABLE>
<CAPTION>
Number of Aggregate Percent of Initial
Range of Remaining Terms to Initial Cut-Off Date Cut-Off Date
Maturity (months) Mortgage Loans Loan Balance Pool Balance
----------------------------- ---------------- ----------------- -------------------
<S> <C> <C> <C>
171 - 180 449 $ 23,164,269.53 17.44%
229 - 240 5 300,151.31 0.23
337 - 348 1 52,991.02 0.04
349 - 360 1,175 109,324,872.12 82.30
----------------------------- ---------------- ----------------- -------------------
TOTAL . . . . . . . . . . . . 1,630 $132,842,283.98 100.00%
================ ================= ===================
</TABLE>
As of the Initial Cut-Off Date, the weighted average remaining term to
maturity was approximately 327 months.
The Cut-Off Date Loan Balances of the Initial Mortgage Loans were
distributed as follows (the sum of the percentages in the following table may
not equal the total due to rounding):
<TABLE>
<CAPTION>
Range of Number of Aggregate Percent of Initial
Cut-Off Date Initial Cut-Off Date Cut-Off Date Pool
Loan Balances ($) Mortgage Loans Loan Balance Balance
------------------------------ -------------- ---------------- ------------------
<S> <C> <C> <C>
10,031.69 - 15,000.00 14 $ 189,963.46 0.14%
15,000.01 - 20,000.00 34 656,153.56 0.49
20,000.01 - 25,000.00 83 1,915,738.10 1.44
25,000.01 - 30,000.00 83 2,330,389.45 1.75
30,000.01 - 35,000.00 93 3,032,925.58 2.28
35,000.01 - 40,000.00 82 3,118,764.21 2.35
40,000.01 - 45,000.00 106 4,557,857.06 3.43
45,000.01 - 50,000.00 99 4,759,841.40 3.58
50,000.01 - 55,000.00 93 4,912,112.62 3.70
55,000.01 - 60,000.00 100 5,807,635.34 4.37
60,000.01 - 65,000.00 53 3,322,047.00 2.50
65,000.01 - 70,000.00 74 5,041,980.50 3.80
70,000.01 - 75,000.00 60 4,357,681.69 3.28
75,000.01 - 80,000.00 58 4,522,768.81 3.40
80,000.01 - 85,000.00 52 4,315,405.16 3.25
85,000.01 - 90,000.00 49 4,317,909.07 3.25
90,000.01 - 95,000.00 47 4,380,411.73 3.30
95,000.01 - 100,000.00 41 4,032,519.33 3.04
100,000.01 - 105,000.00 33 3,405,629.83 2.56
105,000.01 - 110,000.00 32 3,449,753.40 2.60
110,000.01 - 115,000.00 38 4,269,269.73 3.21
115,000.01 - 120,000.00 29 3,402,069.21 2.56
120,000.01 - 125,000.00 23 2,843,071.13 2.14
125,000.01 - 130,000.00 20 2,551,648.01 1.92
130,000.01 - 135,000.00 18 2,376,967.98 1.79
135,000.01 - 140,000.00 18 2,481,026.22 1.87
140,000.01 - 145,000.00 21 3,008,532.57 2.26
145,000.01 - 150,000.00 21 3,125,650.80 2.35
150,000.01 - 200,000.00 80 13,781,097.28 10.37
200,000.01 - 250,000.00 35 7,721,170.29 5.81
250,000.01 - 300,000.00 12 3,296,205.55 2.48
300,000.01 - 350,000.00 19 6,162,596.64 4.64
350,000.01 - 400,000.00 2 718,151.68 0.54
400,000.01 - 450,000.00 2 855,758.62 0.64
500,000.01 - 550,000.00 1 524,393.69 0.39
550,000.01 - 600,000.00 3 1,798,226.50 1.35
700,000.01 - 749,784.92 2 1,498,960.78 1.13
------------------------------ -------------- ---------------- ------------------
TOTAL . . . . . . . . . . . 1,630 $132,842,283.98 100.00%
============== ================ ==================
</TABLE>
As of the Initial Cut-Off Date, the average Cut-Off Date Loan Balance of
the Initial Mortgage Loans was approximately $81,498.33.
As of the Initial Cut-Off Date, the geographic distribution of the
Initial Mortgage Loans was as follows (the sum of the percentages in the
following table may not equal the total due to rounding):
<TABLE>
<CAPTION>
Percent of
Number of Aggregate Initial Cut-Off
Initial Cut-Off Date Date
State Mortgage Loans Loan Balance Pool Balance
- ------------------------------------ --------------- ----------------- ----------------
<S> <C> <C> <C>
Arizona . . . . . . . . . . . . . . 109 $ 6,725,675.84 5.06%
Arkansas . . . . . . . . . . . . . 3 83,980.09 0.06
California . . . . . . . . . . . . 672 66,599,808.50 50.13
Colorado . . . . . . . . . . . . . 45 3,691,458.50 2.78
Delaware . . . . . . . . . . . . . 2 74,919.45 0.06
Florida . . . . . . . . . . . . . . 77 5,614,814.43 4.23
Georgia . . . . . . . . . . . . . . 22 1,508,187.35 1.14
Hawaii . . . . . . . . . . . . . . 40 5,903,858.04 4.44
Idaho . . . . . . . . . . . . . . . 9 699,187.12 0.53
Illinois . . . . . . . . . . . . . 63 4,155,103.67 3.13
Indiana . . . . . . . . . . . . . . 24 963,824.73 0.73
Iowa . . . . . . . . . . . . . . . 7 341,285.97 0.26
Kansas . . . . . . . . . . . . . . 7 285,012.96 0.21
Kentucky . . . . . . . . . . . . . 2 117,510.14 0.09
Louisiana . . . . . . . . . . . . . 11 644,110.99 0.48
Maryland . . . . . . . . . . . . . 9 355,395.67 0.27
Michigan . . . . . . . . . . . . . 2 206,991.17 0.16
Minnesota . . . . . . . . . . . . . 19 1,147,257.27 0.86
Mississippi . . . . . . . . . . . . 3 126,341.77 0.10
Missouri . . . . . . . . . . . . . 51 2,143,086.25 1.61
Montana . . . . . . . . . . . . . . 8 449,295.58 0.34
Nevada . . . . . . . . . . . . . . 57 4,947,178.76 3.72
New Jersey . . . . . . . . . . . . 11 782,137.50 0.59
New Mexico . . . . . . . . . . . . 28 1,947,816.41 1.47
North Carolina . . . . . . . . . . 16 835,019.53 0.63
Ohio . . . . . . . . . . . . . . . 76 4,529,032.00 3.41
Oklahoma . . . . . . . . . . . . . 9 318,450.98 0.24
Oregon . . . . . . . . . . . . . . 35 3,455,744.01 2.60
Pennsylvania . . . . . . . . . . . 58 3,565,950.95 2.68
Rhode Island . . . . . . . . . . . 2 183,151.44 0.14
South Carolina . . . . . . . . . . 15 1,340,620.67 1.01
South Dakota . . . . . . . . . . . 1 48,382.70 0.04
Tennessee . . . . . . . . . . . . . 5 534,924.48 0.40
Texas . . . . . . . . . . . . . . . 57 3,052,742.98 2.30
Utah . . . . . . . . . . . . . . . 37 2,251,432.15 1.69
Washington . . . . . . . . . . . . 25 2,591,845.55 1.95
Wisconsin . . . . . . . . . . . . . 13 620,748.38 0.47
--------------- ----------------- ----------------
TOTAL . . . . . . . . . . . . 1,630 $132,842,283.98 100.00%
=============== ================= ================
</TABLE>
As of the Initial Cut-Off Date, the distribution of the types of
Mortgaged Properties related to the Initial Mortgage Loans was as follows
(the sum of the percentages in the following table may not equal the total
due to rounding):
<TABLE>
<CAPTION>
Percent of
Number of Aggregate Initial Cut-Off
Initial Cut-Off Date Date
Mortgaged Property Type Mortgage Loans Loan Balance Pool Balance
----------------------------- --------------- -------------- ----------------
<S> <C> <C> <C>
Single family . . . . . . . . . . . 1,427 $113,127,425.20 85.16%
Two- to four-family . . . . . . . . 91 9,651,238.79 7.27
PUD . . . . . . . . . . . . . . . . 74 7,747,304.92 5.83
Condominium . . . . . . . . . . . . 33 2,017,600.68 1.52
Manufactured Housing . . . . . . . 5 298,714.39 0.22
----------------------------- --------------- -------------- ----------------
TOTAL . . . . . . . . . . . . 1,630 $132,842,283.98 100.00%
=============== ============== ================
</TABLE>
As of the Initial Cut-Off Date, the distribution of the occupancy status
of the Mortgaged Properties related to the Initial Mortgage Loans was as
follows (the sum of the percentages in the following table may not equal the
total due to rounding):
<TABLE>
<CAPTION>
Percent of
Number of Aggregate Initial Cut-Off
Initial Cut-Off Date Date
Occupancy Status Mortgage Loans Loan Balance Pool Balance
----------------------------- --------------- -------------- ----------------
<S> <C> <C> <C>
Owner-occupied . . . . . . . . . . 1,367 $116,034,472.59 87.35%
Investor . . . . . . . . . . . . . 247 15,832,882.02 11.92
Second Home . . . . . . . . . . . . 16 974,929.37 0.73
--------------- -------------- ----------------
TOTAL . . . . . . . . . . . . 1,630 $132,842,283.98 100.00%
=============== ============== ================
</TABLE>
As of the Initial Cut-Off Date, the distribution of the lien priority of
the Mortgages related to the Initial Mortgage Loans was as follows (the sum
of the percentages in the following table may not equal the total due to
rounding):
<TABLE>
<CAPTION>
Percent of
Number of Aggregate Initial Cut-Off
Initial Cut-Off Date Date
Lien Priority Mortgage Loans Loan Balance Pool Balance
----------------------------- --------------- ----------------- ----------------
<S> <C> <C> <C>
First lien . . . . . . . . . . . . 1,444 $125,685,582.24 94.61%
Second lien . . . . . . . . . . . . 186 7,156,701.74 5.39
--------------- ---------------- ----------------
TOTAL . . . . . . . . . . . . 1,630 $132,842,283.98 100.00%
=============== ================ ================
</TABLE>
As of the Initial Cut-Off Date, the distribution of the months since
origination of the Initial Mortgage Loans was as follows (the sum of the
percentages in the following table may not equal the total due to rounding):
<TABLE>
<CAPTION>
Percent of
Number of Aggregate Initial Cut-Off
Months Since Initial Cut-Off Date Date
Origination Mortgage Loans Loan Balance Pool Balance
------------------- ---------------- --------------- ---------------
<S> <C> <C> <C>
0 93 $ 6,948,620.20 5.23%
1 760 59,978,944.77 45.15
2 669 57,430,299.24 43.23
3 81 7,081,495.95 5.33
4 4 161,720.95 0.12
5 12 660,011.61 0.50
6 3 224,369.21 0.17
7 3 135,924.07 0.10
8 1 20,838.55 0.02
9 3 147,068.41 0.11
15 1 52,991.02 0.04
------------------- ---------------- --------------- ---------------
TOTAL . . . . . . . . . . 1,630 $132,842,283.98 100.00%
================ =============== ===============
</TABLE>
As of the Initial Cut-Off Date, the weighted average number of months
since origination of the Initial Mortgage Loans was approximately 2 months.
As of the Initial Cut-Off Date, the Initial Mortgage Loans were
originated under the different loan programs as follows (the sum of the
percentages in the following table may not equal the total due to rounding):
<TABLE>
<CAPTION>
Number of Aggregate Percent of Initial
Initial Cut-Off Date Cut-Off Date
Loan Programs Mortgage Loans Loan Balance Pool Balance
- --------------------------------- --------------- ---------------- --------------------
<S> <C> <C> <C>
Full Documentation . . . . . . . 1,140 $ 91,895,999.16 69.18%
Limited Documentation . . . . . . 82 6,780,891.74 5.10
Stated Income . . . . . . . . . . 408 34,165,393.08 25.72
--------------- ---------------- --------------------
TOTAL . . . . . . . . . . . 1,630 $132,842,283.98 100.00%
=============== ================ ====================
</TABLE>
As of the Initial Cut-Off Date, the Initial Mortgage Loans were rated in
the following risk categories (the sum of the percentages in the following
table may not equal the total due to rounding):
<TABLE>
<CAPTION>
Number of Aggregate Percent of Initial
Initial Cut-Off Date Cut-Off Date
Risk Categories Mortgage Loans Loan Balance Pool Balance
- ----------------------------------- --------------- --------------- -----------------
<S> <C> <C> <C>
A+ . . . . . . . . . . . . . . . . 502 $ 42,410,579.67 31.93%
A+MO/*/ . . . . . . . . . . . . . . 32 2,266,619.55 1.71
A- . . . . . . . . . . . . . . . . 578 51,822,333.63 39.01
A-MO/*/ . . . . . . . . . . . . . . 22 2,045,930.39 1.54
B . . . . . . . . . . . . . . . . . 261 18,557,786.47 13.97
C . . . . . . . . . . . . . . . . . 139 8,911,144.27 6.71
C- . . . . . . . . . . . . . . . . 96 6,827,890.00 5.14
--------------- --------------- -----------------
TOTAL . . . . . . . . . . . . 1,630 $132,842,283.98 100.00%
=============== =============== =================
</TABLE>
____________________
/*/ Underwritten pursuant to the Mortgage Credit Only program.
As of the Initial Cut-Off Date, the Initial Mortgage Loans were
originated for the following purposes (the sum of the percentages in the
following table may not equal the total due to rounding):
<TABLE>
<CAPTION>
Number of Aggregate Percent of Initial
Initial Cut-Off Date Cut-Off Date
Purpose Mortgage Loans Loan Balance Pool Balance
----------------------------- --------------- -------------- ----------------
<S> <C> <C> <C>
Cash Out Refinance . . . . . . . . 1,080 $ 85,177,749.62 64.12%
Purchase . . . . . . . . . . . . . 134 9,175,358.93 6.91
Rate/Term Refinance . . . . . . . . 416 38,489,175.43 28.97
--------------- --------------- -----------------
TOTAL . . . . . . . . . . . . 1,630 $132,842,283.98 100.00%
=============== =============== =================
</TABLE>
As of the Initial Cut-Off Date, the Initial Mortgage Loans were subject
to prepayment penalties if such loans were repaid within the following years
from origination (the sum of the percentages in the following table may not
equal the total due to rounding):
<TABLE>
<CAPTION>
Number of Aggregate Percent of Initial
Prepayment Penalty Initial Cut-Off Date Cut-Off Date
(years) Mortgage Loans Loan Balance Pool Balance
----------------------------- --------------- -------------- ------------------
<S> <C> <C> <C>
0.0 . . . . . . . . . . . 337 $ 20,878,845.05 15.72%
0.5 . . . . . . . . . . . 2 88,967.99 0.07
1.0 . . . . . . . . . . . 36 2,291,222.58 1.72
2.0 . . . . . . . . . . . 51 4,731,968.50 3.56
3.0 . . . . . . . . . . . 122 8,474,226.02 6.38
4.0 . . . . . . . . . . . 5 625,751.65 0.47
5.0 . . . . . . . . . . . 1,077 95,751,302.19 72.08
--------------- --------------- ------------------
TOTAL . . . . . . . . . . . . 1,630 $132,842,283.98 100.00%
=============== =============== =================
</TABLE>
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
The Pooling and Servicing Agreement permits the Trust Fund to acquire,
on or prior to December 31, 1997, Subsequent Mortgage Loans in an amount not
to exceed approximately $37,157,716.02 in aggregate Cut-Off Date Loan
Balance. The Subsequent Mortgage Loans may have characteristics that differ
from those of the Initial Mortgage Loans. Accordingly, the statistical
characteristics of the Mortgage Loans set forth above (which are based
exclusively on the Initial Mortgage Loans) and the statistical
characteristics of the Mortgage Loans after giving effect to the acquisition
of any Subsequent Mortgage Loans will likely differ in certain respects.
Each date on which the Seller transfers any Subsequent Mortgage Loans to the
Trust Fund shall be referred to herein as a "Subsequent Transfer Date."
The inclusion of Subsequent Mortgage Loans in the Trust Fund on or prior
to December 31, 1997 is subject to receipt of the consent of the Certificate
Insurer. In any event, the inclusion of any Subsequent Mortgage Loans will
be subject to, among other things, the following requirements (unless the
Certificate Insurer, in its discretion, waives any such requirements): (i)
no Subsequent Mortgage Loan may be 30 days Delinquent as of the applicable
Cut-Off Date; (ii) no Subsequent Mortgage Loan may have a remaining term to
maturity in excess of 30 years; (iii) each Subsequent Mortgage Loan has a
fixed Mortgage Rate and no Subsequent Mortgage Loan may have a Mortgage Rate
less than 6.75%; and (iv) following the purchase of such Subsequent Mortgage
Loans by the Trust Fund, the Mortgage Loans (a) will have a weighted average
Mortgage Rate of at least 9.60%; (b) will have a weighted average Combined
Loan-to-Value Ratio of not more than 71.3%; (c) will not include Balloon
Loans representing more than 1.3% by aggregate Loan Balance; (d) will not
have a weighted average remaining term to stated maturity of more than 360
months; (e) will, in each case, have a Loan Balance not in excess of $750,000
as of the Cut-Off Date; and (f) will not include second lien loans
representing more than 5.40% by aggregate unpaid Loan Balance.
PAYMENTS ON THE MORTGAGE LOANS
Except for the Balloon Mortgage Loans, each Mortgage Loan provides for
the amortization of the amount financed under the Mortgage Loan over a series
of substantially equal monthly payments.
Each Mortgage Loan provides for monthly payments by the related
Mortgagor according to the actuarial method (such Mortgage Loans, "Actuarial
Loans"). Actuarial Loans provide that interest is charged to the Mortgagors
thereunder, and payments are due from such Mortgagors, as of a scheduled day
of each month that is fixed at the time of origination. Scheduled monthly
payments made by Mortgagors on the Actuarial 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.
THE POOLING AND SERVICING AGREEMENT
ASSIGNMENT OF THE MORTGAGE LOANS
On the Closing Date, the Seller will transfer ownership of the Initial
Mortgage Loans to the Depositor. Immediately after such transfer, pursuant to
the Pooling and Servicing Agreement, the Depositor will sell, transfer,
assign, set over and otherwise convey without recourse to the Trustee, in
trust for the benefit of the holders of the Certificates and the Certificate
Insurer, all right, title and interest of the Depositor in and to each such
Initial Mortgage Loan and all right, title and interest in and to all other
assets included in the Trust Fund, including all principal and interest
payments due after the Initial Cut-Off Date. On each Subsequent Transfer
Date, the Seller will transfer ownership of the related Subsequent Mortgage
Loans to the Trustee in trust for the benefit of the holders of the
Certificates and the Certificate Insurer, including all principal and
interest payments due after such Cut-Off Date.
In connection with such transfer and assignment, on the Closing Date the
Depositor will deliver, or cause to be delivered, the following documents
(collectively constituting the "Trustee's Mortgage File") to the Trustee with
respect to each Mortgage Loan: (i) the original Mortgage Note, endorsed in
blank or to the order of the Trustee, with all prior and intervening
endorsements showing a complete chain of endorsement from the originator of
the Mortgage Loan to the Seller; (ii) the original Mortgage with evidence of
recording thereon (or, if the original Mortgage has not been returned from
the applicable public recording office or is not otherwise available, a copy
of the Mortgage certified by a responsible officer of the Seller or by the
closing attorney or by an officer of the title insurer or agent of the title
insurer which issued the related title insurance policy or commitment
therefor to be a true and complete copy of the original Mortgage submitted
for recording); (iii) the original executed assignment of the Mortgage
executed by the Seller to the Trustee or in blank, acceptable for recording
except with respect to any currently unavailable information; (iv) the
original assignment and any intervening assignments of the Mortgage, showing
a complete chain of assignment from the originator of the Mortgage Loan to
the Seller (or, if any such assignment has not been returned from the
applicable public recording office or is not otherwise available, a copy of
such assignment certified by a responsible officer of the Seller or by the
closing attorney or by an officer of the title insurer or agent of the title
insurer which issued the related title insurance policy or commitment
therefor to be a true and complete copy of such assignment submitted for
recording); (v) the original, or a copy certified by the Seller or the
originator of the Mortgage Loan to be a true and complete copy of the
original, of each assumption, modification, written assurance or substitution
agreement, if any; and (vi) an original, or a copy certified by the Seller to
be a true and complete copy of the original, of a lender's title insurance
policy, or if a lender's title policy has not been issued as of the Closing
Date, a marked-up commitment (binder) (including any marked additions thereto
or deletions therefrom) to issue such policy; provided, that with respect to
the Initial Mortgage Loans, the Seller anticipates delivery to the Trustee of
the documents set forth in (vi) above within 15 days following the Closing
Date.
On each Subsequent Closing Date, the Depositor will deliver, or cause to
be delivered to the Trustee, the Trustee's Mortgage File with respect to each
Subsequent Mortgage Loan to be conveyed to the Trustee on such date.
The Trustee will review the Mortgage Loan documents relating to the
Initial Mortgage Loans on or prior to the Closing Date and will review the
Mortgage Loan documents relating to the Subsequent Mortgage Loans on or prior
to the Subsequent Transfer Date, and will hold such documents in trust for
the benefit of the holders of the Certificates and the Certificate Insurer.
After the Closing Date, if any document is found to be missing or defective
in any material respect, the Trustee is required to notify the Servicer, the
Seller, the Depositor and the Certificate Insurer in writing. If the Seller
cannot or does not cure such omission or defect within 60 days after its
receipt of notice from the Trustee, the Seller will be required to repurchase
the related Mortgage Loan (the "Defective Loan") from the Trust Fund at a
price (the "Purchase Price") to include 100% of the Loan Balance thereof plus
accrued and unpaid interest thereon, calculated at a rate equal to the
difference between the Mortgage Rate and the Servicing Fee Rate (the "Net
Mortgage Rate") (or, if New Century is no longer the Servicer, at the
applicable Mortgage Rate) through the day immediately preceding the due date
in the Due Period preceding the Distribution Date on which such Purchase
Price will be distributed. Rather than repurchase the Defective Loan as
provided above, the Seller may remove such Defective Loan (a "Deleted
Mortgage Loan") from the Trust Fund and substitute in its place another
Mortgage Loan of like kind (a "Replacement Mortgage Loan"); provided,
however, that such substitution is permitted only within two years after the
Closing Date and may not be made unless an opinion of counsel is provided to
the effect that such substitution would not disqualify the Trust Fund as a
REMIC or result in a prohibited transaction tax under the Code. Any
Replacement Mortgage Loan generally will, on the date of substitution, among
other characteristics set forth in the Pooling and Servicing Agreement, (i)
have a Loan Balance, after deduction of the principal portion of the
scheduled payment due in the Due Period ending in the month succeeding the
month during which such substitution occurred, not in excess of, and not
substantially less than the Loan Balance of the Deleted Mortgage Loan (the
amount of any shortfall to be deposited by the Seller in the Collection
Account not later than the succeeding Determination Date and held for
distribution to the holders of the Certificates on the related Distribution
Date), (ii) have a Mortgage Rate not less than (and not more than one
percentage point greater than) the Mortgage Rate of the Deleted Mortgage
Loan, (iii) have a Combined Loan-to-Value Ratio not higher than that of the
Deleted Mortgage Loan, (iv) have a remaining term to maturity not more than
two years greater than, nor more than two years less than, that of the
Deleted Mortgage Loan, (v) have the same or lower credit risk, as measured by
credit risk category under the Seller's underwriting guidelines and (vi)
comply with all of the representations and warranties set forth in the
Pooling and Servicing Agreement as of the date of substitution. This
cure, repurchase or substitution obligation constitutes the sole remedy
available to the holders of the Offered Certificates or the Trustee for
omission of, or a material defect in, a Mortgage Loan document.
THE TRUSTEE
U.S. Bank National Association, dba First Bank National Association, a
national banking association, will act as Trustee for the holders of the
Certificates pursuant to the Pooling and Servicing Agreement. The Trustee's
offices for notices under the Pooling and Servicing Agreement are located at
180 East Fifth Street, St. Paul, Minnesota 55101, and its telephone number is
(800) 934-6802.
The principal compensation to be paid to the Trustee in respect of its
obligations under the Pooling and Servicing Agreement will be equal to
accrued interest at the Trustee Fee Rate of 0.0125% per annum on the sum of
the aggregate Loan Balance of the Mortgage Loans and the amount, if any, on
deposit in the Pre-Funding Account.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will be paid a monthly fee from interest collected with
respect to each Mortgage Loan (as well as from any liquidation proceeds from
a Liquidated Mortgage Loan that are applied to accrued and unpaid interest)
equal to one-twelfth of the Loan Balance thereof multiplied by the Servicing
Fee Rate (such product, the "Servicing Fee"). The "Servicing Fee Rate" for
each Mortgage Loan will equal 0.50% per annum. The amount of the monthly
Servicing Fee is subject to adjustment with respect to prepaid Mortgage
Loans, as described herein under "--Adjustment to Servicing Fee in Connection
with Certain Prepaid Mortgage Loans." The Servicer is also entitled to
receive, as additional servicing compensation, amounts in respect of all late
payment fees, assumption fees and other similar charges and all reinvestment
income earned on amounts on deposit in the Collection Account and the
Certificate Account. The Servicer is obligated to pay certain ongoing
expenses associated with the Mortgage Loans and incurred by the Trustee in
connection with its responsibilities under the Pooling and Servicing
Agreement.
ADJUSTMENT TO SERVICING FEE IN CONNECTION WITH CERTAIN PREPAID MORTGAGE LOANS
When a borrower prepays all of a Mortgage Loan between scheduled monthly
payment dates (each, a "due date"), the borrower pays interest on the amount
prepaid only to the date of prepayment. This results in a shortfall in the
collection of interest on the Mortgage Loan, as compared with the interest
that would otherwise have been collected and available for distribution to
Certificateholders. In order to mitigate the effect of any such shortfall in
interest distributions to holders of the Offered Certificates on any
Distribution Date (a "Prepayment Interest Shortfall"), the amount of the
Servicing Fee otherwise payable to the Servicer for such month shall, to the
extent of such shortfall, be deposited by the Servicer in the Collection
Account for distribution to holders of the Offered Certificates on such
Distribution Date. However, any such reduction in the Servicing Fee will be
made only to the extent of the Servicing Fee otherwise payable to the
Servicer with respect to payments on the Mortgage Loans received during the
Due Period relating to such Distribution Date. Any such deposit by the
Servicer will be reflected in the distributions to holders of the Offered
Certificates made on the Distribution Date on which the Principal Prepayment
received would be distributed. See "Description of the Certificates--Example
of Distributions" herein.
ADVANCES
Subject to the following limitations, the Servicer will be obligated to
advance or cause to be advanced prior to each Distribution Date its own
funds, or funds in the Collection Account that constitute amounts held for
future distribution, in an amount equal to the aggregate of all payments of
principal and interest, net of the Servicing Fee, that were due during the
related Due Period on the Mortgage Loans and that were delinquent on the
related Determination Date, plus certain amounts representing assumed
payments not covered by any current net income on the Mortgaged Properties
acquired through foreclosure or deed in lieu of foreclosure (any such
advance, a "Delinquency Advance").
Delinquency Advances are required to be made only to the extent they are
deemed by the Servicer to be recoverable from related late collections,
insurance proceeds or liquidation proceeds. The purpose of making such
Delinquency Advances is to maintain a regular cash flow to the
Certificateholders, rather than to guarantee or insure against losses. The
Servicer will not be required to make any Delinquency Advances with respect
to reductions in the amount of the monthly payments on the Mortgage Loans due
to bankruptcy proceedings or the application of the Civil Relief Act.
All Delinquency Advances will be reimbursable to the Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage
Loan as to which such unreimbursed Delinquency Advance was made. In
addition, any Delinquency Advances previously made in respect to any Mortgage
Loan that are at any time deemed by the Servicer to be nonrecoverable from
related late collections, insurance proceeds or liquidation proceeds may be
reimbursed to the Servicer out of any funds in the Collection Account prior
to the distributions on the Certificates. In the event the Servicer fails in
its obligation to make any such Delinquency Advance, the Trustee will be
obligated to make any such Delinquency Advance, to the extent required in the
Pooling and Servicing Agreement.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Offered Certificates will be issued pursuant to a Pooling and
Servicing Agreement, dated as of December 1, 1997 (the "Pooling and Servicing
Agreement"), among the Depositor, the Seller, the Servicer and the Trustee.
Set forth below are summaries of the specific terms and provisions pursuant
to which the Offered Certificates will be issued. The following summaries do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, the provisions of the Pooling and Servicing
Agreement. When particular provisions or terms used in the Pooling and
Servicing Agreement are referred to, the actual provisions (including
definitions of terms) are incorporated by reference.
New Century Home Equity Loan Trust, Series 1997-NC6 will consist of the
Class A-1 Certificates, Class A-2 Certificates, Class A-3 Certificates, Class
A-4 Certificates, Class A-5 Certificates, Class A-6 Certificates, Class A-7
Certificates and Class A-8IO Certificates (collectively, the "Offered
Certificates") and the Class R Certificates (the "Residual Certificates").
The Offered Certificates and the Residual Certificates are collectively
referred to herein as the "Certificates." The Residual Certificates do not
have a principal balance and will evidence a residual interest in the Trust
Fund.
The Offered Certificates will have Original Certificate Principal
Balances or an initial Certificate Notional Balance (in the case of the Class
A-8IO Certificates) specified on the cover hereof or described herein and,
together with the Residual Certificates, will evidence the entire beneficial
ownership interest in the Trust Fund. The aggregate of the Original
Certificate Principal Balances of the Offered Certificates is $170,000,000.
The Class A-8IO Certificates have no principal balance and accrue interest on
a notional balance (the "Certificate Notional Balance") equal to the
aggregate Loan Balance of the Mortgage Loans then outstanding.
The Offered Certificates will be issued in book-entry form as described
below. The Offered Certificates will be issued in minimum dollar
denominations or notional balances of $100,000 and integral multiples of
$1,000 in excess thereof (except that one certificate of each Class may be
issued in a denomination which is not an integral multiple thereof). The
assumed final maturity dates for the Classes of Offered Certificates are the
applicable Distribution Dates set forth in the table below:
<TABLE>
<CAPTION>
Class Assumed Final Maturity Dates
-------------------- ----------------------------
<S> <C>
Class A-1 November 2010
Class A-2 December 2016
Class A-3 December 2019
Class A-4 July 2022
Class A-5 October 2023
Class A-6 May 2026
Class A-7 January 2029
Class A-8IO January 2029
</TABLE>
BOOK-ENTRY CERTIFICATES
The Offered Certificates will initially be book-entry certificates (the
"Book-Entry Certificates"). The Book-Entry Certificates will be issued in
one or more certificates, the original aggregate principal balances of which
will equal the Original Certificate Principal Balance (or, in the case of the
Class A-8IO, the original Certificate Notional Balance) of each Class and
will be held by a nominee of The Depository Trust Company (together with any
successor depository selected by the Depositor, the "Depository"). Beneficial
interests in the Book-Entry Certificates will be held indirectly by investors
through the book-entry facilities of the Depository, as described herein. The
Depositor has been informed by the Depository that its nominee will be Cede &
Co. ("Cede"). Accordingly, Cede is expected to be the holder of record of the
Book-Entry Certificates. Except as described below, no person acquiring a
Book-Entry Certificate (each, a "beneficial owner" or "Certificate Owner")
will be entitled to receive a physical certificate representing such
Certificate (a "Definitive Certificate") except in the event Definitive
Certificates are issued under the limited circumstances described herein.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that
maintains the beneficial owner's account for such purpose. In turn, the
Financial Intermediary's ownership of such Book-Entry Certificate will be
recorded on the records of the Depository (or of a participating firm that
acts as agent for the Financial Intermediary, whose interest will in turn be
recorded on the records of the Depository, if the beneficial owner's
Financial Intermediary is not a Depository participant). Therefore, the
beneficial owner must rely on the foregoing procedures to evidence its
beneficial ownership of a Book-Entry Certificate. Beneficial ownership of a
Book-Entry Certificate may be transferred only in compliance with the
procedures of such Financial Intermediaries and Depository participants.
The Depository, which is a New York-chartered limited purpose trust
company, performs services for its participants, some of which (and/or their
representatives) own the Depository. In accordance with its normal
procedures, the Depository is expected to record the positions held by each
Depository participant in the Book-Entry Certificates, whether held for its
own account or as a nominee for another person. In general, beneficial
ownership of the Book-Entry Certificates will be subject to the rules,
regulations and procedures governing the Depository and Depository
participants as in effect from time to time.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to the Depository. The Depository will be
responsible for crediting the amount of such payments to the accounts of the
applicable Depository participants in accordance with the Depository's normal
procedures. Each Depository participant will be responsible for disbursing
such payments to the beneficial owners of the Book-Entry Certificates that it
represents and to each Financial Intermediary for which it acts as agent.
Each such Financial Intermediary will be responsible for disbursing funds to
the beneficial owners of the Book-Entry Certificates that it represents.
Under a book-entry format, beneficial owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since
such payments will be forwarded by the Trustee to Cede. None of the
Depositor, the Seller, the Servicer or the Trustee is responsible or liable
for such delays in the application of such payments to such beneficial
owners. Because the Depository can only act on behalf of Financial
Intermediaries, the ability of a beneficial owner to pledge Book-Entry
Certificates to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of the Book-Entry
Certificates, may be limited due to the absence of physical certificates for
the Book-Entry Certificates. In addition, issuance of the Book-Entry
Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may
be unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Unless and until Definitive Certificates are issued, it is anticipated
that the only "Certificateholder" of the Book-Entry Certificates within the
meaning of the Pooling and Servicing Agreement will be Cede, as nominee of
the Depository. Beneficial owners of the Book-Entry Certificates will not be
"Certificateholders," as that term is used in the Pooling and Servicing
Agreement. Beneficial owners are only permitted to exercise the rights of
Certificateholders indirectly through Financial Intermediaries and the
Depository. Reports on the Trust Fund provided by the Servicer to Cede, as
nominee of the Depository, may be made available to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose
Depository accounts the Book-Entry Certificates of such beneficial owners are
credited.
The Depository has advised the Depositor and the Trustee that, unless
and until Definitive Certificates are issued, the Depository will take any
action permitted to be taken by the holders of the Book-Entry Certificates
under the Pooling and Servicing Agreement only at the direction of one or
more Financial Intermediaries to whose Depository accounts the Book-Entry
Certificates are credited, to the extent that such actions are taken on
behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates.
Definitive Certificates will be issued to beneficial owners of the Book-
Entry Certificates, or their nominees, rather than to the Depository, only if
(a) the Depositor advises the Trustee in writing that the Depository is no
longer willing, qualified or able to discharge properly its responsibilities
as nominee and depository with respect to the Book-Entry Certificates and the
Depositor or the Trustee is unable to locate a qualified successor; (b) the
Depositor, at its sole option, advises the Trustee that it elects to
terminate a book-entry system through the Depository; or (c) with the consent
of the Certificate Insurer following the occurrence of an Event of Default
(as described below), beneficial owners of the Book-Entry Certificates having
not less than 51% of the Voting Rights evidenced by the Book-Entry
Certificates advise the Trustee and the Depository through the Financial
Intermediaries in writing that the continuation of a book-entry system with
respect to such Book-Entry Certificates through the Depository (or a
successor thereto) is no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the Book-Entry Certificates through the Depository of the
occurrence of such event and the availability of Definitive Certificates.
Upon surrender by the Depository of the global certificate or certificates
representing the Book-Entry Certificates and instructions for re-
registration, the Trustee will issue the Definitive Certificates, and
thereafter the Trustee will recognize the holders of such Definitive
Certificates as Certificateholders under the Pooling and Servicing Agreement.
DISTRIBUTIONS
Distributions on the Offered Certificates will be made by the Trustee on
the 25th day of each month, or if such day is not a Business Day, on the
first Business Day thereafter, commencing in January 1998 (each, a
"Distribution Date"), to the persons in whose names such Certificates are
registered at the close of business on the last Business Day of the month
preceding the month of the related Distribution Date (each, a "Record Date").
DEPOSITS INTO THE COLLECTION ACCOUNT
The Servicer shall establish or cause to be established and maintain or
cause to be maintained an account (the "Collection Account") on behalf of the
Trustee for the benefit of the Certificateholders. Within two business days
after receipt (or, if applicable, on or prior to such other date as may be
specified in the Pooling and Servicing Agreement), the Servicer will remit to
the Trustee (or, in the event the Collection Account is maintained with
another institution pursuant to the Pooling and Servicing Agreement, to such
institution) for deposit into the Collection Account the following payments
and collections received or made by it subsequent to the applicable
Cut-Off Date (to the extent not applied in computing the applicable
Cut-Off Date Loan Balance) or received prior to the applicable Cut-Off
Date but due the Trust Fund:
(i) (a) all payments on account of scheduled principal (including
any amount deemed to be principal with respect to REO Property) that are
due on or subsequent to the applicable Cut-Off Date, and (b) all
Principal Prepayments, in each case on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans
(net of the related Servicing Fee) that are due on or after the
applicable Cut-Off Date;
(iii) with respect to any Mortgage Loan, all proceeds of any
related insurance policies (to the extent such proceeds are not applied
to the restoration of the related Mortgaged Property or released to the
related Mortgagor in accordance with the Servicer's normal servicing
procedures) ("Insurance Proceeds"), and all other cash amounts received
either (a) through eminent domain or condemnation with respect to the
Mortgaged Properties or (b) in connection with the liquidation of
defaulted Mortgage Loans ("Liquidation Proceeds"), together with the net
proceeds on a monthly basis received with respect to any Mortgaged
Properties acquired by the Servicer by foreclosure, deed in lieu of
foreclosure or otherwise, net of the sum of (A) all unreimbursed
Servicing Advances (as defined in the Pooling and Servicing Agreement)
and unreimbursed Delinquency Advances, if any, with respect to such
Mortgage Loan, (B) all accrued interest on such Mortgage Loan at the
applicable Net Mortgage Rate from the due date as to which interest was
last paid by the related Mortgagor through the due date in the Due
Period relating to the Distribution Date in which such proceeds are
required to be distributed on such Mortgage Loan (to the extent not
already covered in (A) above), (C) all accrued and unpaid Servicing
Fees, if any, and (D) without duplication, liquidation expenses.
(iv) all payments made by the Servicer in respect of Prepayment
Interest Shortfalls;
(v) any amount required to be deposited by the Servicer in
connection with any losses on investment of funds in the Collection
Account;
(vi) any amounts required to be deposited by the Servicer with
respect to any deductible clause in any blanket hazard insurance policy
maintained by the Servicer in lieu of requiring each Mortgagor to
maintain a primary hazard insurance policy;
(vii) all proceeds of any Mortgage Loans or property acquired in
respect of Mortgage Loans through foreclosure and purchased by the
Seller or the Servicer and all amounts required to be deposited in
connection with shortfalls in the principal amount of Replacement
Mortgage Loans;
(viii) all prepayment penalties, if any, collected during the
related Due Period;
(ix) the amount of any Delinquency Advances to be deposited to
the Collection Account pursuant to the Pooling and Servicing Agreement;
and
(x) all amounts required to be deposited therein in respect of
repurchases of Mortgage Loans as provided in the Pooling and Servicing
Agreement.
WITHDRAWALS FROM THE COLLECTION ACCOUNT
The Servicer, or the Trustee at the written request of the Servicer,
will withdraw funds from the Collection Account for the following purposes:
(i) to deposit into the Certificate Account prior to 3:00 p.m.,
New York time, on the Servicer Remittance Date immediately preceding
each Distribution Date (after having received Delinquency Advances
for such period) the related Interest Remittance Amount and the related
Principal Remittance Amount, net of amounts to be paid as follows:
(A) to pay to the Servicer or the Seller, as the case may be,
with respect to each Mortgage Loan that has previously been
purchased or replaced pursuant to the Pooling and Servicing
Agreement all amounts received thereon relating to any month
or Due Period subsequent to the month of such purchase or
substitution, as the case may be;
(B) to reimburse the Servicer for any Delinquency Advance or
Servicing Advance previously made that the Servicer has
determined to be a nonrecoverable Delinquency Advance or a
nonrecoverable Servicing Advance; and
(C) to reimburse the Seller, the Depositor and the Servicer for
certain losses, liabilities, costs and expenses reimbursable
to them pursuant to the Pooling and Servicing Agreement;
(ii) to pay to the Servicer (x) when collected on the related
Mortgage Loan, all recovered and previously unreimbursed Delinquency
Advances and Servicing Advances (but only to the extent received from
the related Mortgagor) and (y) any interest or investment income earned
on funds deposited in the Collection Account (net of investment losses);
(iii) to reimburse the Servicer or the Trustee, as the case may
be, for expenses reasonably incurred in respect of any breach or defect
giving rise to a repurchase obligation under the Pooling and Servicing
Agreement, including any expenses arising out of the enforcement of the
purchase obligation, but only to the extent included in the related
purchase price;
(iv) to pay to the Servicer the excess, if any, of any Net
Recovery Proceeds (as defined in the Pooling and Servicing Agreement)
over the Loan Balance of the related Mortgage Loan, to the extent any
such excess was deposited into the Collection Account;
(v) to withdraw any amount not required to be deposited into
the Collection Account, which amount shall include all interest payments
as to which the related due date occurs prior to the applicable Cut-Off
Date;
(vi) to clear and terminate the Collection Account pursuant to
the Pooling and Servicing Agreement upon the termination of the Trust
Fund;
(vii) in the event of a prepayment or satisfaction of a
Mortgage Loan, to pay the refunds and expenses to which the Mortgagor is
entitled as set forth on requests submitted by the Servicer; and
(viii) to pay to the Residual Certificateholders any prepayment
penalties on the Mortgage Loans collected in the calendar month prior to
the related Distribution Date (such amounts to be paid directly to the
Residual Certificateholders on such Distribution Date).
DEPOSITS INTO THE CERTIFICATE ACCOUNT
The Trustee shall maintain a certificate account (the "Certificate
Account") on behalf of the registered holders of the Certificates. The
Trustee shall, promptly upon receipt, deposit into the Certificate Account
and retain therein the following:
(i) the amounts withdrawn from the Collection Account as described
under clause (i) under "-Withdrawals from the Collection Account" above;
(ii) any amount received by the Trustee in connection with a
termination of the Trust Fund in accordance with the Pooling and
Servicing Agreement;
(iii) any amount received from the Servicer and required to be
deposited therein in respect of losses on investment of funds in the
Certificate Account; and
(iv) the amount, if any, required to be withdrawn from either the
Pre-Funding Account or the Capitalized Interest Account in respect of
the first Distribution Date.
WITHDRAWALS FROM THE CERTIFICATE ACCOUNT
The Trustee will withdraw funds from the Certificate Account and apply
them not later than 1:00 p.m., New York time, on each Distribution Date as
follows:
(i) first, to the Certificate Insurer, the Premium Amount (as
defined in the Pooling and Servicing Agreement) for such Distribution
Date;
(ii) second, to the Trustee, the Trustee Fee for such Distribution
Date;
(iii) third, to pay to the Servicer any interest or investment
income earned on funds deposited in the Certificate Account (net of
investment losses); and
(iv) fourth, any remaining amounts then on deposit in the
Certificate Account ("Available Funds"), to make distributions as
described under "--Allocation of Available Funds" below.
PRE-FUNDING ACCOUNT
On the Closing Date, the Seller will deposit approximately
$37,157,716.02 (the "Pre-Funded Amount") into an account (the "Pre-Funding
Account"), to be maintained by and in the name of the Trustee as part of the
Trust Fund for the benefit of the holders of the Certificates. The Pre-
Funding Account will be used to acquire Subsequent Mortgage Loans during the
period beginning on the Closing Date and generally terminating on the earlier
to occur of (i) the date on which the amount on deposit in the Pre-Funding
Account (exclusive of any investment earnings) is less than $100,000 and
(ii) December 31, 1997 (the "Funding Period"). The Pre-Funded Amount will be
reduced during the Funding Period by the amount thereof used to purchase
Subsequent Mortgage Loans in accordance with the Pooling and Servicing
Agreement. Any Pre-Funded Amount remaining at the end of the Funding Period
(the "Unutilized Funding Amount") will be distributed to holders of certain
Classes of Certificates on the Distribution Date immediately following the
Due Period in which the end of the Funding Period occurs, in reduction of the
related Certificate Principal Balances, thus resulting in an unscheduled
distribution of principal in respect of such Classes of Certificates on such
date. The manner in which the Unutilized Funding Amount is allocated to the
Certificates will depend on its size. If the Unutilized Funding Amount
equals or exceeds $100,000, holders of the Certificates will be entitled to a
pro rata distribution of such Unutilized Funding Amount, on the basis of the
respective Original Certificate Principal Balances of such Classes. If the
Unutilized Funding Amount is less than $100,000, it will be distributed
pursuant to the allocation of the Principal Distribution Amount for the
related Distribution Date, as described in "-- Allocation of Available Funds"
below.
Amounts on deposit in the Pre-Funding Account will be invested in
Eligible Investments (as defined in the Pooling and Servicing Agreement).
All interest and any other investment earnings on amounts on deposit in the
Pre-Funding Account will be deposited in the Certificate Account. The Pre-
Funding Account will not be an asset of the REMIC. For federal income tax
purposes, the Pre-Funding Account will be owned by and all investment
earnings on amounts in the Pre-Funding Account shall be taxable to the
Seller.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date the Seller will deposit into an account (the
"Capitalized Interest Account"), to be maintained with and in the name of the
Trustee as part of the Trust Fund for the benefit of the holders of the
Certificates, a portion of the proceeds of the sale of the Certificates. The
amount deposited therein will be used by the Trustee on the Distribution Date
in January 1998 to cover shortfalls in interest on the Certificates that may
arise as a result of the utilization of the Pre-Funding Account for the
purchase by the Trust Fund of Subsequent Mortgage Loans after the Closing
Date. Any amounts not needed to cover such shortfalls will be paid directly
to the Seller. The Capitalized Interest Account will not be an asset of the
REMIC. For federal income tax purposes, the Capitalized Interest Account
will be owned by and all investment earnings on amounts in the Capitalized
Interest Account will be taxable to the Seller.
ALLOCATION OF AVAILABLE FUNDS
Distributions to holders of the Certificates will be made on each
Distribution Date in an amount equal to the amount of Available Funds plus
any Insured Payments, if applicable.
On each Distribution Date, the Trustee will withdraw (a) from the
Certificate Account all Available Funds then on deposit and (b) from an
account (the "Policy Payments Account") maintained by the Trustee pursuant to
the terms of the Pooling and Servicing Agreement, the amount of any Insured
Payment and will distribute the same in the following order of priority:
(i) to the holders of each Class of Offered Certificates, their pro
rata share (based on the amount of interest each such Class is entitled
to receive) of the aggregate Interest Distribution Amount for such
Distribution Date;
(ii) to the Certificate Insurer, the Reimbursement Amount; provided,
however, that any amounts paid under this clause (ii) will not be
permitted to the extent such payments cause an Insured Payment to be
required;
(iii) on the Distribution Date immediately following the month in
which the end of the Funding Period occurs, the Pro Rata Pre-Funding
Distribution Amount, if any, to the holders of the Class A Certificates,
pro rata on the basis of their respective Original Certificate Principal
Balances;
(iv) to the holders of the Offered Certificates, an amount equal to
the Principal Distribution Amount in the following order of priority:
first, to the Class A-1 Certificates, until the Certificate Principal
-----
Balance thereof has been reduced to zero, second, to the Class A-2
------
Certificates, until the Certificate Principal Balance thereof has
been reduced to zero, third, to the Class A-3 Certificates, until
-----
the Certificate Principal Balance thereof has been reduced to zero,
fourth, to the Class A-4 Certificates, until the Certificate
------
Principal Balance thereof has been reduced to zero, fifth, to the Class
----
Certificates, until the Certificate Principal Balance thereof has
been reduced to zero, sixth, to the Class A-6 Certificates, until
------
the Certificate Principal Balance thereof has been reduced to
zero, and, seventh, to the Class A-7 Certificates, until the
-------
Certificate Principal Balance thereof has been reduced to zero; and
(v) to the Residual Certificateholders, any remaining amounts.
Notwithstanding the foregoing, in the event a Subordination Deficit
exists on any Distribution Date and the aggregate amount distributable as
principal (including any draws made under the Certificate Insurance Policy)
on the Class A Certificates is not sufficient to reduce such Subordination
Deficit to zero, then all amounts distributable as principal of the Class A
Certificates on such Distribution Date will be allocated concurrently to the
outstanding Classes of Class A Certificates, pro rata, on the basis on their
respective Certificate Principal Balances.
CREDIT ENHANCEMENT
Overcollateralization Resulting from Cash Flow Structure. The Pooling
and Servicing Agreement requires that, on each Distribution Date, any Net
Monthly Excess Cashflow is to be applied to accelerate payment of principal
on the Offered Certificates in numerical order until the Subordinated Amount
is equal to the Required Subordinated Amount for such Distribution Date. This
application of the Net Monthly Excess Cashflow has the effect of accelerating
the amortization of the Offered Certificates relative to the amortization of
the Mortgage Loans, and of increasing the Subordinated Amount.
The Pooling and Servicing Agreement provides that in the event of a
permitted reduction in the Required Subordinated Amount, a portion of the
amount that would otherwise be distributed as principal to holders of the
Offered Certificates on such date shall instead be distributed to the holders
of the Residual Certificates. This application of principal has the effect of
decelerating the amortization of the Offered Certificates relative to the
amortization of the Mortgage Loans, and of reducing the Subordinated Amount.
The Pooling and Servicing Agreement provides that, on any Distribution
Date, all unscheduled collections on account of principal (other than any
such amounts applied to the payment of a Subordination Reduction Amount)
during the preceding calendar month are to be distributed to the holders of
the Offered Certificates in numerical order on such Distribution Date. If any
Mortgage Loan became a Liquidated Loan during such preceding calendar month,
a Realized Loss could result. The Pooling and Servicing Agreement does not
contain any provision that requires the amount of any Realized Loss to be
distributed to the holders of the Offered Certificates on the Distribution
Date immediately following the event of loss; i.e., the Pooling and Servicing
Agreement does not require the current recovery of losses. However, the
occurrence of a Realized Loss would reduce the Subordinated Amount, which, to
the extent that such reduction caused the Subordinated Amount to be less than
the Required Subordinated Amount for such Distribution Date, would require
the payment of a Subordination Increase Amount on such Distribution Date (or,
in the event of insufficient Available Funds on such Distribution Date, on
subsequent Distribution Dates, until the Subordinated Amount equaled the
applicable Required Subordinated Amount). The effect of the foregoing is to
allocate losses to the holders of the Residual Certificates by reducing, or
eliminating entirely, payments of Net Monthly Excess Cashflow and of
Subordination Reduction Amounts that such holders would otherwise receive.
The Certificate Insurance Policy. The following summary of the terms of
the Certificate Insurance Policy does not purport to be complete and is
qualified in its entirety by reference to the Certificate Insurance Policy.
A form of the Certificate Insurance Policy may be obtained upon request from
the Depositor.
Simultaneously with the issuance of the Offered Certificates, the
Certificate Insurer will deliver the Certificate Insurance Policy to the
Trustee for the benefit of the holders of the Offered Certificates. Under
the Certificate Insurance Policy, the Certificate Insurer will irrevocably
and unconditionally guarantee to the Trustee on each Distribution Date for
the benefit of the holders of the Offered Certificates, the full and complete
payment of Insured Payments with respect to the Offered Certificates,
calculated in accordance with the original terms of the applicable Offered
Certificates when issued and without regard to any amendment or modification
of the applicable Offered Certificates or the Pooling and Servicing Agreement
(except amendments or modifications to which the Certificate Insurer has
given its prior written consent). "Insured Payments" with respect to any
Distribution Date shall mean the sum of (i) any shortfall (other than
Prepayment Interest Shortfalls not covered by the Servicing Fee and
shortfalls resulting from application of the Civil Relief Act) in amounts
available in the Certificate Account to pay the Interest Distribution Amount
on such Certificates for such Distribution Date and (ii) any Subordination
Deficit (such Subordination Deficit to be calculated using Available Funds
only). The Certificate Insurance Policy does not cover Prepayment Interest
Shortfalls, shortfalls resulting from application of the Civil Relief Act or
adjustments in the Pass-Through Rates on the Class A-1, Class A-6 or Class A-
7 Certificate resulting from application of the Weighted Average Rate Cap.
Payment of claims on the Certificate Insurance Policy made in respect of
an Insured Payment will be made by the Certificate Insurer following Receipt
by the Certificate Insurer of the appropriate notice for payment on the later
to occur of (i) 12:00 noon New York City time, on the second Business Day
following Receipt of such notice for payment and (ii) 12:00 noon New York
City time, on the date on which such payment was due on the related Offered
Certificates.
If payment of any principal or current interest on any Offered
Certificates is avoided as a preference payment under applicable bankruptcy,
insolvency, receivership or similar law, the Certificate Insurer will pay
such amount out of the funds of the Certificate Insurer on the later of (a)
the date when due to be paid pursuant to the Order referred to below or (b)
the first to occur of (i) the fourth Business Day following Receipt by the
Certificate Insurer from the Trustee of (A) a certified copy of the order
(the "Order") of the court or other governmental body which exercised
jurisdiction to the effect that the holder of an Offered Certificate is
required to return the amount of any such interest or principal payment
distributed with respect to the related Offered Certificates during the
term of the Certificate Insurance Policy because such distributions
were avoidable as preference payments under applicable
bankruptcy law, (B) a certificate of the holders of the Offered
Certificate that the Order has been entered and is not subject to any stay
and (C) an assignment duly executed and delivered by the holder of the
Offered Certificate, in such form as is reasonably required by the
Certificate Insurer and provided to the holder of the Offered Certificate by
the Certificate Insurer, irrevocably assigning to the Certificate Insurer all
rights and claims of the holder of the Offered Certificate relating to or
arising under the related Offered Certificates against the debtor which made
such preference payment or otherwise with respect to such preference payment,
or (ii) the date of Receipt by the Certificate Insurer from the Trustee of
the items referred to in clauses (A), (B) and (C) above if, at least four
Business Days prior to such date of Receipt, the Certificate Insurer shall
have received written notice from the Trustee that such items were to be
delivered on such date and such date was specified in such notice. Such
payment shall be disbursed to the receiver, conservator, debtor-in-possession
or trustee in bankruptcy named in the Order and not to the Trustee or any
holder of an Offered Certificate directly (unless a holder of the Offered
Certificate has previously paid such amount to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order, in which
case such payment shall be disbursed to the Trustee for distribution to such
holder of the Offered Certificate upon proof of such payment reasonably
satisfactory to the Certificate Insurer).
The terms "Receipt" and "Received," with respect to the Certificate
Insurance Policy, shall mean actual delivery to the Certificate Insurer and
to its fiscal agent appointed by the Certificate Insurer at its option, if
any, prior to 12:00 noon, New York City time, on a Business Day; delivery
either on a day that is not a Business Day or after 12:00 noon, New York City
time, shall be deemed to be Receipt on the next succeeding Business Day. If
any notice or certificate given under each Certificate Insurance Policy by
the Trustee is not in proper form or is not properly completed, executed or
delivered, it shall be deemed not to have been Received, and the Certificate
Insurer or the fiscal agent shall promptly so advise the Trustee and the
Trustee may submit an amended notice.
Under the Certificate Insurance Policy, "Business Day" means any day
other than (i) a Saturday or Sunday or (ii) a day on which banking
institutions in New York and Minnesota or any other location of any successor
servicer or successor Trustee are authorized or obligated by law, executive
order or governmental decree to be closed.
The Certificate Insurer's obligations under the Certificate Insurance
Policy in respect of Insured Payments shall be discharged to the extent funds
are transferred to the Trustee as provided in the Certificate Insurance
Policy, whether or not such funds are properly applied by the Trustee.
The Certificate Insurer will be subrogated to the rights of each
Certificateholder to receive payments of principal and interest, on the
Certificates to the extent of any payment by the Certificate Insurer under
the Certificate Insurance Policy. To the extent the Certificate Insurer
makes Insured Payments either directly or indirectly (as by paying through
the Trustee) to the Certificateholders, the Certificate Insurer will be
subrogated to the rights of the Certificateholders, as applicable, with
respect to such Insured Payments, shall be deemed to the extent of the
payments so made to be a registered Certificateholder for purposes of payment
and shall receive all future Reimbursement Amounts until all such Insured
Payments by the Certificate Insurer have been fully reimbursed.
Claims under the Certificate Insurance Policy constitute direct,
unsecured and unsubordinated obligations of the Certificate Insurer ranking
not less than pari passu with other unsecured and unsubordinated indebtedness
of the Certificate Insurer for borrowed money. Claims against the
Certificate Insurer under the Certificate Insurance Policy and claims against
the Certificate Insurer under each other financial guaranty insurance policy
issued thereby constitute pari passu claims against the general assets of the
Certificate Insurer. The terms of the Certificate Insurance Policy cannot be
modified, altered or affected by any other agreement or instrument, or by the
merger, consolidation or dissolution of the Depositor. The Certificate
Insurance Policy by its terms may not be cancelled or revoked prior to
payment in full of the Offered Certificates. The Certificate Insurance
Policy is governed by the laws of the State of New York.
The Certificate Insurance Policy is not covered by the Property/Casualty
Insurance Security fund specified in Article 76 of the New York Insurance
Law.
To the fullest extent permitted by applicable law, the Certificate
Insurer agrees under the Certificate Insurance Policy not to assert, and
waives, for the benefit of each holder of Offered Certificates, all its
rights (whether by counterclaim, setoff or otherwise) and defenses
(including, without limitation, the defense of fraud), whether acquired by
subrogation, assignment or otherwise, to the extent that such rights and
defenses may be available to the Certificate Insurer to avoid payment of its
obligations under the Certificate Insurance Policy in accordance with the
express provisions of the Certificate Insurance Policy.
Pursuant to the terms of the Pooling and Servicing Agreement, unless a
Certificate Insurer default exists, the Certificate Insurer shall be deemed
to be the holder of the Certificates for certain purposes (other than with
respect to payment on the Certificates), will be entitled to exercise all
rights of the Certificateholders thereunder, without the consent of such
holders, and the Certificateholders may exercise such rights only with the
prior written consent of the Certificate Insurer. In addition, the
Certificate Insurer will have certain additional rights as third party
beneficiary to the Pooling and Servicing Agreement.
In the absence of payments under the Certificate Insurance Policy,
Certificateholders will bear directly the credit and other risks associated
with their undivided interest in the Trust Fund.
The Pooling and Servicing Agreement provides that the Trustee will
receive any Insured Payments as attorney-in-fact for the holders of the
Offered Certificates, and disburse such Insured Payments in accordance with
the provisions of the Pooling and Servicing Agreement.
In the event an Insured Payment is made, the Certificate Insurer, until
all such Insured Payments have been fully reimbursed, will be entitled to
receive the Reimbursement Amount. However, the Certificate Insurer will not
be entitled to reimbursement on any Distribution Date unless on such
Distribution Date the Certificate Insurer shall have paid all amounts
required to have been paid by it under the Certificate Insurance Policy on or
prior to such Distribution Date.
Provided no Certificate Insurer Default (as defined in the Pooling and
Servicing Agreement) has occurred and is continuing, the Certificate Insurer
shall have the right to direct certain actions of the Servicer and Trustee.
The Certificate Insurance Policy does not guarantee to the holders of
the Offered Certificates any specified rate of Principal Prepayments.
The Depositor, New Century and the Certificate Insurer will enter into
an Insurance and Indemnity Agreement (the "Insurance Agreement"). An event
of default by New Century under the Insurance Agreement will constitute an
Event of Default by the Servicer under the Pooling and Servicing Agreement
and allow the Certificate Insurer among other things, to direct the Trustee
to terminate the Servicer. An "event of default" by New Century under the
Insurance Agreement includes (i) failure to pay when due any amount owed
under the Insurance Agreement or certain other documents, (ii) New Century's
untruth or incorrectness in any material respect of any representation or
warranty of New Century in the Insurance Agreement, the Pooling and Servicing
Agreement or certain other documents, (iii) New Century's failure to perform
or to observe any covenant or agreement in the Insurance Agreement, the
Pooling and Servicing Agreement and certain other documents, (iv) New
Century's failure to pay its debts in general or the occurrence of certain
events of insolvency or bankruptcy with respect to New Century, (v) the
occurrence of an Event of Default under the Pooling and Servicing Agreement
or certain other documents and (vi) the failure of the Mortgage Loans to meet
certain performance tests.
DEFINITIONS
The "Accrual Period" for the Offered Certificates (other than the Class
A-1 Certificates) for a given Distribution Date will be the calendar month
preceding the month of such Distribution Date and will be calculated based on
a 360-day year consisting of twelve 30-day months. The "Accrual Period" for
the Class A-1 Certificates for a given Distribution Date will be the actual
number of days (based on a 360-day year) included in the period commencing on
the immediately preceding Distribution Date and ending on the day immediately
preceding such Distribution Date; provided, however, that the initial Accrual
Period for the Class A-1 Certificates will be the actual
number of days included in the period commencing on the Closing Date and
ending on and including January 26, 1998.
The "Call Option Date" is the first Distribution Date on which the
aggregate Loan Balance of the Mortgage Loans in the Trust Fund is less than
or equal to 10% of the Maximum Collateral Amount.
A "Certificate Insurer Default" occurs when the Certificate Insurer
fails to make payments under the Policy in accordance with the terms and
conditions thereof.
The "Certificate Notional Balance" of the Class A-8IO Certificates, with
respect to the first Distribution Date, will be equal to the Initial Cut-off
Date Pool Balance plus the aggregate Cut-off Date Loan Balance of any
Subsequent Mortgage Loans transferred to the Trust Fund during the Funding
Period which have a monthly payment due during the related Due Period. With
respect to any subsequent Distribution Date, the Certificate Notional Balance
will be equal to the aggregate of the Loan Balances of the Mortgage Loans as
of the first day of the preceding calendar month.
The "Certificate Principal Balance" of each Class of Offered
Certificates, as of any Distribution Date, will be equal to the Certificate
Principal Balance of such Class on the Closing Date (the "Original
Certificate Principal Balance") minus all distributions in respect of
principal allocated to such Class on all prior Distribution Dates.
The "Class A Carry-Forward Amount" as of any Distribution Date equals
the sum of (i) the amount, if any, by which (a) the Interest Distribution
Amount for the immediately preceding Distribution Date exceeded (b) the
amount actually distributed to the holders of the related Class of Offered
Certificates on such Distribution Date and (ii) 30 days' interest on such
amount in clause (i) at the related Pass-Through Rate for such Distribution
Date.
A Mortgage Loan is "Delinquent" if any monthly payment due thereon is
not made by the close of business on the day such monthly payment is
scheduled to be due. A Mortgage Loan is "30 days Delinquent" if such monthly
payment has not been received by the close of business on the corresponding
day of the month immediately succeeding the month in which such monthly
payment was due or, if there was no such corresponding day (e.g., as when a
30-day month follows a 31-day month in which a payment was due on the 31st
day of such month), then on the last day of such immediately succeeding
month; and similarly for "60 days Delinquent", etc.
A "Due Period" with respect to any Distribution Date is the period
beginning on the second day of the month in the month preceding the
Distribution Date and ending on the first day of the month in the month in
which such Distribution Date occurs.
The "Excess Subordinated Amount" with respect to any Distribution Date
is the amount, if any, by which (i) the Subordinated Amount that would apply
on such Distribution Date after taking into account all distributions to be
made on such Distribution Date (assuming 100% of the Principal Remittance
Amount is distributed to the holders of the Offered Certificates) exceeds
(ii) the Required Subordinated Amount for such Distribution Date.
The "Insured Distribution Amount" for any Distribution Date is the sum
of the Interest Distribution Amount for the Offered Certificates and the
Subordination Deficit (such Subordination Deficit being calculated using
Available Funds only), in each case with respect to such Distribution Date.
The "Interest Distribution Amount" for any Distribution Date and each
Class of Offered Certificates equals the sum of (i) interest accrued during
the related Accrual Period on the Certificate Principal Balance or
Certificate Notional Balance, as applicable, of such Class at the related
Pass-Through Rate (less the sum of such Class' share of any Prepayment
Interest Shortfalls not covered by the Servicing Fee and any shortfalls in
interest resulting from the application of the Civil Relief Act) and (ii) the
pro rata share allocable to such Class (based on the amount of interest they
would otherwise be entitled to receive) of the Class A Carry-Forward Amount.
The "Interest Remittance Amount" for any Distribution Date is the
aggregate amount of all scheduled interest payments due on the Mortgage Loans
during the related Due Period (including the interest due on any Subsequent
Mortgage Loan transferred to the Trust during the preceding calendar month
which has a due date between the related Cut-Off Date and the last day of the
related Due Period), which were either collected or advanced, net of the
related Servicing Fee, minus the aggregate of the Prepayment Interest
Shortfalls during the previous calendar month, net of the aggregate Servicing
Fee received by the Servicer with respect to the related Due Period.
The "Loan Balance" of any Mortgage Loan with respect to any date of
determination is the outstanding scheduled principal balance thereof
calculated in accordance with the terms of the related Mortgage Note, after
giving effect to all payments of scheduled principal due on or prior to such
date of determination, whether or not received on the date of calculation,
and all payments of unscheduled principal received prior to the month of such
date of determination, provided, however, that the Loan Balance for any
Mortgage Loan that has been liquidated through foreclosure sale, trustee's
sale, disposition of the related REO Property or taking of the related
Mortgaged Property by eminent domain shall be zero as of the end of the month
in which such Mortgage Loan becomes liquidated and at all times thereafter.
The "Maximum Collateral Amount" means the sum of (a) the Initial Cut-Off
Date Pool Balance and (b) the Cut-Off Date Loan Balances of all Subsequent
Mortgage Loans.
The "Net Monthly Excess Cashflow" for any Distribution Date equals the
amount, if any, by which (i) the Available Funds exceeds (ii) the sum of (a)
the Interest Distribution Amount plus the Principal Distribution Amount
(calculated for this purpose without regard to any Subordination Increase
Amount or portion thereof included therein) and (b) any Reimbursement Amount
owed to the Certificate Insurer.
The "Pass-Through Rate" for any Distribution Date and Class of Offered
Certificates shall be as follows:
Class A-1 *
Class A-2 6.60% per annum
Class A-3 6.59% per annum
Class A-4 6.73% per annum
Class A-5 6.76% per annum
Class A-6 lesser of 7.01% per annum and the Weighted Average Rate Cap
Class A-7 lesser of 7.19% per annum and the Weighted Average Rate Cap
Class A-8IO 0.50% per annum
____________________
* The lesser of (a) One-Month Libor on the related Libor Determination
Date plus 0.17% and (b) the Weighted Average Rate Cap.
The "Premium Amount" payable to the Certificate Insurer on any
Distribution Date equals one-twelfth of the product of a per annum rate set
forth in the Pooling and Servicing Agreement (which may increase after an
event of default under the Insurance Agreement) and the Certificate Principal
Balance of the Offered Certificates; provided, however, that for any
Distribution Date on which a Certificate Insurer Default has occurred and is
continuing, the Premium Amount will be equal to zero.
The "Principal Distribution Amount" means, with respect to any
Distribution Date, an amount equal to the lesser of:
(A) the aggregate of the Certificate Principal Balances of the
Classes of Offered Certificates immediately prior to such Distribution
Date; and
(B) the sum of (i) each scheduled payment of principal due on the
Mortgage Loans during the related Due Period, whether or not received,
(ii) all partial and full principal prepayments of such Mortgage Loans
applied by the Servicer during the previous calendar month, (iii) all
amounts referred to in the definition of "Principal Remittance Amount"
(less the amounts specified in clause (i) under "-- Deposits in the
Collection Account") up to the aggregate Loan Balance, as applicable,
(iv) on the Distribution Date immediately following the calendar month
in which the end of the Funding Period occurs, the Regular Pre-Funding
Distribution Amount, if any, (v) on the Distribution Date on which the
Trust Fund is to be terminated in accordance with the Pooling and
Servicing Agreement, that portion of the Termination Price that
represents principal, and (vi) the amount of any Subordination
Increase Amount less the amount of any Subordination Reduction Amount
for such Distribution Date.
A "Principal Prepayment" is any mortgagor payment or other recovery of
principal on a Mortgage Loan that is received in advance of its scheduled due
date and is not accompanied by an amount representing scheduled interest due
on any date or dates in any month or months in or subsequent to the month of
prepayment.
The "Principal Remittance Amount" for any Distribution Date is the sum
of the amounts specified in clause (i), clause (iii), clause (vi), clause
(vii), clause (ix) (with respect to the principal portion of such Delinquency
Advances only) and clause (x) under "--Deposits to the Collection Account"
above, in the case of clause (i)(a) and clause (ix) to the extent such
amounts relate to scheduled principal payments due during the related Due
Period, or any prior Due Period for which there was no related Delinquency
Advance, and received by the related Determination Date, and, in each other
case, to the extent such amounts relate to principal and are actually
received during the preceding calendar month.
The "Pro Rata Pre-Funding Distribution Amount" means, as to the
Distribution Date immediately following the month in which the end of the
Funding Period occurs, (i) the Unutilized Funding Amount, if such amount is
greater than or equal to $100,000 and (ii) zero, if such amount is less than
$100,000.
A "Realized Loss" (i) with respect to any defaulted Mortgage Loan that
is finally liquidated (a "Liquidated Loan") is the amount of loss realized
equal to the portion of the Loan Balance remaining unpaid after application
of all amounts recovered (net of amounts reimbursable to the Servicer for
related Delinquency Advances, expenses and Servicing Fees) towards interest
and principal owing on the Mortgage Loan and (ii) with respect to certain
Mortgage Loans the principal balances or the scheduled payments of principal
of which have been reduced in connection with bankruptcy proceedings, the
amount of such reduction.
The "Regular Pre-Funding Distribution Amount" means, as to the
Distribution Date immediately following the Due Period in which the end of
the Funding Period occurs, (i) the Unutilized Funding Amount, if such amount
is less than $100,000 and (ii) zero, if such amount is greater than or equal
to $100,000.
The "Reimbursement Amount" as of any Distribution Date is the amount of
all Insured Payments made by the Certificate Insurer pursuant to the
Certificate Insurance Policy and other amounts owed to the Certificate
Insurer pursuant to the Insurance Agreement (together with interest thereon
at the rate specified in the Pooling and Servicing Agreement) that have not
been previously repaid as of such Distribution Date.
The "Required Subordinated Amount" as of any Distribution Date will
initially equal a percentage, specified in the Pooling and Servicing
Agreement, of the Maximum Collateral Amount. The Pooling and Servicing
Agreement generally provides that the Required Subordinated Amount may, over
time, decrease or increase, subject to certain floors, caps and triggers.
The "Subordinated Amount" as of any Distribution Date is the amount, if
any, by which (i) the aggregate Loan Balance as of the end of the related Due
Period exceeds (ii) the aggregate Certificate Principal Balance of the
Offered Certificates as of such Distribution Date after giving effect to
distributions to be made on such Certificates on such Distribution Date.
A "Subordination Deficit" with respect to any Distribution Date is the
amount, if any, by which (i) the aggregate Certificate Principal Balance of
the Offered Certificates as of such Distribution Date, after giving effect to
distributions to be made on such Certificates on such Distribution Date
(except for any payment to be made as to principal constituting an Insured
Payment), exceeds (ii) the aggregate Loan Balance as of the end of the
related Due Period.
A "Subordination Increase Amount" with respect to any Distribution Date
equals the excess, if any, of the Required Subordinated Amount over the
Subordinated Amount for such Distribution Date (after giving effect to the
distributions of the amounts described in clauses (B)(i) through (iv) of the
definition of "Principal Distribution Amount."
The "Subordination Reduction Amount" as of any Distribution Date equals
the lesser of (i) the Excess Subordinated Amount for such Distribution Date
and (ii) the distributions of the amounts described in clauses (B)(i) through
(iv) of the definition of "Principal Distribution Amount."
CALCULATION OF ONE-MONTH LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Accrual Period with respect to the Class A-1
Certificates following the initial Accrual Period (each such date, a "LIBOR
Determination Date"), the Trustee will determine the London interbank offered
rate for one-month United States dollar deposits ("One-Month LIBOR") for such
Accrual Period on the basis of the offered rates of the Reference Banks for
one-month United States dollar deposits, as such rates appear on the Telerate
Page 3750, as of 11:00 a.m. (London time) on such LIBOR Determination Date.
As used in this section, "LIBOR Business Day" means a day on which banks are
open for dealing in foreign currency and exchange in London and New York
City; "Telerate Page 3750" means the display page currently so designated on
the Dow Jones Telerate Service (or such other page as may replace that page
on that service for the purpose of displaying comparable rates or prices);
and "Reference Banks" means leading banks selected by the Trustee and engaged
in transactions in Eurodollar deposits in the international Eurocurrency
market (i) with an established place of business in London, (ii) whose
quotations appear on the Telerate Page 3750 on the LIBOR Determination Date
in question, (iii) which have been designated as such by the Trustee and (iv)
not controlling, controlled by or under common control with, the Depositor,
the Seller, the Servicer, the Servicing Agent or any successor Servicer. The
One-Month LIBOR value for the initial Accrual Period will be 6.00% per annum.
On each LIBOR Determination Date, One-Month LIBOR for the related
Accrual Period for the Class A-1 Certificates will be established by the
Trustee as follows:
(a) If on such LIBOR Determination Date two or more Reference Banks
provide such offered quotations, One-Month LIBOR for the related Accrual
Period will be the arithmetic mean of such offered quotations (rounded
upwards if necessary to the nearest whole multiple of 0.0625%).
(b) If on such LIBOR Determination Date fewer than two Reference
Banks provide such offered quotations, One-Month LIBOR for the related
Accrual Period will be the higher of (x) One-Month LIBOR as determined
on the previous LIBOR Determination Date and (y) the Reserve Interest
Rate. The "Reserve Interest Rate" will be the rate per annum that the
Trustee determines to be either (i) the arithmetic mean (rounded upwards
if necessary to the nearest whole multiple of 0.0625%) of the one-month
United States dollar lending rates which New York City banks selected by
the Trustee are quoting on the relevant LIBOR Determination Date to the
principal London offices of leading banks in the London interbank market
or (ii) in the event that the Trustee can determine no such arithmetic
mean, the lowest one-month United States dollar lending rate which New
York City banks selected by the Trustee are quoting on such LIBOR
Determination Date to leading European banks.
The establishment of One-Month LIBOR on each LIBOR Determination Date by
the Trustee and the Trustee's calculation of the rate of interest applicable
to the Class A-1 Certificates for the related Accrual Period will (absent
manifest error) be final and binding.
EXAMPLE OF DISTRIBUTIONS
The following chart sets forth an example of distributions on the
Certificates for the first month of the Trust Fund's existence:
December 1, 1997..... Cut-Off Date.
December 2, 1997 to
January 1, 1998.... Initial Due Period. The Servicer receives scheduled
payments of principal and interest. For succeeding
Distribution Dates, the Due Period will commence on
the second day of the preceding calendar month and
end on the first day of such month.
December 1, 1997 to
December 31, 1997... (A) The Servicer receives Principal Prepayments and
interest thereon to the date of such
prepayment.
December 31, 1997..... (B) Record Date (the last Business Day of the month
preceding the month of the related Distribution
Date).
January 15, 1998..... (C) Determination Date (the fifteenth day of the
month of such Distribution Date or, if such
fifteenth day is not a Business Day, the
preceding Business Day).
January 18, 1998..... (D) Servicer Advance Date.
January 25, 1998..... (E) Distribution Date.
Succeeding monthly periods follow the pattern of above.
_______________
(A) Principal Prepayments received during this period will be distributed to
holders of the Certificates on January 25, 1998 (to the extent not
applied in computing the Initial Cut-Off Date Pool Balance). When a
Mortgage Loan is prepaid in full, interest on the amount prepaid is
collected only from the last due date as to which the most recent
scheduled payment was made by the borrower to the date of prepayment.
(B) Distributions of principal and interest on January 25, 1998 will be made
to holders of the Certificates of record as of the close of business on
the Record Date.
(C) Determination Date.
(D) No later than each Servicer Remittance Date, the Servicer is required to
make Delinquency Advances with respect to the Mortgage Loans.
(E) The Trustee will make distributions to holders of the Certificates on
the 25th day of the month in which the related Due Period ends, or if
such day is not a Business Day, on the next Business Day.
WEIGHTED AVERAGE LIVES
The timing of changes in the rate of Principal Prepayments on the
Mortgage Loans may significantly affect an investor's actual yield to
maturity, even if the average rate of Principal Prepayments is consistent
with such investor's expectation. In general, the earlier a Principal
Prepayment on the Mortgage Loans occurs, the greater the effect of such
Principal Prepayment on an investor's yield to maturity. The effect on an
investor's yield of Principal Prepayments occurring at a rate faster (or
slower) than the rate anticipated by the investor during the period
immediately following the issuance of the Offered Certificates may not be
fully offset by a subsequent like decrease (or increase) in the rate of
Principal Prepayments in a like amount.
The projected weighted average life of any Class of Offered Certificates
is the average amount of time that will elapse from December 15, 1997 (the
"Settlement Date") until each dollar of principal is scheduled to be repaid
to the investors in such Class of Offered Certificates. Because it is
expected that there will be prepayments and defaults on the Mortgage Loans,
the actual weighted average lives of the Classes of Offered Certificates are
expected to vary substantially from the weighted average remaining terms to
stated maturity of the Mortgage Loans as set forth herein under "The Trust
Fund."
The "Assumed Final Maturity Date" for each Class of Offered Certificates
is as set forth herein under "Description of the Certificates--General". For
the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5 and Class A-6
Certificates, such date is the date on which the "Original Certificate
Principal Balance" set forth herein for such Class less all amounts
distributed to the related Certificateholders on account of
principal would be reduced to zero, assuming that no
prepayments are received on the Mortgage Loans, scheduled monthly payments of
principal of and interest on each of the Mortgage Loans are timely received
and no excess cashflow is used to make accelerated payments of principal to
the Certificateholders of such Classes of Offered Certificates. The Assumed
Final Maturity Date for the other Offered Certificates is the thirteenth
Distribution Date following the Due Period in which the Loan Balances of all
Mortgage Loans in the Trust Fund have been reduced to zero, assuming that the
Mortgage Loans pay in accordance with their terms. The weighted average life
of each Class of Offered Certificates is likely to be shorter than would be
the case if payments actually made on the Mortgage Loans conformed to the
foregoing assumptions, and the final Distribution Date with respect to the
Offered Certificates could occur significantly earlier than the related
Assumed Final Maturity Date because (i) prepayments are likely to occur, (ii)
excess cashflow, if any, will be applied as principal of the Offered
Certificates as described herein, (iii) the Required Subordinated Amount is
as defined herein and (iv) the Majority Residual Certificateholders and the
Servicer may cause a termination of the Mortgage Loans in the Trust Fund as
provided herein.
The model used in this Prospectus Supplement with respect to the
Mortgage Loans is the prepayment assumption (the "Prepayment Assumption")
which represents an assumed rate of prepayment each month relative to the
then outstanding principal balance of a pool of mortgage loans for the life
of such mortgage loans. With respect to the Mortgage Loans in the Trust
Fund, the Prepayment Assumption assumes constant prepayment rates of 4.0% per
annum of the then outstanding principal balance of the Mortgage Loans in the
first month of the life of the Mortgage Loans and an additional 1.455% per
annum (i.e., 16% divided by 11) in each month thereafter until the twelfth
month. Beginning in the twelfth month and in each month thereafter during
the life of the Mortgage Loans, the Prepayment Assumption assumes a constant
prepayment rate of 20% per annum. As used in the table below, 0% Prepayment
Assumption assumes prepayment rates equal to 0% of the Prepayment Assumption
(i.e., no prepayments). Correspondingly, 150% Prepayment Assumption assumes
prepayment rates equal to 150% of the Prepayment Assumption and so forth.
Each of the Prepayment Scenarios in the table on page S-54 assumes the
respective percentages of Prepayment Assumptions described thereunder. For
example, Prepayment Scenario III assumes 75% of the Prepayment Assumption
with respect to the Mortgage Loans in the Trust Fund.
The tables on pages S-55 through S-61 were prepared on the basis of the
assumptions in the following paragraph and the tables set forth below. There
are certain differences between the loan characteristics included in such
assumptions and the characteristics of the actual Mortgage Loans. Any such
discrepancy may have an effect upon the percentages of Original Certificate
Principal Balances outstanding and weighted average lives of the Offered
Certificates set forth in the tables on pages S-55 through S-61. In
addition, since the actual Mortgage Loans in the Trust Fund will have
characteristics that differ from those assumed in preparing the tables set
forth below, the distributions of principal of the Offered Certificates may
be made earlier or later than indicated in the tables.
The percentages and weighted average lives in the tables on pages S-55
through S-61 were determined assuming that: (i) the Mortgage Loans consist
of sub-pools of mortgage loans with Cut-Off Date Loan Balances, Mortgage
Rates, original and remaining terms to maturity and original amortization
terms as set forth in the table below, (ii) the Closing Date for the Offered
Certificates occurs on December 12, 1997 and the Offered Certificates were
sold to investors by the Underwriter on December 15, 1997,
(iii) distributions on the Offered Certificates are made on the 25th day of
each month regardless of the day on which the Distribution Date actually
occurs, commencing in January 1998, in accordance with the priorities
described herein, (iv) the Pass-Through Rate for each Class of Offered
Certificates is as described on the cover hereof, (v) the Accrual Period for
the each Class of Offered Certificates for each Distribution Date will
consist of 30 days in a 360-day year consisting of twelve 30-day months and
with respect to the Class A-1 Certificates for each Distribution Date will
consist of the actual number of days from and including the preceding
Distribution Date (or the Closing Date in the case of the first Distribution
Date) to and including the day immediately preceding such Distribution Date,
(vi) the prepayment rates with respect to the Mortgage Loans are a multiple
of the Prepayment Assumption as stated in the "Prepayment Scenarios" table
below, (vii) prepayments include thirty days' interest thereon, (viii) the
Seller is not required to substitute or repurchase any or all of the Mortgage
Loans pursuant to the Pooling and Servicing Agreement and no optional
termination is exercised, except with respect to the entries identified by
the row heading "Weighted Average Life (years) to Call Option Date" in
the tables below, (ix) the Required Subordinated Amount is set
initially as specified in the Pooling and Servicing Agreement
and thereafter decreases in accordance with the
provisions of the Pooling and Servicing Agreement, (x) scheduled payments for
all Mortgage Loans are received on the second day of each month, the
principal portion of such payments is computed prior to giving effect to
prepayments received in such month and there are no losses or delinquencies
with respect to such Mortgage Loans, (xi) all the Mortgage Loans prepay at
the same rate and all such payments are treated as prepayments in full of
individual Mortgage Loans, with no shortfalls in collection of interest,
(xii) such prepayments are received on the last day of each month commencing
in the month of the Closing Date, (xiii) Sub-Pools 4, 5 and 6 (specified in
the table below) will be transferred to the Trust Fund in December 1997 with
scheduled principal payments on such Mortgage Loans being received by the
Servicer during the Due Period beginning December 2, 1997 and passed through
to holders of the Offered Certificates on the Distribution Date in January
1998; (xiv) sufficient funds will be available in the Capitalized Interest
Account to cover any shortfalls in interest due to the Pre-Funding Account
and the transfer of Mortgage Loans described in clause (xiii); (xv) no
reinvestment income from any Account is earned and available for
distribution; (xvi) the amount on deposit in the Pre-Funding Account at the
end of the Pre-Funding Period is zero and (xvii) the Class A-1 Pass-Through
Rate is 5.8575% for each Distribution Date. Nothing contained in the
foregoing assumptions should be construed as a representation that the
Mortgage Loans will not experience delinquencies or losses.
PREPAYMENT SCENARIOS
<TABLE>
<CAPTION>
Prepayment Scenario: Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI
- -------------------------------------------------------------------------------------------------------------
<S> <S> <S> <S> <S> <S> <S>
% of the Prepayment Assumption 0% 50% 75% 100% 150% 200%
=============================================================================================================
</TABLE>
<TABLE>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
<CAPTION>
Original Remaining Original
Term to Term to Amortization
Cut-Off Date Mortgage Maturity Maturity Term
Sub-Pool Loan Balance Rate (Months) (Months) (Months)
- ----------- ---------------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
1 $ 1,612,729.44 12.1037% 180 178 360
2 21,876,671.78 10.0811 181 179 181
3 109,352,882.76 9.4950 360 358 360
4 451,101.42 12.1037 180 179 360
5 6,119,189.86 10.0811 181 180 181
6 30,587,424.74 9.4950 360 359 360
---------------- ---------- -------- -------- ------------
$170,000,000.00 9.6232% 328 327 331
================ ========== ======== ======== ============
</TABLE>
__________________
* Sub-Pools 4, 5 and 6 represent the Subsequent Mortgage Loans.
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of each Class of Offered Certificates, and
set forth the percentages of the Original Certificate Principal Balance of
each such Class that would be outstanding after each of the dates shown, at
various Prepayment Scenarios.
<TABLE>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
<CAPTION>
Class A-1 Prepayment Scenario
--------------------------------------------------------------------
Distribution Date Scenario Scenario Scenario Scenario Scenario Scenario
I II III IV V VI
- ----------------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage . . . . . 100% 100% 100% 100% 100% 100%
December 25, 1998 . . . . . . 89 60 46 32 3 0
December 25, 1999 . . . . . . 80 16 0 0 0 0
December 25, 2000 . . . . . . 75 0 0 0 0 0
December 25, 2001 . . . . . . 70 0 0 0 0 0
December 25, 2002 . . . . . . 64 0 0 0 0 0
December 25, 2003 . . . . . . 57 0 0 0 0 0
December 25, 2004 . . . . . . 50 0 0 0 0 0
December 25, 2005 . . . . . . 42 0 0 0 0 0
December 25, 2006 . . . . . . 33 0 0 0 0 0
December 25, 2007 . . . . . . 23 0 0 0 0 0
December 25, 2008 . . . . . . 12 0 0 0 0 0
December 25, 2009 . . . . . . 0 0 0 0 0 0
December 25, 2010 . . . . . . 0 0 0 0 0 0
December 25, 2011 . . . . . . 0 0 0 0 0 0
December 25, 2012 . . . . . . 0 0 0 0 0 0
December 25, 2013 . . . . . . 0 0 0 0 0 0
December 25, 2014 . . . . . . 0 0 0 0 0 0
December 25, 2015 . . . . . . 0 0 0 0 0 0
December 25, 2016 . . . . . . 0 0 0 0 0 0
December 25, 2017 . . . . . . 0 0 0 0 0 0
December 25, 2018 . . . . . . 0 0 0 0 0 0
December 25, 2019 . . . . . . 0 0 0 0 0 0
December 25, 2020 . . . . . . 0 0 0 0 0 0
December 25, 2021 . . . . . . 0 0 0 0 0 0
December 25, 2022 . . . . . . 0 0 0 0 0 0
December 25, 2023 . . . . . . 0 0 0 0 0 0
December 25, 2024 . . . . . . 0 0 0 0 0 0
December 25, 2025 . . . . . . 0 0 0 0 0 0
December 25, 2026 . . . . . . 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity . . . . . . . . 6.51 1.30 1.00 0.84 0.66 0.55
Weighted Average Life (years)
to Call Option Date . . . . 6.51 1.30 1.00 0.84 0.66 0.55
</TABLE>
* Rounded to the nearest whole percentage.
<TABLE>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
<CAPTION>
Class A-2 Prepayment Scenario
--------------------------------------------------------------------
Distribution Date Scenario Scenario Scenario Scenario Scenario Scenario
I II III IV V VI
- ----------------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage . . . . . 100% 100% 100% 100% 100% 100%
December 25, 1998 . . . . . . 100 100 100 100 100 65
December 25, 1999 . . . . . . 100 100 81 42 0 0
December 25, 2000 . . . . . . 100 72 17 0 0 0
December 25, 2001 . . . . . . 100 29 0 0 0 0
December 25, 2002 . . . . . . 100 0 0 0 0 0
December 25, 2003 . . . . . . 100 0 0 0 0 0
December 25, 2004 . . . . . . 100 0 0 0 0 0
December 25, 2005 . . . . . . 100 0 0 0 0 0
December 25, 2006 . . . . . . 100 0 0 0 0 0
December 25, 2007 . . . . . . 100 0 0 0 0 0
December 25, 2008 . . . . . . 100 0 0 0 0 0
December 25, 2009 . . . . . . 100 0 0 0 0 0
December 25, 2010 . . . . . . 83 0 0 0 0 0
December 25, 2011 . . . . . . 63 0 0 0 0 0
December 25, 2012 . . . . . . 37 0 0 0 0 0
December 25, 2013 . . . . . . 26 0 0 0 0 0
December 25, 2014 . . . . . . 13 0 0 0 0 0
December 25, 2015 . . . . . . 0 0 0 0 0 0
December 25, 2016 . . . . . . 0 0 0 0 0 0
December 25, 2017 . . . . . . 0 0 0 0 0 0
December 25, 2018 . . . . . . 0 0 0 0 0 0
December 25, 2019 . . . . . . 0 0 0 0 0 0
December 25, 2020 . . . . . . 0 0 0 0 0 0
December 25, 2021 . . . . . . 0 0 0 0 0 0
December 25, 2022 . . . . . . 0 0 0 0 0 0
December 25, 2023 . . . . . . 0 0 0 0 0 0
December 25, 2024 . . . . . . 0 0 0 0 0 0
December 25, 2025 . . . . . . 0 0 0 0 0 0
December 25, 2026 . . . . . . 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity . . . . . . . . 14.82 3.59 2.55 2.00 1.44 1.15
Weighted Average Life (years)
to Call Option Date . . . . 14.82 3.59 2.55 2.00 1.44 1.15
</TABLE>
* Rounded to the nearest whole percentage.
<TABLE>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
<CAPTION>
Class A-3 Prepayment Scenario
--------------------------------------------------------------------
Distribution Date Scenario Scenario Scenario Scenario Scenario Scenario
I II III IV V VI
- ----------------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage . . . . . 100% 100% 100% 100% 100% 100%
December 25, 1998 . . . . . . 100 100 100 100 100 100
December 25, 1999 . . . . . . 100 100 100 100 47 0
December 25, 2000 . . . . . . 100 100 100 40 0 0
December 25, 2001 . . . . . . 100 100 32 0 0 0
December 25, 2002 . . . . . . 100 81 0 0 0 0
December 25, 2003 . . . . . . 100 16 0 0 0 0
December 25, 2004 . . . . . . 100 0 0 0 0 0
December 25, 2005 . . . . . . 100 0 0 0 0 0
December 25, 2006 . . . . . . 100 0 0 0 0 0
December 25, 2007 . . . . . . 100 0 0 0 0 0
December 25, 2008 . . . . . . 100 0 0 0 0 0
December 25, 2009 . . . . . . 100 0 0 0 0 0
December 25, 2010 . . . . . . 100 0 0 0 0 0
December 25, 2011 . . . . . . 100 0 0 0 0 0
December 25, 2012 . . . . . . 100 0 0 0 0 0
December 25, 2013 . . . . . . 100 0 0 0 0 0
December 25, 2014 . . . . . . 100 0 0 0 0 0
December 25, 2015 . . . . . . 100 0 0 0 0 0
December 25, 2016 . . . . . . 72 0 0 0 0 0
December 25, 2017 . . . . . . 41 0 0 0 0 0
December 25, 2018 . . . . . . 7 0 0 0 0 0
December 25, 2019 . . . . . . 0 0 0 0 0 0
December 25, 2020 . . . . . . 0 0 0 0 0 0
December 25, 2021 . . . . . . 0 0 0 0 0 0
December 25, 2022 . . . . . . 0 0 0 0 0 0
December 25, 2023 . . . . . . 0 0 0 0 0 0
December 25, 2024 . . . . . . 0 0 0 0 0 0
December 25, 2025 . . . . . . 0 0 0 0 0 0
December 25, 2026 . . . . . . 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity . . . . . . . . 19.74 5.54 3.89 2.99 2.06 1.60
Weighted Average Life (years)
to Call Option Date . . . . 19.74 5.54 3.89 2.99 2.06 1.60
</TABLE>
* Rounded to the nearest whole percentage.
<TABLE>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
<CAPTION>
Class A-4 Prepayment Scenario
--------------------------------------------------------------------
Distribution Date Scenario Scenario Scenario Scenario Scenario Scenario
I II III IV V VI
- ----------------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage . . . . . 100% 100% 100% 100% 100% 100%
December 25, 1998 . . . . . . 100 100 100 100 100 100
December 25, 1999 . . . . . . 100 100 100 100 100 40
December 25, 2000 . . . . . . 100 100 100 100 5 0
December 25, 2001 . . . . . . 100 100 100 43 0 0
December 25, 2002 . . . . . . 100 100 58 0 0 0
December 25, 2003 . . . . . . 100 100 0 0 0 0
December 25, 2004 . . . . . . 100 65 0 0 0 0
December 25, 2005 . . . . . . 100 22 0 0 0 0
December 25, 2006 . . . . . . 100 0 0 0 0 0
December 25, 2007 . . . . . . 100 0 0 0 0 0
December 25, 2008 . . . . . . 100 0 0 0 0 0
December 25, 2009 . . . . . . 100 0 0 0 0 0
December 25, 2010 . . . . . . 100 0 0 0 0 0
December 25, 2011 . . . . . . 100 0 0 0 0 0
December 25, 2012 . . . . . . 100 0 0 0 0 0
December 25, 2013 . . . . . . 100 0 0 0 0 0
December 25, 2014 . . . . . . 100 0 0 0 0 0
December 25, 2015 . . . . . . 100 0 0 0 0 0
December 25, 2016 . . . . . . 100 0 0 0 0 0
December 25, 2017 . . . . . . 100 0 0 0 0 0
December 25, 2018 . . . . . . 100 0 0 0 0 0
December 25, 2019 . . . . . . 76 0 0 0 0 0
December 25, 2020 . . . . . . 43 0 0 0 0 0
December 25, 2021 . . . . . . 6 0 0 0 0 0
December 25, 2022 . . . . . . 0 0 0 0 0 0
December 25, 2023 . . . . . . 0 0 0 0 0 0
December 25, 2024 . . . . . . 0 0 0 0 0 0
December 25, 2025 . . . . . . 0 0 0 0 0 0
December 25, 2026 . . . . . . 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity . . . . . . . . 22.83 7.44 5.22 4.00 2.69 2.02
Weighted Average Life (years)
to Call Option Date . . . . 22.83 7.44 5.22 4.00 2.69 2.02
</TABLE>
* Rounded to the nearest whole percentage.
<TABLE>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
<CAPTION>
Class A-5 Prepayment Scenario
--------------------------------------------------------------------
Distribution Date Scenario Scenario Scenario Scenario Scenario Scenario
I II III IV V VI
- ----------------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage . . . . . . 100% 100% 100% 100% 100% 100%
December 25, 1998 . . . . . . . 100 100 100 100 100 100
December 25, 1999 . . . . . . . 100 100 100 100 100 100
December 25, 2000 . . . . . . . 100 100 100 100 100 0
December 25, 2001 . . . . . . . 100 100 100 100 0 0
December 25, 2002 . . . . . . . 100 100 100 49 0 0
December 25, 2003 . . . . . . . 100 100 100 0 0 0
December 25, 2004 . . . . . . . 100 100 14 0 0 0
December 25, 2005 . . . . . . . 100 100 0 0 0 0
December 25, 2006 . . . . . . . 100 71 0 0 0 0
December 25, 2007 . . . . . . . 100 9 0 0 0 0
December 25, 2008 . . . . . . . 100 0 0 0 0 0
December 25, 2009 . . . . . . . 100 0 0 0 0 0
December 25, 2010 . . . . . . . 100 0 0 0 0 0
December 25, 2011 . . . . . . . 100 0 0 0 0 0
December 25, 2012 . . . . . . . 100 0 0 0 0 0
December 25, 2013 . . . . . . . 100 0 0 0 0 0
December 25, 2014 . . . . . . . 100 0 0 0 0 0
December 25, 2015 . . . . . . . 100 0 0 0 0 0
December 25, 2016 . . . . . . . 100 0 0 0 0 0
December 25, 2017 . . . . . . . 100 0 0 0 0 0
December 25, 2018 . . . . . . . 100 0 0 0 0 0
December 25, 2019 . . . . . . . 100 0 0 0 0 0
December 25, 2020 . . . . . . . 100 0 0 0 0 0
December 25, 2021 . . . . . . . 100 0 0 0 0 0
December 25, 2022 . . . . . . . 40 0 0 0 0 0
December 25, 2023 . . . . . . . 0 0 0 0 0 0
December 25, 2024 . . . . . . . 0 0 0 0 0 0
December 25, 2025 . . . . . . . 0 0 0 0 0 0
December 25, 2026 . . . . . . . 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity . . . . . . . . . 24.93 9.41 6.64 5.07 3.40 2.47
Weighted Average Life (years)
to Call Option Date . . . . . 24.93 9.41 6.64 5.07 3.40 2.47
</TABLE>
* Rounded to the nearest whole percentage.
<TABLE>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
<CAPTION>
Class A-6 Prepayment Scenario
--------------------------------------------------------------------
Distribution Date Scenario Scenario Scenario Scenario Scenario Scenario
I II III IV V VI
- ----------------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage . . . . . . 100% 100% 100% 100% 100% 100%
December 25, 1998 . . . . . . . 100 100 100 100 100 100
December 25, 1999 . . . . . . . 100 100 100 100 100 100
December 25, 2000 . . . . . . . 100 100 100 100 100 72
December 25, 2001 . . . . . . . 100 100 100 100 78 14
December 25, 2002 . . . . . . . 100 100 100 100 31 0
December 25, 2003 . . . . . . . 100 100 100 79 0 0
December 25, 2004 . . . . . . . 100 100 100 47 0 0
December 25, 2005 . . . . . . . 100 100 76 21 0 0
December 25, 2006 . . . . . . . 100 100 50 1 0 0
December 25, 2007 . . . . . . . 100 100 29 0 0 0
December 25, 2008 . . . . . . . 100 81 11 0 0 0
December 25, 2009 . . . . . . . 100 61 0 0 0 0
December 25, 2010 . . . . . . . 100 43 0 0 0 0
December 25, 2011 . . . . . . . 100 26 0 0 0 0
December 25, 2012 . . . . . . . 100 10 0 0 0 0
December 25, 2013 . . . . . . . 100 0 0 0 0 0
December 25, 2014 . . . . . . . 100 0 0 0 0 0
December 25, 2015 . . . . . . . 100 0 0 0 0 0
December 25, 2016 . . . . . . . 100 0 0 0 0 0
December 25, 2017 . . . . . . . 100 0 0 0 0 0
December 25, 2018 . . . . . . . 100 0 0 0 0 0
December 25, 2019 . . . . . . . 100 0 0 0 0 0
December 25, 2020 . . . . . . . 100 0 0 0 0 0
December 25, 2021 . . . . . . . 100 0 0 0 0 0
December 25, 2022 . . . . . . . 100 0 0 0 0 0
December 25, 2023 . . . . . . . 84 0 0 0 0 0
December 25, 2024 . . . . . . . 49 0 0 0 0 0
December 25, 2025 . . . . . . . 11 0 0 0 0 0
December 25, 2026 . . . . . . . 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity . . . . . . . . . 27.02 12.79 9.23 7.07 4.70 3.44
Weighted Average Life (years)
to Call Option Date . . . . . 27.02 12.79 9.23 7.07 4.70 3.44
</TABLE>
* Rounded to the nearest whole percentage.
<TABLE>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
<CAPTION>
Class A-7 Prepayment Scenario
--------------------------------------------------------------------
Distribution Date Scenario Scenario Scenario Scenario Scenario Scenario
I II III IV V VI
- ----------------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage . . . . . . 100% 100% 100% 100% 100% 100%
December 25, 1998 . . . . . . . 100 100 100 100 100 100
December 25, 1999 . . . . . . . 100 100 100 100 100 100
December 25, 2000 . . . . . . . 100 100 100 100 100 100
December 25, 2001 . . . . . . . 100 100 100 100 100 100
December 25, 2002 . . . . . . . 100 100 100 100 100 70
December 25, 2003 . . . . . . . 100 100 100 100 99 40
December 25, 2004 . . . . . . . 100 100 100 100 68 21
December 25, 2005 . . . . . . . 100 100 100 100 45 11
December 25, 2006 . . . . . . . 100 100 100 100 29 5
December 25, 2007 . . . . . . . 100 100 100 78 18 1
December 25, 2008 . . . . . . . 100 100 100 60 11 0
December 25, 2009 . . . . . . . 100 100 95 45 6 0
December 25, 2010 . . . . . . . 100 100 77 34 3 0
December 25, 2011 . . . . . . . 100 100 62 25 0 0
December 25, 2012 . . . . . . . 100 100 48 17 0 0
December 25, 2013 . . . . . . . 100 100 39 12 0 0
December 25, 2014 . . . . . . . 100 87 31 8 0 0
December 25, 2015 . . . . . . . 100 75 24 6 0 0
December 25, 2016 . . . . . . . 100 63 19 3 0 0
December 25, 2017 . . . . . . . 100 53 14 1 0 0
December 25, 2018 . . . . . . . 100 44 11 0 0 0
December 25, 2019 . . . . . . . 100 36 7 0 0 0
December 25, 2020 . . . . . . . 100 29 5 0 0 0
December 25, 2021 . . . . . . . 100 22 3 0 0 0
December 25, 2022 . . . . . . . 100 16 1 0 0 0
December 25, 2023 . . . . . . . 100 11 0 0 0 0
December 25, 2024 . . . . . . . 100 6 0 0 0 0
December 25, 2025 . . . . . . . 100 2 0 0 0 0
December 25, 2026 . . . . . . . 54 0 0 0 0 0
Weighted Average Life (years)
to Maturity . . . . . . . . . 29.12 21.00 15.93 12.45 8.34 6.05
Weighted Average Life (years)
to Call Option Date . . . . . 28.59 17.32 12.69 9.86 6.55 4.74
</TABLE>
* Rounded to the nearest whole percentage.
SENSITIVITY OF THE CLASS A-8IO CERTIFICATES
The yield to maturity of the Class A-8IO Certificates will be highly
sensitive to the principal prepayment, repurchase and default experience of
the Mortgage Loans. Investors should carefully consider the associated
risks, including the risk that a rapid rate of principal prepayments on the
Mortgage Loans or repurchases of Mortgage Loans could result in the failure
of investors in the Class A-8IO Certificates to recover their initial
investments. The yield to holders of the Class A-8IO Certificates could also
be adversely affected in the event that the Majority Residual Interestholders
or the Servicer exercise the right under the Pooling and Servicing Agreement
to repurchase all remaining Mortgage Loans and REO Properties in the Trust
Fund and thereby effect the early retirement of the Certificates, as
described in "Description of the Certificates--Optional Termination."
The following tables (the "Yield Tables") demonstrate the sensitivity of
the pre-tax yields on the Class A-8IO Certificates to various constant
Percentages of Prepayment Assumption by projecting the aggregate payments of
interest on such Certificates and the corresponding pre-tax yields on a
corporate bond equivalent ("CBE") basis, assuming distributions on the
Mortgage Loans are made as set forth above under "Description of the
Certificates-Weighted Average Lives."
<TABLE>
PRE-TAX YIELDS ON THE CLASS A-8IO CERTIFICATES
(PRICED TO MATURITY)
<CAPTION>
Percentages of Prepayment Assumption
------------------------------------------------------------------------------
Assumed
Purchase Price 0% 50% 75% 100% 150% 200%
- --------------- ------- ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
$2,492,486 34.629 24.083 18.604 12.975 1.204 -11.364
$2,598,736 33.039 22.513 17.044 11.424 -0.328 -12.879
$2,704,986 31.578 21.070 15.611 10.000 -1.735 -14.270
$2,811,236 30.231 19.740 14.290 8.687 -3.032 -15.553
</TABLE>
<TABLE>
PRE-TAX YIELDS ON THE CLASS A-8IO CERTIFICATES
(PRICED TO THE CALL OPTION DATE)
<CAPTION>
Percentages of Prepayment Assumption
------------------------------------------------------------------------------
Assumed
Purchase Price 0% 50% 75% 100% 150% 200%
- --------------- ------- ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
$2,492,486 34.629 24.020 18.249 11.945 -2.521 -19.260
$2,598,736 33.039 22.437 16.636 10.278 -4.335 -21.221
$2,704,986 31.578 20.980 15.147 8.734 -6.022 -23.049
$2,811,236 30.230 19.634 13.767 7.299 -7.597 -24.760
</TABLE>
The pre-tax yields set forth in the preceding tables were calculated by
determining the monthly discount rates which, when applied to the assumed
streams of cash flows to be paid on the Class A-8IO Certificates, would cause
the discounted present value of such assumed streams of cash flows to the
Closing Date to equal the assumed purchase prices (which include accrued
interest), and converting such monthly rates to CBE rates. Such calculations
do not take into account the interest rates at which funds received by
holders of the Class A-8IO Certificates may be reinvested and consequently
does not purport to reflect the return on any investment in the Class A-8IO
Certificates when such reinvestment rates are considered.
It is highly unlikely that the Mortgage Loans will prepay at the same
rate until maturity or that all of the Mortgage Loans will prepay at the same
rate or time. As a result of these factors, the pre-tax yield on the Class
A-8IO Certificates is likely to differ from those shown in such tables, even
if all of the Mortgage Loans prepay at the indicated percentages of the
Prepayment Assumption. No representation is made as to the actual rate of
principal payments on the Mortgage Loans (or the Mortgage Rates thereon) for
any period or over the life of the Class A-8IO Certificates or as to the
yield on the Class A-8IO Certificates. Investors must make their own
decisions as to the appropriate prepayment assumptions to be used in deciding
whether to purchase the Class A-8IO Certificates.
REPORTS TO HOLDERS OF THE CERTIFICATES
On each Distribution Date, the Trustee will forward to each holder of a
Certificate and the Certificate Insurer a statement generally setting forth:
(i) the aggregate amount of the distributions;
(ii) the amount of such distributions allocable to principal,
separately identifying the aggregate amount of any scheduled principal,
Principal Prepayments or other unscheduled recoveries of principal
included therein;
(iii) the amount of such distributions allocable to interest and
the calculation thereof;
(iv) the amount of the Class A Carry-Forward Amount, if any;
(v) the Required Subordinated Amount and Subordinated Amount as of
such Distribution Date;
(vi) the Certificate Principal Balance of each Class of Offered
Certificates after giving effect to the distribution of principal on
such Distribution Date;
(vii) the aggregate Loan Balance for the Mortgage Loans in the
Trust Fund as of the end of the related Due Period;
(viii) the related amount of the Servicing Fee paid to or retained
by the Servicer;
(ix) the amount of the Trustee Fee paid to the Trustee;
(x) the amount of Delinquency Advances and Servicing Advances for
the related Due Period;
(xi) the number and aggregate Loan Balance of Mortgage Loans that
were (A) delinquent (exclusive of Mortgage Loans in foreclosure) (1) 30
to 59 days, (2) 60 to 89 days and (3) 90 or more days, (B) in
foreclosure and delinquent (1) 30 to 59 days, (2) 60 to 89 days and (3)
90 or more days and (C) in bankruptcy as of the close of business on the
last day of the calendar month preceding such Distribution Date;
(xii) with respect to any Mortgage Loan that became an REO
Property during the preceding calendar month, the loan number, the Loan
Balance of such Mortgage Loan as of the close of business on the last
day of such month and the date of acquisition thereof, as well as the
total number and Loan Balance of any REO Properties as of the close of
business on the last day of the preceding month;
(xiii) the aggregate amount of Realized Losses incurred during the
preceding calendar month, as well as the cumulative amount of Realized
Losses;
(xiv) any Subordination Deficit after giving effect to the
distribution of principal on such Distribution Date;
(xv) the Reimbursement Amount, if any;
(xvi) the Pass-Through Rate for each Class of Offered Certificates
for such Distribution Date; and
(xx) the amount on deposit in the Pre-Funding Account and in the
Capitalized Interest Account.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each holder of a
Certificate of record during the previous calendar year a statement
containing information necessary to enable holders of the Certificates to
prepare their tax returns. Such statements will not have been examined and
reported upon by an independent public accountant.
AMENDMENT
The Pooling and Servicing Agreement may be amended by the Seller, the
Depositor, the Servicer and the Trustee, without the consent of the holders
of the Certificates but only with the consent of the Certificate Insurer, for
any of the purposes set forth under "The Pooling and Servicing Agreement--
Amendment" in the Prospectus. In addition, the Pooling and Servicing
Agreement may be amended by the Seller, the Depositor, the Servicer and the
Trustee with the consent of the Certificate Insurer and the holders of a
majority in interest of any Class of Offered Certificates affected thereby
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Pooling and Servicing Agreement or
of modifying in any manner the rights of the holders of Offered Certificates;
provided, however, that no such amendment may (i) reduce in any manner the
amount of, or delay the timing of, distributions required to be made on any
Offered Certificate without the consent of the holder of such Certificate;
(ii) adversely affect in any material respect the interests of the holders of
any Class of the Offered Certificates in a manner other than as described in
clause (i) above, without the consent of the holders of Offered Certificates
of such Class evidencing Percentage Interests aggregating at least 66%; or
(iii) reduce the aforesaid percentage of aggregate outstanding principal
amounts of Offered Certificates, the holders of which are required to consent
to any such amendment, without the consent of the holders of all such
Certificates.
OPTIONAL TERMINATION
The Majority Residual Certificateholders will have the right to
repurchase all remaining Mortgage Loans and REO Properties, if any, and
thereby effect the early retirement of the Certificates, subject to the
aggregate Loan Balance of the Mortgage Loans in the Trust Fund at the time of
repurchase being less than or equal to 10% of the Maximum Collateral Amount.
In addition, on any Distribution Date on which the aggregate Loan Balance of
the Mortgage Loans in the Trust Fund is less than or equal to 5% of the
Maximum Collateral Amount, the Servicer (and if New Century is no longer
serving as Servicer, the Certificate Insurer) will have a similar option with
respect to the Trust Fund. In the event that the option is exercised, the
repurchase will be made at a price equal to the sum of (i) the greater of (a)
100% of the Loan Balance of each Mortgage Loan and REO Property and (b) the
fair market value (net of accrued interest) of the Mortgage Loans and REO
Properties determined as set forth in the Pooling and Servicing Agreement,
(ii) 30 days' interest thereon at a rate equal to the applicable Mortgage
Rate and (iii) the aggregate amount of (x) all unreimbursed Delinquency
Advances, (y) all unreimbursed out-of-pocket costs and expenses previously
incurred by the Servicer in the performance of its servicing obligations, to
the extent such costs and expenses relate to the Mortgage Loans and REO
Properties then held as part of the Trust Fund and (z) any accrued and unpaid
Servicing Fees. Proceeds from such repurchase will be included in Available
Funds and will be distributed to the holders of the Certificates in
accordance with the Pooling and Servicing Agreement. Any such purchase which
will result in unreimbursed Reimbursement Amounts to the Certificate Insurer
will require Certificate Insurer consent. Any such repurchase of the
MortgageLoansandREOPropertieswillresultintheearlyretirementoftheCertificates.
OPTIONAL PURCHASE OF DEFAULTED LOANS
As to any Mortgage Loan which is delinquent in payment by 90 days or
more, the Servicer may, at its option, purchase such Mortgage Loan from the
Trust Fund at a price which includes 100% of the Loan Balance thereof plus
accrued interest thereon at the applicable Mortgage Rate from the date
through which interest was last paid by the related Mortgagor through the day
before the due date in the Due Period in which such purchase occurs;
provided, however, that (i) the total amount of such Mortgage Loans that may
be purchased by the Servicer described in this paragraph (not including
Mortgage Loans repurchased due to a breach of a representation or warranty
under the Pooling and Servicing Agreement) may not exceed 10% of the
Aggregate Maximum Collateral Amount and (ii) unless the Certificate Insurer
otherwise consents, the Mortgage Loans must be purchased in the order they
become delinquent.
EVENTS OF DEFAULT; SERVICER TERMINATION TRIGGER EVENT
Events of Default will consist, among other things, of: (i) any failure
by the Servicer to deposit in the Collection Account or Certificate Account
the required amounts or remit to the Trustee any payment which continues
unremedied for two Business Days; (ii) any failure by the Servicer to observe
or perform in any material respect any of its covenants or agreements in the
Pooling and Servicing Agreement, which continues unremedied for 30 days after
the first date on which (x) the Servicer has knowledge of such failure or (y)
written notice of such failure is given to the Servicer by the Seller, the
Trustee, the Depositor or the holders of Offered Certificates evidencing not
less than 51% of the voting rights evidenced by the Offered Certificates;
(iii) insolvency, readjustment of debt, marshalling of assets and liabilities
or similar proceedings, and certain actions by or on behalf of the Servicer
indicating its insolvency or inability to pay its obligations; or (iv)
certain defaults under the Insurance Agreement. As of any date of
determination, voting rights will be allocated among holders of the Offered
Certificates as described in the Pooling and Servicing Agreement. Voting
rights will be allocated among holders of the Certificates of each Class of
Offered Certificates in accordance with such holders' respective Percentage
Interests in such Class.
A "Servicer Termination Trigger Event" will occur if certain loss or
delinquency amounts are exceeded with respect to the Mortgage Loans, as
described in the Pooling and Servicing Agreement.
RIGHTS UPON EVENT OF DEFAULT OR SERVICER TERMINATION TRIGGER EVENT
So long as an Event of Default under the Pooling and Servicing Agreement
remains unremedied, the Trustee at the direction of the Certificate Insurer
or the holders of Offered Certificates evidencing not less than 51% of the
voting rights (with the consent of the Certificate Insurer) may terminate all
of the rights and obligations of the Servicer in its capacity as servicer
with respect to the Trust Fund, as provided in the Pooling and Servicing
Agreement, whereupon the Trustee will succeed to all of the responsibilities
and duties of the Servicer under the Pooling and Servicing Agreement,
including the obligation to make Delinquency Advances. If a Servicer
Termination Trigger Event occurs, the Trustee shall, but only upon receipt of
instructions from the Certificate Insurer, terminate all of the rights and
obligations of the Servicer under the Pooling and Servicing Agreement and in
and to the Mortgage Loans as described in the preceding sentence. No
assurance can be given that termination of the rights and obligations of the
Servicer under the Pooling and Servicing Agreement would not adversely affect
the servicing of the Mortgage Loans, including the delinquency experience of
the Mortgage Loans.
No holder of an Offered Certificate, solely by virtue of such holder's
status as a holder of an Offered Certificate, will have any right under the
Pooling and Servicing Agreement to institute any proceeding with respect
thereto, unless such holder previously has given to the Trustee written
notice of default and unless the holders of Offered Certificates having not
less than 51% of the voting rights evidenced by the Offered Certificates so
agree and have offered reasonable indemnity to the Trustee, the Certificate
Insurer shall have consented thereto and the Trustee for 60 days has
neglected or refused to institute any such proceeding.
Pursuant to the Pooling and Servicing Agreement, the Servicer covenants
and agrees to act as the Servicer for an initial term from the Closing Date
to March 31, 1998, which term will be extendable by the Certificate Insurer
by notice to the Trustee for successive terms of three (3) calendar months
each, until the termination of the Trust Fund. The Servicer will, upon its
receipt of each such notice of extension (a "Servicer Extension Notice")
become bound for the duration of the term covered by such Servicer Extension
Notice to continue as the Servicer subject to and in accordance with the
other provisions of the Pooling and Servicing Agreement. If as of the
fifteenth (15th) day prior to the last day of any term of the Servicer, the
Trustee shall not have received any Servicer Extension Notice from the
Certificate Insurer, the Trustee will, within five (5) days thereafter, give
written notice of such nonreceipt to the Certificate Insurer and the
Servicer. The Certificate Insurer has agreed to extend each 90-day term of
the Servicer, in the absence of an Event of Default under the Pooling and
Servicing Agreement or an event of default under the Insurance Agreement.
THE CERTIFICATE INSURER
The following information set forth in this section has been provided by
the Certificate Insurer. Accordingly, neither the Depositor nor New Century
makes any representation as to the accuracy and completeness of such
information.
GENERAL
Financial Security Assurance Inc. (the "Certificate Insurer") is a
monoline insurance company incorporated in 1984 under the laws of the State
of New York. Financial Security is licensed to engage in financial guaranty
insurance business in all 50 states, the District of Columbia and Puerto
Rico.
The Certificate Insurer and its subsidiaries are engaged exclusively in
the business of writing financial guaranty insurance, principally in respect
of securities offered in domestic and foreign markets. In general, financial
guaranty insurance consists of the issuance of a guaranty of scheduled
payments of an issuer's securities -- thereby enhancing the credit rating of
those securities -- in consideration for the payment of a premium to the
insurer. The Certificate Insurer and its subsidiaries principally insure
asset-backed, collateralized and municipal securities. Asset-backed
securities are generally supported by residential mortgage loans, consumer or
trade receivables, securities or other assets having an ascertainable cash
flow or market value. Collateralized securities include public utility first
mortgage bonds and sale/leaseback obligation bonds. Municipal securities
consist largely of general obligation bonds, special revenue bonds and other
special obligations of state and local governments. The Certificate Insurer
insures both newly issued securities sold in the primary market and
outstanding securities sold in the secondary market that satisfy the
Certificate Insurer's underwriting criteria.
The Certificate Insurer is a wholly-owned subsidiary of Financial
Security Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange
listed company. Major shareholders of Holdings include Fund American
Enterprises Holdings, Inc., U S WEST Capital Corporation and The Tokio Marine
and Fire Insurance Co., Ltd. No shareholder of Holdings is obligated to pay
any debt of Financial Security or any claim under any insurance policy issued
by the Certificate Insurer or to make any additional contribution to the
capital of the Certificate Insurer.
The principal executive offices of the Certificate Insurer are located
at 350 Park Avenue, New York, New York 10022, and its telephone number at
that location is (212) 826-0100.
REINSURANCE
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by the Certificate Insurer
or any of its domestic operating insurance company subsidiaries are reinsured
among such companies on an agreed-upon percentage substantially proportional
to their respective capital, surplus and reserves, subject to applicable
statutory risk limitations. In addition, the Certificate Insurer reinsures a
portion of its liabilities under certain of its financial guaranty insurance
policies with other reinsurers under various quota share treaties and on a
transaction-by-transaction basis. Such reinsurance is utilized by the
Certificate Insurer as a risk management device and to comply with certain
statutory and rating agency requirements; it does not alter or limit the
Certificate Insurer's obligations under any financial guaranty insurance
policy.
RATINGS OF CLAIMS-PAYING ABILITY
The Certificate Insurer's claims-paying ability is rated "Aaa" by
Moody's and "AAA" by S&P, Fitch Investors Service, L.P. Nippon Investors
Service Inc. and Standard & Poor's (Australia) Pty. Ltd. Such ratings
reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision
or withdrawal at any time by such rating agencies. See "Ratings" in this
Prospectus Supplement.
CAPITALIZATION
The following table sets forth the capitalization of the Certificate
Insurer and its wholly owned subsidiaries on the basis of generally accepted
accounting principles as of September 30, 1997 (in thousands):
<TABLE>
<CAPTION> September 30, 1997
(Unaudited)
-----------
<S> <C>
Deferred Premium Revenue (net of
prepaid reinsurance premiums) . . . . . . . . . . . . . . . . $ 402,891
-----------------------------
Shareholder's Equity:
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . $ 15,000
Additional Paid-In Capital . . . . . . . . . . . . . . . . . $ 646,620
Unrealized Gain on Investments
(net of deferred income taxes) . . . . . . . . . . . . . . $ 20,808
Accumulated Earnings . . . . . . . . . . . . . . . . . . . . $ 212,033
-----------------------------
Total Shareholder's Equity . . . . . . . . . . . . . . . . . . $ 894,461
-----------------------------
Total Deferred Premium Revenue
and Shareholder's Equity . . . . . . . . . . . . . . . . . . $ 1,297,352
=============================
</TABLE>
For further information concerning the Certificate Insurer, see the
Consolidated Financial Statements of the Financial Security Assurance Inc.
and Subsidiaries, and the notes thereto, incorporated by reference herein.
Copies of the statutory quarterly and annual statements filed with the State
of New York Insurance Department by the Certificate Insurer are available
upon request to the State of New York Insurance Department.
INSURANCE REGULATION
The Certificate Insurer is licensed and subject to regulation as a
financial guaranty insurance corporation under the laws of the State of New
York, its state of domicile. In addition, the Certificate Insurer and its
insurance subsidiaries are subject to regulation by insurance laws of the
various other jurisdictions in which they are licensed to do business. As a
financial guaranty insurance corporation licensed to do business in the State
of New York, the Certificate Insurer is subject to Article 69 of the New York
Insurance Law which, among other things, limits the business of each such
insurer to financial guaranty insurance and related lines, requires that each
such insurer maintain a minimum surplus to policyholders, establishes
contingency, loss and unearned premium reserve requirements for each such
insurer, and limits the size of individual transactions ("single risks") and
the volume of transactions ("aggregate risks") that may be underwritten by
each such insurer. Other provisions of the New York Insurance Law,
applicable to non-life insurance companies such as the Certificate Insurer,
regulate, among other things, permitted investments, payment of dividends,
transactions with affiliates, mergers, consolidations, acquisitions or sales
of assets and incurrence of liability for borrowings.
The Policy is not covered by the Property/Casualty Insurance Security
Fund specified in Article 76 of the New York Insurance Law.
The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or any information or
disclosure contained herein, or omitted herefrom, other than with respect to
the accuracy of the information regarding the Certificate Insurer set forth
under the heading "The Certificate Insurer".
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates against the purchase price of the Mortgage Loans transferred to
the Trust Fund.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the Trust Fund (other than the Pre-
Funding Account and the Capitalized Interest Account) as a "real estate
mortgage investment conduit" (a "REMIC") for federal income tax purposes. In
the opinion of Brown & Wood LLP, tax counsel to the Trust and counsel to the
Underwriter, assuming compliance with the Pooling and Servicing Agreement,
the Trust Fund (other than the Pre-Funding Account and the Capitalized
Interest Account) will qualify as a REMIC, the Offered Certificates will
constitute "regular interests" in the related REMIC and the Residual
Certificates will constitute the sole Class of "residual interests" in the
REMIC.
ORIGINAL ISSUE DISCOUNT
The Offered Certificates may be issued with original issue discount for
federal income tax purposes. For purposes of determining the amount and rate
of accrual of original issue discount and market discount, the Depositor
intends to assume that there will be prepayments on the Mortgage Loans at
100% of the Prepayment Assumption. No representation is made as to whether
the Mortgage Loans will prepay at that rate or any other rate. See "Yield,
Prepayment and Maturity Considerations" herein and "Certain Material Federal
Income Tax Consequences" in the Prospectus.
The Offered Certificates may be treated as being issued at a premium. In
such case, the holders of the Offered Certificates may elect under Section
171 of the Internal Revenue Code of 1986, as amended (the "Code"), to
amortize such premium under the constant yield method and to treat such
amortizable premium as an offset to interest income on the Offered
Certificates. Such election, however, would apply to all the
Certificateholder's debt instruments acquired on or after the first taxable
year in which the election is first made, and should only be made after
consulting with a tax adviser.
If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
holder of a Certificate, such holder will be permitted to offset such amounts
only against the respective future income, if any, from such Certificate.
Although the tax treatment is uncertain, a holder of a Certificate may be
permitted to deduct a loss to the extent that such holder's respective
remaining basis in such Certificate exceeds the maximum amount of future
payments to which such holder is entitled, assuming no further Principal
Prepayments of the Mortgage Loans are received. Although the matter is not
free from doubt, any such loss might be treated as a capital loss.
SPECIAL TAX ATTRIBUTES OF THE OFFERED CERTIFICATES
As is described more fully under "Certain Material Federal Income Tax
Consequences" in the Prospectus, the Offered Certificates will represent
qualifying assets under Sections 856(c)(5)(A) and 7701(a)(19)(C)(v) of the
Code, and net interest income attributable to the Offered Certificates will
be "interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code, to the extent the assets of the
Trust Fund are assets described in such sections. The Offered Certificates
will represent qualifying assets under Section 860G(a)(3) if acquired by a
REMIC within the prescribed time periods of the Code.
PROHIBITED TRANSACTIONS TAX AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100% of the net income
derived from "prohibited transactions" (the "Prohibited Transactions
Tax"). In general, subject to certain specified exceptions, a prohibited
transaction means the disposition of a Mortgage Loan, the receipt of income
from a source other than a Mortgage Loan or certain other permitted
investments, the receipt of compensation for services, or gain from the
disposition of an asset purchased with the payments on the Mortgage Loans
for temporary investment pending distribution on the Certificates. It is not
anticipated that the Trust Fund will engage in any prohibited transactions
in which it would recognize a material amount of net income.
In addition, certain contributions to a trust fund that elects to be
treated as a REMIC made after the day on which such trust fund issues all of
its interests could result in the imposition of a tax on the trust fund equal
to 100% of the value of the contributed property (the "Contributions Tax").
The Trust Fund will not accept contributions that would subject it to such
tax.
In addition, a trust fund that elects to be treated as a REMIC may also
be subject to federal income tax at the highest corporate rate on "net income
from foreclosure property," determined by reference to the rules applicable
to real estate investment trusts. "Net income from foreclosure property"
generally means gain from the sale of a foreclosure property other than
qualifying rents and other qualifying income for a real estate investment
trust. It is not anticipated that the Trust Fund will recognize net income
from foreclosure property subject to federal income tax.
BACKUP WITHHOLDING
Certain Certificate Owners may be subject to backup withholding at the
rate of 31% with respect to interest paid on the Offered Certificates if the
Certificate Owners, upon issuance, fail to supply the Trustee or their broker
with their taxpayer identification number, furnish an incorrect taxpayer
identification number, fail to report interest, dividends, or other
"reportable payments" (as defined in the Code) properly, or, under certain
circumstances, fail to provide the Trustee or their broker with a certified
statement, under penalty of perjury, that they are not subject to backup
withholding.
The Trustee will be required to report annually to the Internal Revenue
Service (the "IRS"), and to each Certificateholder of record, the amount of
interest paid (and OID accrued, if any) on the Offered Certificates (and the
amount of interest withheld for federal income taxes, if any) for each
calendar year, except as to exempt holders (generally, holders that are
corporations, certain tax-exempt organizations or nonresident aliens who
provide certification as to their status as nonresidents). As long as the
only holder of record of a Class of Offered Certificates is Cede, as nominee
of DTC, the IRS and Certificate Owners of such Class will receive tax and
other information, including the amount of interest paid on such Certificates
owned, from Participants and Financial Intermediaries rather than from the
Trustee. (The Trustee, however, will respond to requests for necessary
information to enable Participants, Financial Intermediaries and certain
other persons to complete their reports.) Each non-exempt Certificate Owner
will be required to provide, under penalty of perjury, a certificate on IRS
form W-9 containing his or her name, address, correct federal taxpayer
identification number and a statement that he or she is not subject to backup
withholding. Should a nonexempt Certificate Owner fail to provide the
required certification, the Participants or Financial Intermediaries (or the
Paying Agent) will be required to withhold 31% of the interest (and
principal) otherwise payable to the holder, and remit the withheld amount to
the IRS as a credit against the holder's federal income tax liability.
Final regulations dealing with withholding tax on income paid to Foreign
Investors (as defined herein), backup withholding and related matters (the
"New Withholding Regulations") were issued by the Treasury Department on
October 6, 1997. The New Withholding Regulations will generally be effective
for payments made after December 31, 1998, subject to certain transition
rules. Prospective Certificate Owners are strongly urged to consult their
own tax advisors with respect to the New Withholding Regulations.
Such amounts will be deemed distributed to the affected Certificate
Owner for all purposes of the related Certificates and the Pooling and
Servicing Agreement.
FEDERAL INCOME TAX CONSEQUENCES TO FOREIGN INVESTORS
The following information describes the United States federal
income tax treatment of holders that are not United States persons
("Foreign Investors"). The term "Foreign Investor" means any person
other than a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof (including a partnership
that is not treated as a United States person under any applicable Treasury
regulations), an estate whose income is subject to U.S. federal income tax
regardless of its source of income, or a trust if a court within the United
States is able to exercise primary supervision of the administration of the
trust and one or more United States persons have the authority to control
all substantial decisions of the trust. To the extent provided in
regulations, certain trusts in existence on August 20, 1996 and treated as
United States persons prior to such date that elect to continue to be
treated as United States persons shall also not be considered as Foreign
Investors.
The Code and Treasury regulations generally subject interest paid to a
Foreign Investor to a withholding tax at a rate of 30% (unless such rate were
changed by an applicable treaty). The withholding tax, however, is
eliminated with respect to certain "portfolio debt investments" issued to
Foreign Investors. Portfolio debt investments include debt instruments
issued in registered form for which the United States payor receives a
statement that the beneficial owner of the instrument is a Foreign Investor.
The Offered Certificates will be issued in registered form; therefore, if the
information required by the Code is furnished (as described below) and no
other exceptions to the withholding tax exemption are applicable, no
withholding tax will apply to the Offered Certificates.
For the Offered Certificates to constitute portfolio debt investments
exempt from the United States withholding tax, the withholding agent must
receive from the Certificate Owner an executed IRS Form W-8 signed under
penalty of perjury by the Certificate Owner stating that the Certificate
Owner is a Foreign Investor and providing such Certificate Owner's name and
address. The statement must be received by the withholding agent in the
calendar year in which the interest payment is made, or in either of the two
preceding calendar years.
In addition, prospective Foreign Investors are strongly urged to consult
their own tax advisors with respect to the New Withholding Regulations.
A Certificate Owner that is a nonresident alien or foreign corporation
will not be subject to United States federal income tax on gain realized on
the sale, exchange, or redemption of such Offered Certificate, provided that
(i) such gain is not effectively connected with a trade or business carried
on by the Certificate Owner in the United States, (ii) in the case of a
Certificate Owner that is an individual, such Certificate Owner is not
present in the United States for 183 days or more during the taxable year in
which such sale, exchange or redemption occurs and (iii) in the case of gain
representing accrued interest, the conditions described in the immediately
preceding paragraph are satisfied.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Certain Material Federal Income
Tax Consequences--REMIC Certificates" in the Prospectus.
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Offered Certificates under the tax
laws of any state. Investors considering an investment in the Offered
Certificates should consult their own tax advisors regarding such tax
consequences.
All investors should consult their own tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Offered Certificates.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), prohibits "parties in interest" with respect to an
employee benefit plan subject to ERISA and/or a plan or other arrangement
subject to the excise tax provisions set forth under Section 4975 of the Code
(each of the foregoing, a "Plan") from engaging in certain transactions
involving such Plan and its assets unless a statutory or administrative
exemption applies to the transaction. Section 4975 of the Code
imposes certain excise taxes on prohibited transactions involving plans
described under that Section; ERISA authorizes the imposition of civil
penalties for prohibited transactions involving plans not covered under
Section 4975 of the Code. Any Plan fiduciary which proposes to cause a Plan
to acquire any of the Offered Certificates should consult with its counsel
with respect to the potential consequences under ERISA and the Code of the
Plan's acquisition and ownership of such Certificates. See "ERISA
Considerations" in the Prospectus.
Certain employee benefit plans, including governmental plans and certain
church plans, are not subject to ERISA's requirements. Accordingly, assets of
such plans may be invested in the Offered Certificates without regard to the
ERISA considerations described herein and in the Prospectus, subject to the
provisions of other applicable federal and state law. Any such plan which is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the
Code may nonetheless be subject to the prohibited transaction rules set forth
in Section 503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's
general fiduciary requirements, including the requirement of investment
prudence and diversification and the requirement that a Plan's investments be
made in accordance with the documents governing the Plan. A fiduciary which
decides to invest the assets of a Plan in the Offered Certificates should
consider, among other factors, the extreme sensitivity of the investments to
the rate of principal payments (including prepayments) on the Mortgage Loans.
The U.S. Department of Labor (the "DOL") has granted to Greenwich
Capital Markets, Inc. an administrative exemption (Prohibited Transaction
Exemption 90-59; Exemption Application No. D-8374) (the "Exemption") from
certain of the prohibited transaction rules of ERISA and the related excise
tax provisions of Section 4975 of the Code with respect to the initial
purchase, the holding and the subsequent resale by Plans of certificates in
pass-through trusts that consist of certain receivables, loans and other
obligations that meet the conditions and requirements of the Exemption. The
Exemption applies to mortgage loans such as the Mortgage Loans in the Trust
Fund.
Among the conditions that must be satisfied for the Exemption to apply
are the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arm's length transaction
with an unrelated party;
(2) the rights and interest evidenced by the certificates acquired
by the Plan are not subordinated to the rights and interests evidenced
by other certificates of the trust fund;
(3) the certificates acquired by the Plan have received a rating at
the time of such acquisition that is one of the three highest generic
rating categories from Standard & Poor's, a division of The McGraw-Hill
Companies ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff &
Phelps Credit Rating Co. ("DCR") or Fitch Investors Service, L.P.
("Fitch" and, together with S&P, Moody's and DCR, the "Exemption Rating
Agencies");
(4) the trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the
underwriters in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the seller
pursuant to the assignment of the loans to the trust fund represents not
more than the fair market value of such loans; the sum of all payments
made to and retained by the servicer and any other servicer represents
not more than reasonable compensation for such person's services under
the agreement pursuant to which the loans are pooled and reimbursements
of such person's reasonable expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933.
The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets of
the type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been
rated in one of the three highest generic rating categories by an
Exemption Rating Agency for at least one year prior to the Plan's
acquisition of certificates; and
(iii) certificates evidencing interests in such other investment
pools must have been purchased by investors other than Plans for at
least one year prior to any Plan's acquisition of certificates.
Moreover, the Exemption provides relief from certain self-dealing/
conflict of interest prohibited transactions that may occur when the Plan
fiduciary causes a Plan to acquire certificates in a trust as to which the
fiduciary (or its affiliate) is an obligor on the receivables held in the
trust provided that, among other requirements, (i) in the case of an
acquisition in connection with the initial issuance of certificates, at least
fifty percent (50%) of each Class of certificates in which Plans have
invested and at least 50% of the aggregate interest in the Trust is acquired
by persons independent of the Restricted Group; (ii) such fiduciary (or its
affiliate) is an obligor with respect to five percent (5%) or less of the
fair market value of the obligations contained in the trust; (iii) a Plan's
investment in certificates of any Class does not exceed twenty-five percent
(25%) of all of the certificates of that Class outstanding at the time of the
acquisition; and (iv) immediately after the acquisition, no more than
twenty-five percent (25%) of the assets of the Plan with respect to which
such person is a fiduciary are invested in certificates representing an
interest in one or more trusts containing assets sold or serviced by the same
entity. The Exemption does not apply to Plans sponsored by any of the
Underwriter, the Trustee, the Servicer, any obligor with respect to Mortgage
Loans included in the Trust Fund constituting more than five percent of the
aggregate unamortized principal balance of the assets in the Trust Fund, or
any affiliate of such parties (the "Restricted Group").
As amended on July 21, 1997, the Exemption generally allows mortgage
loans (the "Obligations") supporting payments to certificateholders, and
having a value equal to no more than twenty-five percent (25%) of the total
principal amount of the certificates being offered by the trust, to be
transferred to the trust within a 90-day or three-month period following the
closing date ("Pre-Funding Period"), instead of requiring that all such
Obligations be either identified or transferred on or before the closing
date. The relief is available when the following conditions are met:
(1) The ratio of the amount allocated to the pre-funding account to
the total principal amount of the certificates being offered (the
"Pre-Funding Limit") must not exceed twenty-five percent (25%).
(2) All Obligations transferred after the closing date (the
"Additional Obligations") must meet the same terms and conditions
for eligibility as the original Obligations used to create the
trust, which terms and conditions have been approved by an Exemption
Rating Agency.
(3) The transfer of such Additional Obligations to the trust during
the Pre-Funding Period must not result in the certificates to be
covered by the Exemption receiving a lower credit rating from an
Exemption Rating Agency upon termination of the Pre-Funding Period
than the rating that was obtained at the time of the initial
issuance of the certificates by the trust.
(4) Solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate (the "Average Interest
Rate") for all of the Obligations in the trust at the end of the
Pre-Funding Period must not be more than 100 basis points lower than
the Average Interest Rate for the Obligations which were transferred
to the trust on the closing date.
(5) In order to ensure the characteristics of the Additional
Obligations are substantially similar to the original obligations
which were transferred to the Trust:
(i) the characteristics of the Additional Obligations must be
monitored by an insurer or other credit support provider which
is independent of the depositor; or
(ii) an independent accountant retained by the depositor must
provide the depositor with a letter (with copies provided to
each Exemption Rating Agency rating the certificates, the
underwriter and the trustee) stating whether or not the
characteristics of the Additional Obligations conform to the
characteristics described in the prospectus or prospectus
supplement and/or pooling and servicing agreement. In
preparing such letter, the independent accountant must use the
same type of procedures as were applicable to the Obligations
which were transferred to the trust as of the closing date.
(6) The Pre-Funding Period must end no later than three months or 90
days after the closing date or earlier in certain circumstances if
the pre-funding account falls below the minimum level specified in
the pooling and servicing agreement or an event of default occurs.
(7) Amounts transferred to any pre-funding account and/or
capitalized interest account used in connection with the pre-funding
may be invested only in certain permitted investments.
(8) The prospectus or prospectus supplement must describe:
(i) any pre-funding account and/or capitalized interest account
used in connection with a pre-funding account;
(ii) the duration of the Pre-Funding Period;
(iii) the percentage and/or dollar amount of the Pre-Funding
Limit for the trust; and
(iv) that the amounts remaining in the pre-funding account at
the end of the Pre-Funding Period will be remitted to
certificateholders as repayments of principal.
(9) The pooling and servicing agreement must describe the Permitted
Investments for the pre-funding account and/or capitalized interest
account and, if not disclosed in the related prospectus or
prospectus supplement, the terms and conditions for eligibility of
Additional Obligations.
The Underwriter believes that all of the conditions for exemptive relief
the Exemption with respect to pre-funding have been or will be satisfied.
Therefore, the acquisition, holding and transfer of the Offered Certificates
would be eligible for relief under the Exemption, as amended.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the
Exemption, and the potential consequences in their specific circumstances,
prior to making an investment in the Offered Certificates. Moreover, each
Plan fiduciary should determine whether under the general fiduciary standards
of investment prudence and diversification, an investment in the Offered
Certificates is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
LEGAL INVESTMENT CONSIDERATIONS
The Certificates will not constitute "mortgage related securities" under
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
Accordingly, many institutions with legal authority to invest in "mortgage
related securities" may not be legally authorized to invest in the Offered
Certificates.
There may be restrictions on the ability of certain investors, including
depository institutions, either to purchase the Offered Certificates or to
purchase Offered Certificates 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 Certificates 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 Certificates. In connection with the sale of the Offered
Certificates, the Underwriter may be deemed to have received compensation
from the Depositor in the form of underwriting discounts.
The Depositor has been advised by the Underwriter that it intends to
make a market in the Offered Certificates but has no obligation to do so.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue.
The Offered Certificates are offered by the Underwriter, subject to
prior sale, when, as and if delivered to and accepted by the Underwriter and
subject to its right to reject orders in whole or in part. It is expected
that delivery of the Offered Certificates will be made in book-entry form
only through the facilities of The Depository Trust Company on or about the
Closing Date.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Offered
Certificates will be passed upon for the Depositor and for the Underwriter by
Brown & Wood LLP, New York, New York, and for the Seller by Morrison &
Forester LLP, Irvine, California.
RATINGS
It is a condition of the issuance of the Offered Certificates that the
Offered Certificates (other than the Class A-8IO Certificates) be rated AAA
and Aaa by S&P and Moody's, respectively (Moody's, together with S&P, the
"Rating Agencies") and that the Class A-8IO Certificates be rated "AAAr" by
S&P and "Aaa" by Moody's. No rating addresses whether Subsequent Mortgage
Loans will be purchased by the Trust Fund, the amount of any such Mortgage
Loans to be so purchased, or the impact any such purchase might have on the
yields of the Offered Certificates.
The ratings on the Offered Certificates address the likelihood of the
receipt by the holders of the Offered Certificates of all distributions on
the Mortgage Loans to which they are entitled. The ratings on the Offered
Certificates also address the structural, legal and issuer-related aspects of
the Offered Certificates, including the nature of the Mortgage Loans. In
general, the ratings on the Offered Certificates address credit risk and not
prepayment risk. The ratings on the Offered Certificates do not represent
any assessment of the likelihood that principal prepayments of the Mortgage
Loans will be made by borrowers or the degree to which the rate of such
prepayments might differ from that originally anticipated. The "r" symbol is
appended to a rating by S&P if those Certificates that S&P believes may
experience high volatility or high variability in expected returns due to
non-credit risks. The absence of an "r" symbol in the ratings of the Offered
Certificates should not be taken as an indication that such Certificates will
exhibit no volatility or variability in total return. As a result, the
initial ratings assigned to the Offered Certificates do not address the
possibility that holders of the Offered Certificates might suffer a lower
than anticipated yield in the event of principal payments on the Offered
Certificates resulting from rapid prepayments of the Mortgage Loans or the
application of the Net Monthly Excess Cashflow as described herein, or in the
event that the Trust Fund is terminated prior to the Assumed Final Maturity
Dates of the Offered Certificates. The ratings on the Offered Certificates
do not address the ability of the Trust to acquire Subsequent Mortgage Loans,
any potential redemption with respect thereto or the effect on yield
resulting therefrom.
The Depositor has not engaged any rating agency other than the Rating
Agencies to provide ratings on the Offered Certificates. However, there can
be no assurance as to whether any other rating agency will rate the Offered
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. Any rating on the Certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Offered
Certificates 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 Certificates 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 Certificates.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc. and
Subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for
each of the three years in the period ended December 31, 1996, incorporated
by reference in this Prospectus Supplement, have been incorporated herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
INDEX OF DEFINED TERMS
Accrual Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-47
Actuarial Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
Additional Obligations . . . . . . . . . . . . . . . . . . . . . . . . S-72
Assumed Final Maturity Date . . . . . . . . . . . . . . . . . . . . . . S-52
Available Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-43
Average Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . S-72
Balloon Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . . . S-10
Balloon Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-10
beneficial owner . . . . . . . . . . . . . . . . . . . . . . . . . . . S-39
Book-Entry Certificates . . . . . . . . . . . . . . . . . . . . . . . . S-39
Call Option Date . . . . . . . . . . . . . . . . . . . . . . . . . S-8, S-48
Capitalized Interest Account . . . . . . . . . . . . . . . . . . S-11, S-43
CBE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-62
Cede . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6, S-19, S-39
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-20
Certificate Account . . . . . . . . . . . . . . . . . . . . . . . . . . S-42
Certificate Insurance Policy . . . . . . . . . . . . . . . . . . . S-1, S-8
Certificate Insurer . . . . . . . . . . . . . . . . . . . . . S-1, S-5, S-66
Certificate Insurer Default . . . . . . . . . . . . . . . . . . . . . . S-48
Certificate Notional Balance . . . . . . . . . . . . . . . . S-1, S-38, S-48
Certificate Owner . . . . . . . . . . . . . . . . . . . . . . . . . . . S-39
Certificate Principal Balance . . . . . . . . . . . . . . . . . . . S-1, S-48
Certificateholders . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
Certificates . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-5, S-38
Civil Relief Act . . . . . . . . . . . . . . . . . . . . . . . . . . . S-19
Class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Class A Carry-Forward Amount . . . . . . . . . . . . . . . . . . . . . S-48
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-8
CLTV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-68
Collection Account . . . . . . . . . . . . . . . . . . . . . . . . . . S-40
Combined Loan-to-Value Ratio . . . . . . . . . . . . . . . . . . . . . S-10
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-24
Compensating Interest . . . . . . . . . . . . . . . . . . . . . . . . . S-16
Contributions Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . S-69
Cut-Off Date Loan Balance . . . . . . . . . . . . . . . . . . . . . . . S-25
Defective Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-36
Defective Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-18
Definitive Certificate . . . . . . . . . . . . . . . . . . . . . . . . S-39
Deleted Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . . . S-36
Delinquency Advance . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
Delinquency Advances . . . . . . . . . . . . . . . . . . . . . . . . . S-11
Delinquency Statistic Date . . . . . . . . . . . . . . . . . . . . . . S-18
Delinquent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-48
Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-5
Depository . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2, S-39
Distribution Date . . . . . . . . . . . . . . . . . . . . . . S-2, S-6, S-40
DTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-19
due date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
Due Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-48
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-12
Excess Subordinated Amount . . . . . . . . . . . . . . . . . . . . . . S-48
Exemption Rating Agencies . . . . . . . . . . . . . . . . . . . . . . . S-71
Financial Intermediary . . . . . . . . . . . . . . . . . . . . . . . . S-39
Financial Security . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
First Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-10
Foreign Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . S-69
Funding Period . . . . . . . . . . . . . . . . . . . . . . . . . S-10, S-43
Greenwich . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
Initial Cut-Off Date . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
Initial Cut-Off Date Pool Balance . . . . . . . . . . . . . . . . . S-8, S-26
Initial Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . S-1, S-6
Insurance Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . S-41
Insured Distribution Amount . . . . . . . . . . . . . . . . . . . . . . S-48
Insured Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
Insured Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . S-45
Interest Distribution Amount . . . . . . . . . . . . . . . . . . . . . S-48
Interest Remittance Amount . . . . . . . . . . . . . . . . . . . . . . S-48
IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-69
LIBOR Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . S-51
LIBOR Determination Date . . . . . . . . . . . . . . . . . . . . . . . S-51
Liquidated Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-50
Liquidation Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . S-41
Loan Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-49
LTV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
Majority Residual Interestholders . . . . . . . . . . . . . . . . . . . S-12
Maximum Collateral Amount . . . . . . . . . . . . . . . . . . . . . . . S-49
Moody's . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
Mortgage Loan Purchase Agreement . . . . . . . . . . . . . . . . . . . . S-5
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Mortgage Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-9
Mortgage Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-12
Mortgage Rates . . . . . . . . . . . . . . . . . . . . . . . . . . S-7, S-9
Mortgaged Property . . . . . . . . . . . . . . . . . . . . . . . . . . S-14
Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-25
Mortgagor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-15
NCFC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-24
Net income from foreclosure property . . . . . . . . . . . . . . . . . S-69
Net Monthly Excess Cashflow . . . . . . . . . . . . . . . . . . . . . . S-49
Net Mortgage Rate . . . . . . . . . . . . . . . . . . . . . . . . S-12, S-36
New Century . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-5
New Withholding Regulations . . . . . . . . . . . . . . . . . . . . . . S-69
Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-72
Offered Certificates . . . . . . . . . . . . . . . . . . . . . . . S-1, S-5
One-Month LIBOR . . . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-51
Original Certificate Principal Balance . . . . . . . . . . . . . . . . . S-1
Pass-Through Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . S-49
Pass-Through Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-12
Policy Payments Account . . . . . . . . . . . . . . . . . . . . . . . . S-44
Pooling and Servicing Agreement . . . . . . . . . . . . . . . . . . . . . S-6
Pre-Funded Amount . . . . . . . . . . . . . . . . . . . . . . . . S-10, S-43
Pre-Funding Account . . . . . . . . . . . . . . . . . . . . . S-1, S-10, S-43
Pre-Funding Limit . . . . . . . . . . . . . . . . . . . . . . . . . . . S-72
Pre-Funding Period . . . . . . . . . . . . . . . . . . . . . . . . . . S-72
Premium Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-49
Prepayment Assumption . . . . . . . . . . . . . . . . . . . . . . . . . S-53
Prepayment Interest Shortfall . . . . . . . . . . . . . . . . . . S-12, S-37
Principal Distribution Amount . . . . . . . . . . . . . . . . . . . S-7, S-49
Principal Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . S-50
Principal Remittance Amount . . . . . . . . . . . . . . . . . . . . . . S-50
Pro Rata Pre-Funding Distribution Amount . . . . . . . . . . . . . . . S-50
Prohibited Transactions Tax . . . . . . . . . . . . . . . . . . . . . . S-68
Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-36
Rating Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
Realized Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-50
Receipt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-46
Received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-46
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6, S-40
Reference Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-51
Regular Pre-Funding Distribution Amount . . . . . . . . . . . . . . . . S-50
Reimbursement Amount . . . . . . . . . . . . . . . . . . . . . . . . . S-50
REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-12, S-68
Replacement Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . S-36
Required Subordinated Amount . . . . . . . . . . . . . . . . . . . . . S-50
Reserve Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . S-51
Residual Certificates . . . . . . . . . . . . . . . . . . . . S-1, S-5, S-38
S&P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
Second Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . S-10
Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-5
Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-5
Servicing Agent . . . . . . . . . . . . . . . . . . . . . . . . . . S-5, S-11
Servicing Agent Agreement . . . . . . . . . . . . . . . . . . . . . . . S-11
Servicing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . S-11, S-37
Servicing Fee Rate . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
Settlement Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-52
SMMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-73
Stated Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Subordinated Amount . . . . . . . . . . . . . . . . . . . . . . . . . . S-50
Subordination Deficit . . . . . . . . . . . . . . . . . . . . . . . . . S-50
Subordination Increase Amount . . . . . . . . . . . . . . . . . . . . . S-51
Subordination Reduction Amount . . . . . . . . . . . . . . . . . . . . S-51
Subsequent Mortgage Loans . . . . . . . . . . . . . . . . . . S-1, S-6, S-26
Subsequent Transfer Date . . . . . . . . . . . . . . . . . . . . . . . S-35
Telerate Page 3750 . . . . . . . . . . . . . . . . . . . . . . . . . . S-51
Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-5
Trustee Fee Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Trustee's Mortgage File . . . . . . . . . . . . . . . . . . . . . . . . S-35
Underwriter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Underwriting Guidelines . . . . . . . . . . . . . . . . . . . . . . . . S-21
Unutilized Funding Amount . . . . . . . . . . . . . . . . . . . . . . . S-43
Weighted Average Rate Cap . . . . . . . . . . . . . . . . . . . . . . . . S-7
Yield Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-62
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 primarilyby 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.
September 9, 1997
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is
in addition to the obligation of dealers to deliver a Prospectus and
Prospectus Supplement when acting as underwriters and with respect to their
unsold allotments or subscriptions.
PROSPECTUS SUPPLEMENT OR CURRENT REPORT ON FORM 8-K
The Prospectus Supplement or Current Report on Form 8-K relating to the
Securities of each Series to be offered hereunder will, among other things,
set forth with respect to such Securities, as appropriate: (i) a description
of the class or classes of Securities and the Pass-Through Rate or method of
determining the rate or the amount of interest, if any, to be passed through
to each such class; (ii) the aggregate principal amount and Distribution
Dates relating to such Series and, if applicable, the initial and final
scheduled Distribution Dates for each class; (iii) information as to the
assets comprising the Trust Fund, including the general characteristics of
the Trust Fund Assets included therein and, if applicable, the insurance
policies, surety bonds, guaranties, letters of credit or other instruments or
agreements included in the Trust Fund or otherwise, and the amount and source
of any reserve account; (iv) the circumstances, if any, under which the Trust
Fund may be subject to early termination; (v) the method used to calculate
the amount of principal to be distributed with respect to each class of
Securities; (vi) the order of application of distributions to each of the
classes within such Series, whether sequential, pro rata, or otherwise; (vii)
the Distribution Dates with respect to such Series; (viii) additional
information with respect to the method of distribution of such Securities;
(ix) whether one or more REMIC elections will be made and designation of the
regular interests and residual interests; (x) the aggregate original
percentage ownership interest in the Trust Fund to be evidenced by each class
of Securities; (xi) information as to the Trustee; (xii) information as to
the nature and extent of subordination with respect to any class of
Securities that is subordinate in right of payment to any other class; and
(xiii) information as to the Master Servicer.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports
filed or caused to be filed by the Depositor with respect to a Trust Fund
pursuant to Section 13(a), 14 or 15(d) of the Securities and Exchange Act of
1934, as amended (the "Exchange Act") prior to the termination of the
offering of Securities evidencing interests therein. Upon request by any
person to whom this Prospectus is delivered in connection with the offering
of one or more classes of Securities, the Depositor will provide or cause to
be provided without charge a copy of any such documents and/or reports
incorporated herein by reference, in each case to the extent such documents
or reports relate to such classes of Securities, other than the exhibits to
such documents (unless such exhibits are specifically incorporated by
reference in such documents). Requests to the Depositor should be directed
in writing to: Paul D. Stevelman, Assistant Secretary, Financial Asset
Securities Corp., 600 Steamboat Road, Greenwich, Connecticut 06830, telephone
number (203) 625-2756. The Depositor has determined that its financial
statements are not material to the offering of any Securities.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Securities. This Prospectus, which forms a part
of the Registration Statement, and the Prospectus Supplement relating to each
Series of Securities contain summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the Rules and Regulations of
the Commission. For further information, reference is made to such
Registration Statement and the exhibits thereto. Such Registration Statement
and exhibits can be inspected and copied at prescribed rates at the public
reference facilities maintained by the Commission at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional
Offices located as follows: Midwest Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional Office, 7
World Trade Center, Suite 1300, New York, New York 10048. In addition, the
Securities and Exchange Commission (the "Commission") maintains a Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Depositor, that file
electronically with the Commission.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any
Prospectus Supplement with respect hereto and, if given or made, such
information or representations must not be relied upon. This Prospectus and
any Prospectus Supplement with respect hereto do not constitute an offer to
sell or a solicitation of an offer to buy any securities other than the
Securities offered hereby and thereby nor an offer of the Securities to any
person in any state or other jurisdiction in which such offer would be
unlawful. The delivery of this Prospectus at any time does not imply that
information herein is correct as of any time subsequent to its date.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the related Trust Fund for a
Series of Securities are required under an Agreement to be forwarded to
Securityholders. However, such reports will neither be examined nor reported
on by an independent public accountant. See "Description of the Securities--
Reports to Securityholders".
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related
Prospectus Supplement with respect to the Series offered thereby and to the
related Agreement (as such term is defined below) which will be prepared in
connection with each Series of Securities. Unless otherwise specified,
capitalized terms used and not defined in this Summary of Terms have the
meanings given to them in this Prospectus and in the related Prospectus
Supplement.
Title of Securities........ Asset Backed Certificates (the "Certificates")
and Asset Backed Notes (the "Notes" and,
together with the Certificates, the
"Securities"), which are issuable in Series.
Depositor.................. Financial Asset Securities Corp., a Delaware
corporation, an indirect limited purpose finance
subsidiary of National Westminster Bank Plc and
an affiliate of Greenwich Capital Markets, Inc.
See "The Depositor" herein.
Trustee.................... The trustee (the "Trustee") for each Series of
Securities will be specified in the related
Prospectus Supplement. See "The Agreements"
herein for a description of the Trustee's rights
and obligations.
Master Servicer............ The entity or entities named as Master Servicer
(the "Master Servicer") will be specified in the
related Prospectus Supplement. See "The
Agreements--Certain Matters Regarding the Master
Servicer and the Depositor".
Trust Fund Assets.......... Assets of the Trust Fund for a Series of
Securities will include certain assets (the
"Trust Fund Assets") which will primarily
consist of (a) Loans or (b) Private Asset Backed
Securities, together with payments in respect of
such Trust Fund Assets and certain other
accounts, obligations or agreements, in each
case as specified in the related Prospectus
Supplement. The Loans will be collected in a
pool (each, a "Pool") as of the first day of the
month of the issuance of the related Series of
Securities or such other date specified in the
Prospectus Supplement (the "Cut-off Date").
Trust Fund assets also may include insurance
policies, cash accounts, reinvestment income,
guaranties, letters of credit or other assets to
the extent described in the related Prospectus
Supplement. See "Credit Enhancement". In
addition, if the related Prospectus Supplement
so provides, the related Trust Funds' assets
will include the funds on deposit in an account
(a "Pre-Funding Account") which will be used to
purchase additional Loans during the period
specified in the related Prospectus Supplement.
See "The Agreements--Pre-Funding Accounts".
A. Loans.................. The Loans will consist of (i) closed-end loans
(the "Closed-End Loans") and/or revolving home
equity loans or certain balances therein (the
"Revolving Credit Line Loans", together with the
Closed-End Loans, the "Home Equity Loans"), and
(ii) home improvement installment sales
contracts and installment loan agreements (the
"Home Improvement Contracts"). The Home Equity
Loans and the Home Improvement Contracts are
collectively referred to herein as the "Loans".
All Loans will have been purchased by the
Depositor, either directly or through an
affiliate, from one or more Sellers.
As specified in the related Prospectus
Supplement, the Home Equity Loans will, and the
Home Improvement Contracts may, be secured by
mortgages or deeds of trust or other similar
security instruments creating a lien on a
mortgaged property (the "Mortgaged Property"),
which may be subordinated to one or more senior
liens on the Mortgaged Property, as described in
the related Prospectus Supplement. As specified
in the related Prospectus Supplement, Home
Improvement Contracts may be unsecured or
secured by purchase money security interests in
the Home Improvements financed thereby. The
Mortgaged Properties and the Home Improvements
are collectively referred to herein as the
"Properties".
B. Private Asset-
Backed Securities........ Private Asset Backed Securities may include (a)
pass-through certificates representing
beneficial interests in certain loans and/or
(b) collateralized obligations secured by such
loans. Private Asset Backed Securities may
include stripped securities representing an
undivided interest in all or a part of either
the principal distributions (but not the
interest distributions) or the interest
distributions (but not the principal
distributions) or in some specified portion of
the principal and interest distributions (but
not all of such distributions) on certain
loans. Although individual loans underlying a
Private Asset Backed Security may be insured or
guaranteed by the United States or an agency or
instrumentality thereof, they need not be, and
the Private Asset Backed Securities themselves
will not be so insured or guaranteed. Payments
on the Private Asset Backed Securities will be
distributed directly to the Trustee as
registered owner of such Private Asset Backed
Securities. See "The Trust Fund--Private Asset
Backed Securities".
Description of
the Securities........... Each Security will represent a beneficial owner-
ship interest in, or will be secured by the
assets of, a Trust Fund created by the Depositor
pursuant to an Agreement among the Depositor,
the Master Servicer and the Trustee for the
related Series. The Securities of any Series may
be issued in one or more classes as specified in
the related Prospectus Supplement. A Series of
Securities may include one or more classes of
senior Securities (collectively, the "Senior
Securities") and one or more classes of
subordinate Securities (collectively, the
"Subordinated Securities"). Certain Series or
classes of Securities may be covered by
insurance policies or other forms of credit
enhancement, in each case as described herein
and in the related Prospectus Supplement.
One or more classes of Securities of each Series
(i) may be entitled to receive distributions
allocable only to principal, only to interest or
to any combination thereof; (ii) may be entitled
to receive distributions only of prepayments of
principal throughout the lives of the Securities
or during specified periods; (iii) may be
subordinated in the right to receive
distributions of scheduled payments of
principal, prepayments of principal, interest or
any combination thereof to one or more other
classes of Securities of such Series throughout
the lives of the Securities or during specified
periods; (iv) may be entitled to receive such
distributions only after the occurrence of
events specified in the related Prospectus
Supplement; (v) may be entitled to receive
distributions in accordance with a schedule or
formula or on the basis of collections from
designated portions of the assets in the related
Trust Fund; (vi) as to Securities entitled to
distributions allocable to interest, may be
entitled to receive interest at a fixed rate or
a rate that is subject to change from time to
time; and (vii) as to Securities entitled to
distributions allocable to interest, may be
entitled to distributions allocable to interest
only after the occurrence of events specified in
the related Prospectus Supplement and may accrue
interest until such events occur, in each case
as specified in the related Prospectus
Supplement. The timing and amounts of such
distributions may vary among classes, over time,
or otherwise as specified in the related
Prospectus Supplement.
Distributions on
the Securities........... Distributions on the Securities entitled thereto
will be made monthly or at such other intervals
and on the dates specified in the related
Prospectus Supplement (each, a "Distribution
Date") out of the payments received in respect
of the assets of the related Trust Fund or Funds
or other assets pledged for the benefit of the
Securities as specified in the related
Prospectus Supplement. The amount allocable to
payments of principal and interest on any
Distribution Date will be determined as
specified in the related Prospectus Supplement.
Allocations of distributions among
Securityholders of a single class shall be set
forth in the related Prospectus Supplement.
Unless otherwise specified in the related
Prospectus Supplement, the aggregate original
principal balance of the Securities will not
exceed the aggregate distributions allocable to
principal that such Securities will be entitled
to receive. If specified in the related
Prospectus Supplement, the Securities will have
an aggregate original principal balance equal to
the aggregate unpaid principal balance of the
Trust Fund Assets as of the first day of the
month of creation of the Trust Fund and will
bear interest in the aggregate at a rate equal
to the interest rate borne by the underlying
Loans (the "Loan Rate") and/or Private Asset
Backed Securities, net of the aggregate
servicing fees and any other amounts specified
in the related Prospectus Supplement (the
"Pass-Through Rate"). If specified in the
related Prospectus Supplement, the aggregate
original principal balance of the Securities and
interest rates on the classes of Securities will
be determined based on the cash flow on the
Trust Fund Assets.
The rate at which interest will be passed
through to holders of each class of Securities
entitled thereto may be a fixed rate or a rate
that is subject to change from time to time from
the time and for the periods, in each case as
specified in the related Prospectus Supplement.
Any such rate may be calculated on a
loan-by-loan, weighted average, notional amount
or other basis, in each case as described in the
related Prospectus Supplement.
Compensating
Interest................. If so specified in the related Prospectus
Supplement, the Master Servicer will be required
to remit to the Trustee, with respect to each
Loan in the related Trust Fund as to which a
principal prepayment in full or a principal
payment which is in excess of the scheduled
monthly payment and is not intended to cure a
delinquency was received during any Due Period,
an amount, from and to the extent of amounts
otherwise payable to the Master Servicer as
servicing compensation, equal to (i) the excess,
if any, of (a) 30 days' interest on the
principal balance of the related Loan at the
Loan Rate net of the per annum rate at which the
Master Servicer's servicing fee accrues, over
(b) the amount of interest actually received on
such Loan during such Due Period, net of the
Master Servicer's servicing fee or (ii) such
other amount as described in the related
Prospectus Supplement. See "Description of the
Securities--Compensating Interest".
Credit Enhancement......... The assets in a Trust Fund or the Securities of
one or more classes in the related Series may
have the benefit of one or more types of credit
enhancement as described in the related
Prospectus Supplement. The protection against
losses afforded by any such credit support may
be limited. The type, characteristics and
amount of credit enhancement will be determined
based on the characteristics of the Loans
and/or Private Asset Backed Securities
underlying or comprising the Trust Fund Assets
and other factors and will be established on
the basis of requirements of each Rating Agency
rating the Securities of such Series. See
"Credit Enhancement."
A. Subordination........... The rights of the holders of the Subordinated
Securities of a Series to receive distributions
with respect to the assets in the related Trust
Fund will be subordinated to such rights of the
holders of the Senior Securities of the same
Series to the extent described in the related
Prospectus Supplement. This subordination is
intended to enhance the likelihood of regular
receipt by holders of Senior Securities of the
full amount of monthly payments of principal and
interest due them. The protection afforded to
the holders of Senior Securities of a Series by
means of the subordination feature will be
accomplished by (i) the preferential right of
such holders to receive, prior to any
distribution being made in respect of the
related Subordinated Securities, the amounts of
interest and/or principal due them on each
Distribution Date out of the funds available for
distribution on such date in the related
Security Account and, to the extent described in
the related Prospectus Supplement, by the right
of such holders to receive future distributions
on the assets in the related Trust Fund that
would otherwise have been payable to the holders
of Subordinated Securities; (ii) reducing the
ownership interest of the related Subordinated
Securities; (iii) a combination of clauses (i)
and (ii) above; or (iv) as otherwise described
in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement,
subordination may apply only in the event of
certain types of losses not covered by other
forms of credit support, such as hazard losses
not covered by standard hazard insurance
policies, losses due to the bankruptcy or fraud
of the borrower. The related Prospectus
Supplement will set forth information
concerning, among other things, the amount of
subordination of a class or classes of
Subordinated Securities in a Series, the
circumstances in which such subordination will
be applicable, and the manner, if any, in which
the amount of subordination will decrease over
time.
B. Reserve Account......... One or more reserve accounts (each, a "Reserve
Account") may be established and maintained for
each Series. The related Prospectus Supplement
will specify whether or not such Reserve
Accounts will be included in the corpus of the
Trust Fund for such Series and will also
specify the manner of funding the related
Reserve Accounts and the conditions under which
the amounts in any such Reserve Accounts will
be used to make distributions to holders of
Securities of a particular class or released
from the related Reserve Account.
C. Special Hazard Insurance
Policy ................ Certain classes of Securities may have the
benefit of a Special Hazard Insurance Policy.
Certain physical risks that are not otherwise
insured against by standard hazard
insurance policies may be covered by a Special
Hazard Insurance Policy or Policies. Each
Special Hazard Insurance Policy will be limited
in scope and will cover losses pursuant to the
provisions of each such Special Hazard Insurance
Policy as described in the related Prospectus
Supplement.
D. Bankruptcy Bond......... One or more bankruptcy bonds (each a
"Bankruptcy Bond") may be obtained covering
certain losses resulting from action which may
be taken by a bankruptcy court in connection
with a Loan. The level of coverage and the
limitations in scope of each Bankruptcy Bond
will be specified in the related Prospectus
Supplement.
E. Loan Pool
Insurance Policy........ A mortgage pool insurance policy or policies
may be obtained and maintained for Loans
relating to any Series, which shall be limited
in scope, covering defaults on the related
Loans in an initial amount equal to a specified
percentage of the aggregate principal balance
of all Loans included in the Pool as of the
Cut-off Date.
F. FHA Insurance........... If specified in the related Prospectus
Supplement, (i) all or a portion of the Loans in
a Pool may be insured by the Federal Housing
Administration (the "FHA") and/or (ii) all or a
portion of the Loans may be partially guaranteed
by the Department of Veterans' Affairs (the
"VA"). See "Certain Legal Considerations--
Title I Program".
G. Cross-Support........... If specified in the related Prospectus
Supplement, the beneficial ownership of separate
groups of assets included in a Trust Fund may be
evidenced by separate classes of the related
Series of Securities. In such case, credit
support may be provided by a cross-support
feature which requires that distributions be
made with respect to Securities evidencing
beneficial ownership of one or more asset groups
prior to distributions to Subordinated
Securities evidencing a beneficial ownership
interest in, or secured by, other asset groups
within the same Trust Fund.
If specified in the related Prospectus
Supplement, the coverage provided by one or more
forms of credit support may apply concurrently
to two or more separate Trust Funds. If
applicable, the related Prospectus Supplement
will identify the Trust Funds to which such
credit support relates and the manner of
determining the amount of the coverage provided
thereby and of the application of such coverage
to the identified Trust Funds.
H. Other Arrangements..... Other arrangements as described in the
related Prospectus Supplement including,
but not limited to, one or more letters of
credit, surety bonds, other insurance or
third-party guarantees may be used to
provide coverage for certain risks of
defaults or various types of losses.
Advances................... The Master Servicer and, if applicable, each
mortgage servicing institution that services a
Loan in a Pool on behalf of the Master Servicer
(a "Sub-Servicer") may be obligated to advance
amounts (each, an "Advance") corresponding to
delinquent interest and/or principal payments on
such Loan until the date, as specified in the
related Prospectus Supplement, following the
date on which the related Property is sold at a
foreclosure sale or the related Loan is
otherwise liquidated. Any obligation to make
Advances may be subject to limitations as
specified in the related Prospectus Supplement.
If so specified in the related Prospectus
Supplement, Advances may be drawn from a cash
account available for such purpose as described
in such Prospectus Supplement.
Any such obligation of the Master Servicer or a
Sub-Servicer to make Advances may be supported
by the delivery to the Trustee of a support
letter from an affiliate of the Master Servicer
or such Sub-Servicer or an unaffiliated third
party (a "Support Servicer") guaranteeing the
payment of such Advances by the Master Servicer
or Sub-Servicer, as the case may be, as
specified in the related Prospectus Supplement.
In the event the Master Servicer, Support
Servicer or Sub-Servicer fails to make a
required Advance, the Trustee may be obligated
to advance such amounts otherwise required to be
advanced by the Master Servicer, Support
Servicer or Sub-Servicer. See "Description of
the Securities--Advances."
Optional Termination....... The Master Servicer or the party specified in
the related Prospectus Supplement, including the
holder of the residual interest in a REMIC, may
have the option to effect early retirement of a
Series of Securities through the purchase of the
Trust Fund Assets and other assets in the
related Trust Fund under the circumstances
and in the manner described in "The Agreements--
Termination; Optional Termination" herein and in
the related Prospectus Supplement.
Legal Investment........... The Prospectus Supplement for each series of
Securities will specify which, if any, of the
classes of Securities offered thereby constitute
"mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). Classes of Securities that
qualify as "mortgage related securities" will be
legal investments for certain types of
institutional investors to the extent provided
in SMMEA, subject, in any case, to any other
regulations which may govern investments by such
institutional investors. Institutions whose
investment activities are subject to review by
federal or state authorities should consult with
their counsel or the applicable authorities to
determine whether an investment in a particular
class of Securities (whether or not such class
constitutes a "mortgage related security")
complies with applicable guidelines, policy
statements or restrictions. See "Legal
Investment."
Certain Material
Federal Income Tax
Consequences............. The material federal income tax consequences to
Securityholders will vary depending on whether
one or more elections are made to treat the
Trust Fund or specified portions thereof as a
real estate mortgage investment conduit
("REMIC") under the provisions of the Internal
Revenue Code of 1986, as amended (the "Code").
The Prospectus Supplement for each Series of
Securities will specify whether such an election
will be made. See "Certain Material Federal
Income Tax Consequences".
ERISA Considerations....... A fiduciary of any employee benefit plan or
other retirement plan or arrangement subject to
the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or the Code should
carefully review with its legal advisors whether
the purchase or holding of Securities could give
rise to a transaction prohibited or not
otherwise permissible under ERISA or the Code.
See "ERISA Considerations". Certain classes of
Securities may not be transferred unless the
Trustee and the Depositor are furnished with a
letter of representation or an opinion of
counsel to the effect that such transfer will
not result in a violation of the prohibited
transaction provisions of ERISA and the Code and
will not subject the Trustee, the Depositor or
the Master Servicer to additional obligations.
See "Description of the Securities-General" and
"ERISA Considerations".
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
LIMITED LIQUIDITY
There will be no market for the Securities of any Series prior to the
issuance thereof, and there can be no assurance that a secondary market will
develop or, if it does develop, that it will provide Securityholders with
liquidity of investment or will continue for the life of the Securities of
such Series.
LIMITED ASSETS
The Depositor does not have, nor is it expected to have, any significant
assets. Unless otherwise specified in the related Prospectus Supplement, the
Securities of a Series will be payable solely from the Trust Fund for such
Securities and will not have any claim against or security interest in the
Trust Fund for any other Series. There will be no recourse to the Depositor
or any other person for any failure to receive distributions on the
Securities. Further, at the times set forth in the related Prospectus
Supplement, certain Trust Fund Assets and/or any balance remaining in the
Security Account immediately after making all payments due on the Securities
of such Series, after making adequate provision for future payments on
certain classes of Securities and after making any other payments specified
in the related Prospectus Supplement, may be promptly released or remitted to
the Depositor, the Servicer, any credit enhancement provider or any other
person entitled thereto and will no longer be available for making payments
to Securityholders. Consequently, holders of Securities of each Series must
rely solely upon payments with respect to the Trust Fund Assets and the other
assets constituting the Trust Fund for a Series of Securities, including, if
applicable, any amounts available pursuant to any credit enhancement for such
Series, for the payment of principal of and interest on the Securities of
such Series.
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer or any of their respective affiliates. The
only obligations, if any, of the Depositor with respect to the Trust Fund
Assets or the Securities of any Series will be pursuant to certain
representations and warranties. The Depositor does not have, and is not
expected in the future to have, any significant assets with which to meet any
obligation to repurchase Trust Fund Assets with respect to which there has
been a breach of any representation or warranty. If, for example, the
Depositor were required to repurchase a Loan, its only sources of funds to
make such repurchase would be from funds obtained (i) from the enforcement of
a corresponding obligation, if any, on the part of the Seller or originator
of such Loan, or (ii) from a Reserve Account or similar credit enhancement
established to provide funds for such repurchases. The Master Servicer's
servicing obligations under the related Agreement may include its limited
obligation to make certain advances in the event of delinquencies on the
Loans, but only to the extent deemed recoverable. To the extent described in
the related Prospectus Supplement, the Depositor or Master Servicer will be
obligated under certain limited circumstances to purchase or act as a
remarketing agent with respect to a convertible Loan upon conversion to a
fixed rate.
CREDIT ENHANCEMENT
Although credit enhancement is intended to reduce the risk of delinquent
payments or losses to holders of Securities entitled to the benefit thereof,
the amount of such credit enhancement will be limited, as set forth in the
related Prospectus Supplement, and may decline and could be depleted under
certain circumstances prior to the payment in full of the related Series of
Securities, and as a result Securityholders may suffer losses. Moreover,
such credit enhancement may not cover all potential losses or risks. For
example, credit enhancement may or may not cover fraud or negligence by a
loan originator or other parties. See "Credit Enhancement".
PREPAYMENT AND YIELD CONSIDERATIONS
The timing of principal payments of the Securities of a Series will be
affected by a number of factors, including the following: (i) the extent of
prepayments of the Loans and, in the case of Private Asset Backed Securities,
the underlying loans related thereto, comprising the Trust Fund, which
prepayments may be influenced by a variety of factors, (ii) the manner of
allocating principal and/or payments among the classes of Securities of a
Series as specified in the related Prospectus Supplement, (iii) the exercise
by the party entitled thereto of any right of optional termination and (iv)
the rate and timing of payment defaults and losses incurred with respect to
the Trust Fund Assets. Prepayments of principal may also result from
repurchases of Trust Fund Assets due to material breaches of the Depositor's
or the Master Servicer's representations and warranties, as applicable. The
yield to maturity experienced by a holder of Securities may be affected by
the rate of prepayment of the Loans comprising or underlying the Trust Fund
Assets. See "Yield and Prepayment Considerations".
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending
two or more days prior to a Distribution Date, the effective yield to
Securityholders will be reduced from the yield that would otherwise be
obtainable if interest payable on the Security were to accrue through the day
immediately preceding each Distribution Date, and the effective yield (at
par) to Securityholders will be less than the indicated coupon rate. See
"Description of the Securities - Distributions of Interest".
BALLOON PAYMENTS
Certain of the Loans as of the Cut-off Date may not be fully amortizing
over their terms to maturity and, thus, will require substantial principal
payments (i.e., balloon payments) at their stated maturity. Loans with
balloon payments involve a greater degree of risk because the ability of a
borrower to make a balloon payment typically will depend upon its ability
either to timely refinance the loan or to timely sell the related Property.
The ability of a borrower to accomplish either of these goals will be
affected by a number of factors, including the level of available mortgage
rates at the time of sale or refinancing, the borrower's equity in the
related Property, the financial condition of the borrower and tax laws.
NATURE OF MORTGAGES
There are several factors that could adversely affect the value of
Properties such that the outstanding balance of the related Loans, together
with any senior financing on the Properties, if applicable, would equal or
exceed the value of the Properties. Among the factors that could adversely
affect the value of the Properties are an overall decline in the residential
real estate market in the areas in which the Properties are located or a
decline in the general condition of the Properties as a result of failure of
borrowers to maintain adequately the Properties or of natural disasters that
are not necessarily covered by insurance, such as earthquakes and floods. In
the case of Home Equity Loans, such decline could extinguish the value of the
interest of a junior mortgagee in the Property before having any effect on
the interest of the related senior mortgagee. If such a decline occurs, the
actual rates of delinquencies, foreclosures and losses on all Loans could be
higher than those currently experienced in the mortgage lending industry in
general.
Even assuming that the Properties provide adequate security for the
Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Loans and corresponding delays in the receipt of
related proceeds by Securityholders could occur. An action to foreclose on a
Property securing a Loan is regulated by state statutes and rules and is
subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a Property. In the event of a
default by a borrower, these restrictions, among other things, may impede the
ability of the Master Servicer to foreclose on or sell the Property or to
obtain liquidation proceeds sufficient to repay all amounts due on the
related Loan. In addition, the Master Servicer will be entitled to deduct
from related liquidation proceeds all expenses reasonably incurred in
attempting to recover amounts due on defaulted Loans and not yet repaid,
including payments to senior lienholders, legal fees and costs of legal
action, real estate taxes and maintenance and preservation expenses.
Liquidation expenses with respect to defaulted loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in
realizing upon a defaulted loan having a small remaining principal balance as
it would in the case of a defaulted loan having a large remaining principal
balance, the amount realized after expenses of liquidation would be smaller
as a percentage of the outstanding principal balance of the small loan than
would be the case with the defaulted loan having a large remaining principal
balance. Since the mortgages and deeds of trust securing the Home Equity
Loans will be primarily junior liens subordinate to the rights of the
mortgagee under the related senior mortgage(s) or deed(s) of trust, the
proceeds from any liquidation, insurance or condemnation proceeds will be
available to satisfy the outstanding balance of such junior lien only to the
extent that the claims of such senior mortgagees have been satisfied in full,
including any related foreclosure costs. In addition, a junior mortgagee may
not foreclose on the property securing a junior mortgage unless it forecloses
subject to any senior mortgage, in which case it must either pay the entire
amount due on any senior mortgage to the related senior mortgagee at or prior
to the foreclosure sale or undertake the obligation to make payments on any
such senior mortgage in the event the mortgagor is in default thereunder.
The Trust Fund will not have any source of funds to satisfy any senior
mortgages or make payments due to any senior mortgagees.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of certain
originators and servicers of Loans. In addition, most states have other
laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices which
may apply to the origination, servicing and collection of the Loans.
Depending on the provisions of the applicable law and the specific facts and
circumstances involved, violations of these laws, policies and principles may
limit the ability of the Master Servicer to collect all or part of the
principal of or interest on the Loans, may entitle the borrower to a refund
of amounts previously paid and, in addition, could subject the Master
Servicer to damages and administrative sanctions. See "Certain Legal Aspects
of the Loans".
ENVIRONMENTAL RISKS
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and
safety. In certain circumstances, these laws and regulations impose
obligations on owners or operators of residential properties such as those
subject to the Loans. The failure to comply with such laws and regulations
may result in fines and penalties.
Under various federal, state and local laws and regulations, an owner or
operator of real estate may be liable for the costs of addressing hazardous
substances on, in or beneath such property and related costs. Such liability
could exceed the value of the property and the aggregate assets of the owner
or operator. In addition, persons who transport or dispose of hazardous
substances, or arrange for the transportation, disposal or treatment of
hazardous substances, at off-site locations may also be held liable if there
are releases or threatened releases of hazardous substances at such off-site
locations.
Under the laws of some states and under the federal Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"),
contamination of property may give rise to a lien on the property to assure
the payment of the costs of clean-up. In several states, such a lien has
priority over the lien of an existing mortgage against such property.
Under the laws of some states, and under CERCLA and the federal Solid
Waste Disposal Act, there is a possibility that a lender may be held liable
as an "owner" or "operator" for costs of addressing releases or threatened
releases of hazardous substances at a property, or releases of petroleum from
an underground storage tank, under certain circumstances. See "Certain Legal
Aspects of the Loans--Environmental Risks."
CERTAIN OTHER LEGAL CONSIDERATIONS REGARDING THE LOANS
The Loans may also be subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Loans;
(ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of
age, race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act, in the extension of credit;
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience;
and
(iv) for Loans that were originated or closed after November 7,
1989, the Home Equity Loan Consumer Protection Act of 1988, which
requires additional application disclosures, limits changes that may be
made to the loan documents without the borrower's consent and restricts
a lender's ability to declare a default or to suspend or reduce a
borrower's credit limit to certain enumerated events.
The Riegle Act. Certain mortgage loans are subject to the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "Riegle
Act") which incorporates the Home Ownership and Equity Protection Act of
1994. These provisions impose additional disclosure and other requirements
on creditors with respect to non-purchase money mortgage loans with high
interest rates or high up-front fees and charges. The provisions of the
Riegle Act apply on a mandatory basis to all mortgage loans originated on or
after October 1, 1995. These provisions can impose specific statutory
liabilities upon creditors who fail to comply with their provisions and may
affect the enforceability of the related loans. In addition, any assignee of
the creditor would generally be subject to all claims and defenses that the
consumer could assert against the creditor, including, without limitation,
the right to rescind the mortgage loan.
The Home Improvement Contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission
and other similar federal and state statutes and regulations (collectively,
the "Holder in Due Course Rules"), which protect the homeowner from defective
craftsmanship or incomplete work by a contractor. These laws permit the
obligor to withhold payment if the work does not meet the quality and
durability standards agreed to by the homeowner and the contractor. The
Holder in Due Course Rules have the effect of subjecting any assignee of the
seller in a consumer credit transaction to all claims and defenses which the
obligor in the credit sale transaction could assert against the seller of the
goods.
Violations of certain provisions of these federal laws may limit the
ability of the Master Servicer to collect all or part of the principal of or
interest on the Loans and in addition could subject the Trust Fund to damages
and administrative enforcement. See "Certain Legal Aspects of the Loans".
RATING OF THE SECURITIES
It will be a condition to the issuance of a class of Securities that
they be rated in one of the four highest rating categories by the Rating
Agency identified in the related Prospectus Supplement. Any such rating
would be based on among other things, the adequacy of the value of the Trust
Fund Assets and any credit enhancement with respect to such class and will
respect such Rating Agency's assessment solely of the likelihood that holders
of a class of Securities will receive payments to which such Securityholders
are entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments on the related Loans
will be made, the degree to which the rate of such prepayments might differ
from that originally anticipated or the likelihood of early optional
termination of the Series of Securities. Such rating shall not be deemed a
recommendation to purchase, hold or sell Securities, inasmuch as it does not
address market price or suitability for a particular investor. Such
rating will not address the possibility that prepayment at higher or lower
rates than anticipated by an investor may cause such investor to
experience a lower than anticipated yield or that an investor
purchasing a Security at a significant premium might fail to recoup its
initial investment under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect
for any given period of time or that it may not be lowered or withdrawn
entirely by the Rating Agency in the future if in its judgment circumstances
in the future so warrant. In addition to being lowered or withdrawn due to
any erosion in the adequacy of the value of the Trust Fund Assets or any
credit enhancement with respect to a Series, such rating might also be
lowered or withdrawn, among other reasons, because of an adverse change in
the financial or other condition of a credit enhancement provider or a change
in the rating of such credit enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a class of Securities will be determined on the basis of
criteria established by each Rating Agency rating classes of such Series.
Such criteria are sometimes based upon an actuarial analysis of the behavior
of similar loans in a larger group. Such analysis is often the basis upon
which each Rating Agency determines the amount of credit enhancement required
with respect to each such class. There can be no assurance that the
historical data supporting any such actuarial analysis will accurately
reflect future experience nor any assurance that the data derived from a
large pool of similar loans accurately predicts the delinquency, foreclosure
or loss experience of any particular pool of Loans. No assurance can be
given that the values of any Properties have remained or will remain at their
levels on the respective dates of origination of the related Loans. If the
residential real estate markets should experience an overall decline in
property values such that the outstanding principal balances of the Loans in
a particular Trust Fund and any secondary financing on the related Properties
become equal to or greater than the value of the Properties, the rates of
delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. In addition, adverse
economic conditions (which may or may not affect real property values) may
affect the timely payment by mortgagors of scheduled payments of principal
and interest on the Loans and, accordingly, the rates of delinquencies,
foreclosures and losses with respect to any Trust Fund. To the extent that
such losses are not covered by credit enhancement, such losses will be borne,
at least in part, by the holders of one or more classes of the Securities of
the related Series. See "Rating".
BOOK-ENTRY REGISTRATION
If issued in book-entry form, such registration may reduce the liquidity
of the Securities in the secondary trading market since investors may be
unwilling to purchase Securities for which they cannot obtain physical
certificates. Since transactions in Securities can be effected only through
the Depository Trust Company ("DTC"), participating organizations
("Participants"), Financial Intermediaries and certain banks, the ability of
a Securityholder to pledge a Security to persons or entities that do not
participate in the DTC system, or otherwise to take actions in respect of
such Securities, may be limited due to lack of a physical certificate
representing the Securities.
In addition, Securityholders may experience some delay in their receipt
of distributions of interest and principal on the Securities since
distributions are required to be forwarded by the Trustee to DTC and DTC will
then be required to credit such distributions to the accounts of Participants
which thereafter will be required to credit them to the accounts of
Securityholders either directly or indirectly through Financial
Intermediaries. See "Description of the Securities--Book-Entry Registration
of Securities".
PRE-FUNDING ACCOUNTS
If so provided in the related Prospectus Supplement, on the Closing Date
the Depositor will deposit an amount (the "Pre-Funded Amount") specified in
such Prospectus Supplement into the Pre-Funding Account. In no event shall
the Pre-Funded Amount exceed 25% of the initial aggregate principal amount of
the Certificates and/or Notes of the related Series of Securities. The Pre-
Funded Amount will be used to purchase Loans ("Subsequent Loans") in a period
from the Closing Date to a date not more than three months after the Closing
Date (such period, the "Funding Period") from the Depositor (which, in
turn, will acquire such Subsequent Loans from the Seller or Sellers
specified in the related Prospectus Supplement). To the extent that the
entire Pre-Funded Amount has not been applied to the purchase of
Subsequent Loans by the end of the related Funding Period, any amounts
remaining in the Pre-Funding Account will be distributed as a prepayment
of principal to Certificateholders and/or Noteholders on the
Distribution Date immediately following the end of the Funding Period, in
the amounts and pursuant to the priorities set forth in the related
Prospectus Supplement.
LOWER CREDIT QUALITY TRUST FUND ASSETS
Certain of the Trust Fund Assets underlying or securing, as the case may
be, a Series of Securities may have been made to lower credit quality
borrowers who have marginal credit and fall into one of two categories:
customers with moderate income, limited assets and other income
characteristics which cause difficulty in borrowing from banks and other
traditional sources of lenders, and customers with a derogatory credit report
including a history of irregular employment, previous bankruptcy filings,
repossession of property, charged-off loans and garnishment of wages. The
average interest rate charged on such Trust Fund Assets made to these types
of borrowers is generally higher than that charged by lenders that typically
impose more stringent credit requirements. The payment experience on loans
made to these types of borrowers is likely to be different (i.e., greater
likelihood of later payments or defaults, less likelihood of prepayments)
from that on loans made to borrowers with higher credit quality, and is
likely to be more sensitive to changes in the economic climate in the areas
in which such borrowers reside. See "The Mortgage Pool" in the related
Prospectus Supplement.
DELINQUENT TRUST FUND ASSETS
No more than 5% (by principal balance) of the Trust Fund Assets for any
particular Series of Securities will be between 30 and 59 days past due as of
the related Cut-off Date.
OTHER CONSIDERATIONS
There is no assurance that the market value of the Trust Fund Assets or
any other assets of a Series will at any time be equal to or greater than the
principal amount of the Securities of such Series then outstanding, plus
accrued interest thereon. Moreover, upon an event of default under the
Agreement for a Series and a sale of the assets in the Trust Fund or upon a
sale of the assets of a Trust Fund for a Series of Securities, the Trustee,
the Master Servicer, the credit enhancer, if any, and any other service
provider specified in the related Prospectus Supplement generally will be
entitled to receive the proceeds of any such sale to the extent of unpaid
fees and other amounts owing to such persons under the related Agreement
prior to distributions to Securityholders. Upon any such sale, the proceeds
thereof may be insufficient to pay in full the principal of and interest on
the Securities of such Series.
THE TRUST FUND
The Certificates of each Series will represent interests in the assets
of the related Trust Fund, and the Notes of each Series will be secured by
the pledge of the assets of the related Trust Fund. The Trust Fund for each
Series will be held by the Trustee for the benefit of the related
Securityholders. Each Trust Fund will consist of certain assets (the "Trust
Fund Assets") consisting of a pool (each, a "Pool") comprised of Loans or
Private Asset Backed Securities, in each case as specified in the related
Prospectus Supplement, together with payments in respect of such Trust Fund
Assets and certain other accounts, obligations or agreements, in each case as
specified in the related Prospectus Supplement./F1/ The Pool will be created
on the first day of the month of the issuance of the related Series
- --------------------
/F1/ Whenever the terms "Pool", "Certificates" and "Notes" are used
in this Prospectus, such terms will be deemed to apply, unless the context
indicates otherwise, to one specific Pool and the Certificates representing
certain undivided interests in, or Notes secured by the assets of, a single
trust fund (the "Trust Fund") consisting primarily of the Loans in such Pool.
Similarly, the term "Pass-Through Rate" will refer to the Pass-Through Rate
borne by the Certificates or Notes of one specific Series and the term "Trust
Fund" will refer to one specific Trust Fund.
of Securities or such other date specified in the Prospectus Supplement (the
"Cut-off Date"). The Securities will be entitled to payment from the assets
of the related Trust Fund or Funds or other assets pledged for the benefit of
the Securityholders as specified in the related Prospectus Supplement and
will not be entitled to payments in respect of the assets of any other trust
fund established by the Depositor.
The Trust Fund Assets will be acquired by the Depositor, either directly
or through affiliates, from originators or sellers which may be affiliates of
the Depositor (the "Sellers"), and conveyed by the Depositor to the related
Trust Fund. Loans acquired by the Depositor will have been originated in
accordance with the underwriting criteria specified below under "Loan
Program-Underwriting Standards" or as otherwise described in a related
Prospectus Supplement. See "Loan Program--Underwriting Standards".
The Depositor will cause the Trust Fund Assets to be assigned to the
Trustee named in the related Prospectus Supplement for the benefit of the
holders of the Securities of the related Series. The Master Servicer named
in the related Prospectus Supplement will service the Trust Fund Assets,
either directly or through other servicing institutions ("Sub-Servicers"),
pursuant to a Pooling and Servicing Agreement among the Depositor, the Master
Servicer and the Trustee with respect to a Series of Certificates, or a
servicing agreement (each, a "Servicing Agreement") between the Trustee and
the Servicer with respect to a Series of Notes, and will receive a fee for
such services. See "Loan Program" and "The Pooling and Servicing Agreement".
With respect to Loans serviced by the Master Servicer through a Sub-Servicer,
the Master Servicer will remain liable for its servicing obligations under
the related Agreement as if the Master Servicer alone were servicing such
Loans.
As used herein, "Agreement" means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and
with respect to a Series of Notes, the Indenture and the Servicing Agreement,
as the context requires.
If so specified in the related Prospectus Supplement, a Trust Fund
relating to a Series of Securities may be a business trust formed under the
laws of the state specified in the related Prospectus Supplement pursuant to
a trust agreement (each, a "Trust Agreement") between the Depositor and the
trustee of such Trust Fund.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or
liabilities. No Trust Fund is expected to engage in any activities other
than acquiring, managing and holding of the related Trust Fund Assets and
other assets contemplated herein and in the related Prospectus Supplement and
the proceeds thereof, issuing Securities and making payments and
distributions thereon and certain related activities. No Trust Fund is
expected to have any source of capital other than its assets and any related
credit enhancement.
Unless otherwise specified in the related Prospectus Supplement, the
only obligations of the Depositor with respect to a Series of Securities will
be to obtain certain representations and warranties from the Sellers and to
assign to the Trustee for such Series of Securities the Depositor's rights
with respect to such representations and warranties. See "The Agreements--
Assignment of Trust Fund Assets". The obligations of the Master Servicer
with respect to the Loans will consist principally of its contractual
servicing obligations under the related Agreement (including its obligation
to enforce the obligations of the Sub-Servicers or Sellers, or both, as more
fully described herein under "Loan Program--Representations by Sellers;
Repurchases" and "The Agreements--Sub-Servicing of Loans", "--Assignment of
Trust Fund Assets") and its obligation, if any, to make certain cash advances
in the event of delinquencies in payments on or with respect to the Loans in
the amounts described herein under "Description of the Securities--Advances".
The obligations of the Master Servicer to make advances may be subject to
limitations, to the extent provided herein and in the related Prospectus
Supplement.
The following is a brief description of the assets expected to be
included in the Trust Funds. If specific information respecting the Trust
Fund Assets is not known at the time the related Series of Securities
initially is offered, more general information of the nature described below
will be provided in the related Prospectus Supplement, and specific
information will be set forth in a report on Form 8-K to be filed with the
Securities and Exchange Commission within fifteen days after the initial
issuance of such Securities (the "Detailed Description"). A copy of the
Agreement with respect to each Series of Securities will be attached to
the Form 8-K and will be available for inspection at the corporate
trust office of the Trustee specified in the related Prospectus
Supplement. A schedule of the Trust Fund Assets relating to such Series
will be attached to the Agreement delivered to the Trustee upon delivery
of the Securities.
THE LOANS
General. For purposes hereof, "Home Equity Loans" includes "Closed-End
Loans" and "Revolving Credit Line Loans". The real property which secures
repayment of the Loans is referred to as "Properties". Unless otherwise
specified in the related Prospectus Supplement, the Loans will be secured by
mortgages or deeds of trust or other similar security instruments creating a
lien on a Property, which may be subordinated to one or more senior liens on
the related Properties, each as described in the related Prospectus
Supplement. As more fully described in the related Prospectus Supplement,
the Loans may be "conventional" loans or loans that are insured or guaranteed
by a governmental agency such as the FHA or VA.
The Properties relating to Loans will consist primarily of detached or
semi-detached one- to four-family dwelling units, townhouses, rowhouses,
individual condominium units, individual units in planned unit developments,
and certain other dwelling units ("Single Family Properties") or Small Mixed-
Used Properties (as defined herein) which consist of structures of not more
than three stories which include one- to four-family residential dwelling
units and space used for retail, professional or other commercial uses. Such
Properties may include vacation and second homes, investment properties and
leasehold interests. The Properties may be located in any one of the fifty
states, the District of Columbia, Guam, Puerto Rico or any other territory of
the United States.
The payment terms of the Loans to be included in a Trust Fund will be
described in the related Prospectus Supplement and may include any of the
following features (or combination thereof) or other features, all as
described above or in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index (which will be specified in the
related Prospectus Supplement), a rate that is fixed for a period of
time or under certain circumstances and is followed by an adjustable
rate, a rate that otherwise varies from time to time, or a rate that is
convertible from an adjustable rate to a fixed rate. Changes to an
adjustable rate may be subject to periodic limitations, maximum rates,
minimum rates or a combination of such limitations. Accrued interest
may be deferred and added to the principal of a loan for such periods
and under such circumstances as may be specified in the related
Prospectus Supplement. Loans may provide for the payment of interest at
a rate lower than the specified interest rate borne by such Mortgage
(the "Loan Rate") for a period of time or for the life of the Loan, and
the amount of any difference may be contributed from funds supplied by
the Seller of the Property or another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the loan over its term, may be calculated on the basis of an
assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from
the interest rate on the Loan or may not be amortized during all or a
portion of the original term. Payment of all or a substantial portion
of the principal may be due on maturity ("balloon payment"). Principal
may include interest that has been deferred and added to the principal
balance of the Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the loan, may increase over a specified period of time or may
change from period to period. Loans may include limits on periodic
increases or decreases in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the loan or may decline over time,
and may be prohibited for the life of the loan or for certain
periods ("lockout periods"). Certain loans may permit prepayments after
expiration of the applicable lockout period and may require the payment
of a prepayment fee in connection with any such subsequent prepayment.
Other loans may permit prepayments without payment of a fee unless the
prepayment occurs during specified time periods. The loans may include
"due on sale" clauses which permit the mortgagee to demand payment of
the entire loan in connection with the sale or certain transfers of the
related Property. Other loans may be assumable by persons meeting the
then applicable underwriting standards of the Seller.
As more fully described in the related Prospectus Supplement, interest
on each Revolving Credit Line Loan, excluding introduction rates offered from
time to time during promotional periods, is computed and payable monthly on
the average daily outstanding principal balance of such Loan. Principal
amounts on a Revolving Credit Line Loan may be drawn down (up to a maximum
amount as set forth in the related Prospectus Supplement) or repaid under
each Revolving Credit Line Loan from time to time, but may be subject to a
minimum periodic payment. Except to the extent provided in the related
Prospectus Supplement, the Trust Fund will not include any amounts borrowed
under a Revolving Credit Line Loan after the Cut-off Date. The full amount
of a Closed-End Loan is advanced at the inception of the loan and generally
is repayable in equal (or substantially equal) installments of an amount to
fully amortize such loan at its stated maturity. Except to the extent
provided in the related Prospectus Supplement, the original terms to stated
maturity of Closed-End Loan will not exceed 360 months. Under certain
circumstances, under either a Revolving Credit Line Loan or a Closed-End
Loan, a borrower may choose an interest only payment option and is obligated
to pay only the amount of interest which accrues on the loan during the
billing cycle. An interest only payment option may be available for a
specified period before the borrower must begin paying at least the minimum
monthly payment of a specified percentage of the average outstanding balance
of the loan.
The aggregate principal balance of Loans secured by Properties that are
owner-occupied will be disclosed in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the sole
basis for a representation that a given percentage of the Loans is secured by
Single Family Property that is owner-occupied will be either (i) the making
of a representation by the borrower at origination of the Loan either that
the underlying Property will be used by the borrower for a period of at least
six months every year or that the borrower intends to use the Property as a
primary residence or (ii) a finding that the address of the underlying
Property is the borrower's mailing address.
The Loans may include fixed-rate, closed-end mortgage loans having terms
to maturity of up to 30 years and secured by first-lien mortgages originated
on Properties containing one to four residential units and no more than three
income producing non-residential units ("Small Mixed-Use Properties"). At
least 50% of the units contained in a Small Mixed-Use Property will consist
of residential units. Income from such non-residential units will not exceed
40% of the adjusted gross income of the related borrower. The maximum Loan-
to-Value Ratio on Small Mixed-Use Properties will not exceed 65%. Small
Mixed-Use Properties may be owner occupied or investor properties and the
loan purpose may be a refinancing or a purchase.
Home Improvement Contracts. The Trust Fund Assets for a Series may
consist, in whole or part, of home improvement installment sales contracts
and installment loan agreements (the "Home Improvement Contracts") originated
by a home improvement contractor, a thrift or a commercial mortgage banker in
the ordinary course of business. As specified in the related Prospectus
Supplement, the Home Improvement Contracts will either be unsecured or
secured by the Mortgages primarily on Single Family Properties which are
generally subordinate to other mortgages on the same Property, or secured by
purchase money security interest in the Home Improvements financed thereby.
Except as otherwise specified in the related Prospectus Supplement, the Home
Improvement Contracts will be fully amortizing and may have fixed interest
rates or adjustable interest rates and may provide for other payment
characteristics as described below and in the related Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, the
home improvements (the "Home Improvements") securing the Home Improvement
Contracts will include, but are not limited to, replacement windows, house
siding, new roofs, swimming pools, satellite dishes, kitchen and bathroom
remodeling goods and solar heating panels.
The initial Loan-to-Value Ratio of a Home Improvement Contract is
computed in the manner described in the related Prospectus Supplement.
Additional Information. Each Prospectus Supplement will contain
information, as of the date of such Prospectus Supplement and to the extent
then specifically known to the Depositor, with respect to the Loans contained
in the related Pool, including (i) the aggregate outstanding principal
balance and the average outstanding principal balance of the Loans as of the
applicable Cut-off Date, (ii) the type of property securing the Loan (e.g.,
one- to four-family houses, individual units in condominium apartment
buildings, vacation and second homes or other real property), (iii) the
original terms to maturity of the Loans, (iv) the largest principal balance
and the smallest principal balance of any of the Loans, (v) the earliest
origination date and latest maturity date of any of the Loans, (vi) the
Loan-to-Value Ratios or Combined Loan-to-Value Ratios, as applicable, of the
Loans, (vii) the Loan Rates or annual percentage rates ("APR") or range of
Loan Rates or APR's borne by the Loans, and (viii) the geographical location
of the Loans on a state-by-state basis. If specific information respecting
the Loans is not known to the Depositor at the time the related Securities
are initially offered, more general information of the nature described above
will be provided in the related Prospectus Supplement, and specific
information will be set forth in the Detailed Description.
Except as otherwise specified in the related Prospectus Supplement, the
"Combined Loan-to-Value Ratio" of a Loan at any given time is the ratio,
expressed as a percentage, of (i) the sum of (a) the original principal
balance of the Loan (or, in the case of a Revolving Credit Line Loan, the
maximum amount thereof available) and (b) the outstanding principal balance
at the date of origination of the Loan of any senior mortgage loan(s) or, in
the case of any open-ended senior mortgage loan, the maximum available line
of credit with respect to such mortgage loan, regardless of any lesser amount
actually outstanding at the date of origination of the Loan, to (ii) the
Collateral Value of the related Property. Except as otherwise specified in
the related Prospectus Supplement, the "Collateral Value" of the Property,
other than with respect to certain Loans the proceeds of which were used to
refinance an existing mortgage loan (each, a "Refinance Loan"), is the lesser
of (a) the appraised value determined in an appraisal obtained by the
originator at origination of such Loan and (b) the sales price for such
Property. In the case of Refinance Loans, the "Collateral Value" of the
related Property is the appraised value thereof determined in an appraisal
obtained at the time of refinancing.
PRIVATE ASSET BACKED SECURITIES
General. Private Asset Backed Securities may consist of (a) pass-
through certificates or participation certificates evidencing an undivided
interest in a pool of home equity or home improvement loans, or (b)
collateralized mortgage obligations secured by home equity or home
improvement loans. Private Asset Backed Securities may include stripped
asset backed securities representing an undivided interest in all or a part
of either the principal distributions (but not the interest distributions) or
the interest distributions (but not the principal distributions) or in some
specified portion of the principal and interest distributions (but not all of
such distributions) on certain home equity or home improvement loans.
Private Asset Backed Securities will have been issued pursuant to a pooling
and servicing agreement, an indenture or similar agreement (a "PABS
Agreement"). The seller/servicer of the underlying Loans will have entered
into the PABS Agreement with the trustee under such PABS Agreement (the "PABS
Trustee"). The PABS Trustee or its agent, or a custodian, will possess the
loans underlying such Private Asset Backed Security. Loans underlying a
Private Asset Backed Security will be serviced by a servicer (the "PABS
Servicer") directly or by one or more subservicers who may be subject to the
supervision of the PABS Servicer. Except as otherwise specified in the
related Prospectus Supplement, the PABS Servicer will be a FNMA or FHLMC
approved servicer and, if FHA Loans underlie the Private Asset Backed
Securities, approved by HUD as an FHA mortgagee.
The issuer of the Private Asset Backed Securities (the "PABS Issuer")
will be a financial institution or other entity engaged generally in the
business of mortgage lending, a public agency or instrumentality of a state,
local or federal government, or a limited purpose corporation organized
for the purpose of, among other things, establishing trusts and acquiring
and selling housing loans to such trusts and selling beneficial interests in
such trusts. The PABS Issuer shall not be an affiliate of the Depositor.
The obligations of the PABS Issuer will generally be limited to certain
representations and warranties with respect to the assets conveyed by it
to the related trust. Except as otherwise specified in the related
Prospectus Supplement, the PABS Issuer will not have guaranteed any of the
assets conveyed to the related trust or any of the Private Asset Backed
Securities issued under the PABS Agreement. Additionally, although the
loans underlying the Private Asset Backed Securities may be guaranteed by
an agency or instrumentality of the United States, the Private Asset
Backed Securities themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Asset Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Asset Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest
distributions. Principal and interest distributions will be made on the
Private Asset Backed Securities by the PABS Trustee or the PABS Servicer.
The PABS Issuer or the PABS Servicer may have the right to repurchase assets
underlying the Private Asset Backed Securities after a certain date or under
other circumstances as specified in the related Prospectus Supplement.
Underlying Loans. The home equity or home improvement loans underlying
the Private Asset Backed Securities may consist of fixed rate, level payment,
fully amortizing loans or graduated payment loans, buydown loans, adjustable
rate loans, or loans having balloon or other special payment features. Such
loans may be secured by single family property, multifamily property,
manufactured homes or by an assignment of the proprietary lease or occupancy
agreement relating to a specific dwelling within a cooperative and the
related shares issued by such cooperative. Except as otherwise specified in
the related Prospectus Supplement, the underlying loans will have the
following characterizations: (i) no loan will have had a Loan-to-Value Ratio
at origination in excess of 95%, (ii) each single family loan secured by a
mortgaged property that had a Loan-to-Value ratio in excess of 80% at
origination will be covered by a primary mortgage insurance policy, (iii)
each loan will have had an original term to stated maturity of not less than
5 years and not more than 40 years, (iv) no loan that was more than 89 days
delinquent as to the payment of principal or interest will have been eligible
for inclusion in the assets under the related PABS Agreement, (v) each loan
(other than a cooperative loan) will be required to be covered by a standard
hazard insurance policy (which may be a blanket policy), and (vi) each loan
(other than a cooperative loan or a contract secured by a manufactured home)
will be covered by a title insurance policy.
Credit Support Relating to Private Asset Backed Securities. Credit
support in the form of reserve funds, subordination of other private
certificates issued under the PABS Agreement, letters of credit, surety
bonds, insurance policies or other types of credit support may be provided
with respect to the loans underlying the Private Asset Backed Securities
themselves.
Rating of Private Asset Backed Securities. The PABS upon their issuance
will have been assigned a rating in one of the four highest rating categories
by at least one nationally recognized statistical rating agency.
Additional Information. The Prospectus Supplement for a Series for
which the Trust Fund includes Private Asset Backed Securities will specify
(i) the aggregate approximate principal amount and type of the Private Asset
Backed Securities to be included in the Trust Fund, (ii) certain
characteristics of the loans which comprise the underlying assets for the
Private Asset Backed Securities including (A) the payment features of such
loans, (B) the approximate aggregate principal balance, if known, of
underlying loans insured or guaranteed by a governmental entity, (C) the
servicing fee or range of servicing fees with respect to the loans, and (D)
the minimum and maximum stated maturities of the underlying loans at
origination, (iii) the maximum original term-to-stated maturity of the
Private Asset Backed Securities, (iv) the weighted average term-to-stated
maturity of the Private Asset Backed Securities, (v) the pass-through or
certificate rate of the Private Asset Backed Securities, (vi) the weighted
average pass-through or certificate rate of the Private Asset Backed
Securities, (vii) the PABS Issuer, the PABS Servicer (if other than the PABS
Issuer) and the PABS Trustee for such Private Asset Backed Securities, (viii)
certain characteristics of credit support, if any, such as reserve funds,
insurance policies, surety bonds, letters of credit or guaranties relating to
the loans underlying the Private Asset Backed Securities or to such Private
Asset Backed Securities themselves, (ix) the term on which the underlying
loans for such Private Asset Backed Securities may, or are required to, be
purchased prior to their stated maturity or the stated maturity of the
Private Asset Backed Securities, (x) the terms on which loans may be
substituted for those originally underlying the Private Asset Backed
Securities and (xi) to the extent provided in a periodic report to the
Trustee in its capacity as holder of the PABS, certain information
regarding the status of the credit support, if any, relating to the PABS.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Trust Fund Assets or will be used
by the Depositor for general corporate purposes. The Depositor expects to
sell Securities in Series from time to time, but the timing and amount of
offerings of Securities will depend on a number of factors, including the
volume of Trust Fund Assets acquired by the Depositor, prevailing interest
rates, availability of funds and general market conditions.
THE DEPOSITOR
Financial Asset Securities Corp., the Depositor, is a Delaware
corporation organized on August 2, 1995 for the limited purpose of acquiring,
owning and transferring Trust Fund Assets and selling interests therein or
bonds secured thereby. It is an indirect limited purpose finance subsidiary
of National Westminster Bank Plc and an affiliate of Greenwich Capital
Markets, Inc., a registered securities broker-dealer. The Depositor
maintains its principal office at 600 Steamboat Road, Greenwich, Connecticut
06830. Its telephone number is (203) 625-2700.
Neither the Depositor nor any of the Depositor's affiliates will insure
or guarantee distributions on the Securities of any Series.
LOAN PROGRAM
The Loans will have been purchased by the Depositor, either directly or
through affiliates, from Sellers. Unless otherwise specified in the related
Prospectus Supplement, the Loans so acquired by the Depositor will have been
originated in accordance with the underwriting criteria specified below under
"Underwriting Standards".
UNDERWRITING STANDARDS
Each Seller will represent and warrant that all Loans originated and/or
sold by it to the Depositor or one of its affiliates will have been
underwritten in accordance with standards consistent with those utilized by
mortgage lenders generally during the period of origination for similar types
of loans. As to any Loan insured by the FHA or partially guaranteed by the
VA, the Seller will represent that it has complied with underwriting policies
of the FHA or the VA, as the case may be.
Underwriting standards are applied by or on behalf of a lender to
evaluate the borrower's credit standing and repayment ability, and the value
and adequacy of the Property as collateral. In general, a prospective
borrower applying for a Loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent credit information,
including the principal balance and payment history with respect to any
senior mortgage, if any, which, unless otherwise specified in the related
Prospectus Supplement, the borrower's income will be verified by the Seller.
As part of the description of the borrower's financial condition, the
borrower generally is required to provide a current list of assets and
liabilities and a statement of income and expenses, as well as an
authorization to apply for a credit report which summarizes the borrower's
credit history with local merchants and lenders and any record of bankruptcy.
In most cases, an employment verification is obtained from an independent
source (typically the borrower's employer) which verification reports the
length of employment with that organization, the current salary, and whether
it is expected that the borrower will continue such employment in the future.
If a prospective borrower is self-employed, the borrower may be required to
submit copies of signed tax returns. The borrower may also be required to
authorize verification of deposits at financial institutions where the
borrower has demand or savings accounts.
In determining the adequacy of the property to be used as collateral, an
appraisal will generally be made of each property considered for financing.
The appraiser is generally required to inspect the property, issue a report
on its condition and, if applicable, verify that construction, if new, has
been completed. The appraisal is based on the market value of comparable
homes, the estimated rental income (if considered applicable by the
appraiser) and the cost of replacing the home. The value of the property
being financed, as indicated by the appraisal, must be such that it currently
supports, and is anticipated to support in the future, the outstanding loan
balance.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available (i) to meet the borrower's
monthly obligations on the proposed mortgage loan (generally determined on
the basis of the monthly payments due in the year of origination) and other
expenses related to the property (such as property taxes and hazard
insurance) and (ii) to meet monthly housing expenses and other financial
obligations and monthly living expenses. The underwriting standards applied
by Sellers, particularly with respect to the level of loan documentation and
the mortgagor's income and credit history, may be varied in appropriate cases
where factors such as low Combined Loan-to-Value Ratios or other favorable
credit exist.
QUALIFICATIONS OF SELLERS
Unless otherwise specified in the related Prospectus Supplement, each
Seller will be required to satisfy the qualifications set forth herein. Each
Seller must be an institution experienced in originating and servicing loans
of the type contained in the related Pool in accordance with accepted
practices and prudent guidelines, and must maintain satisfactory facilities
to originate and service those loans. Unless otherwise specified in the
related Prospectus Supplement, each Seller will be a seller/servicer approved
by either FNMA or FHLMC.
REPRESENTATIONS BY SELLERS; REPURCHASES OR SUBSTITUTIONS
Each Seller will have made representations and warranties in respect of
the Loans sold by such Seller and evidenced by all, or a part, of a Series of
Securities. Except as otherwise specified in the related Prospectus
Supplement, such representations and warranties include, among other things:
(i) that title insurance (or in the case of Properties located in areas where
such policies are generally not available, an attorney's certificate of
title) and any required hazard insurance policy (or certificate of title as
applicable) remained in effect on the date of purchase of the Loan from the
Seller by or on behalf of the Depositor; (ii) that the Seller had good title
to each such Loan and such Loan was subject to no offsets, defenses,
counterclaims or rights of rescission except to the extent that any buydown
agreement described herein may forgive certain indebtedness of a borrower;
(iii) that each Loan constituted a valid lien on the Property (subject only
to permissible liens disclosed, if applicable, title insurance exceptions, if
applicable, and certain other exceptions described in the Agreement) and that
the Property was free from damage and was in acceptable condition; (iv) that
there were no delinquent tax or assessment liens against the Property;
(v) that no required payment on a Loan was more than thirty days' delinquent;
and (vi) that each Loan was made in compliance with, and is enforceable
under, all applicable local, state and federal laws and regulations in all
material respects.
If so specified in the related Prospectus Supplement, the
representations and warranties of a Seller in respect of a Loan will be made
not as of the Cut-off Date but as of the date on which such Seller sold the
Loan to the Depositor or one of its affiliates. Under such circumstances, a
substantial period of time may have elapsed between such date and the date of
initial issuance of the Series of Securities evidencing an interest in such
Loan. Since the representations and warranties of a Seller do not address
events that may occur following the sale of a Loan by such Seller, its
repurchase obligation described below will not arise if the relevant event
that would otherwise have given rise to such an obligation with respect to a
Loan occurs after the date of sale of such Loan by such Seller to the
Depositor or its affiliates. However, the Depositor will not include any
Loan in the Trust Fund for any Series of Securities if anything has come to
the Depositor's attention that would cause it to believe that the
representationes and warranties of a Seller will not be accurate and complete
in all material respects in respect of such Loan as of the date of initial
issuance of the related Series of Securities. If the Master Servicer is also
a Seller of Loans with respect to a particular Series, such representations
will be in addition to the representations and warranties made by the Master
Servicer in its capacity as a Master Servicer.
The Master Servicer or the Trustee, if the Master Servicer is the
Seller, will promptly notify the relevant Seller of any breach of any
representation or warranty made by it in respect of a Loan which materially
and adversely affects the interests of the Securityholders in such Loan.
Unless otherwise specified in the related Prospectus Supplement, if such
Seller cannot cure such breach within 90 days following notice from the
Master Servicer or the Trustee, as the case may be, then such Seller will be
obligated either (i) to repurchase such Loan from the Trust Fund at a price
(the "Purchase Price") equal to 100% of the unpaid principal balance thereof
as of the date of the repurchase plus accrued interest thereon to the first
day of the month following the month of repurchase at the Loan Rate (less any
Advances or amount payable as related servicing compensation if the Seller is
the Master Servicer) or (ii) to substitute for such Loan a replacement loan
that satisfies certain requirements set forth in the Agreement. If a REMIC
election is to be made with respect to a Trust Fund, unless otherwise
specified in the related Prospectus Supplement, the Master Servicer or a
holder of the related residual certificate generally will be obligated to pay
any prohibited transaction tax which may arise in connection with any such
repurchase or substitution and the Trustee must have received a satisfactory
opinion of counsel that such repurchase or substitution will not cause the
Trust Fund to lose its status as a REMIC or otherwise subject the Trust Fund
to a prohibited transaction tax. The Master Servicer may be entitled to
reimbursement for any such payment from the assets of the related Trust Fund
or from any holder of the related residual certificate. See "Description of
the Securities--General". Except in those cases in which the Master Servicer
is the Seller, the Master Servicer will be required under the applicable
Agreement to enforce this obligation for the benefit of the Trustee and the
holders of the Securities, following the practices it would employ in its
good faith business judgment were it the owner of such Loan. This repurchase
or substitution obligation will constitute the sole remedy available to
holders of Securities or the Trustee for a breach of representation by a
Seller.
Neither the Depositor nor the Master Servicer (unless the Master
Servicer is the Seller) will be obligated to purchase or substitute a Loan if
a Seller defaults on its obligation to do so, and no assurance can be given
that Sellers will carry out their respective repurchase or substitution
obligations with respect to Loans. However, to the extent that a breach of a
representation and warranty of a Seller may also constitute a breach of a
representation made by the Master Servicer, the Master Servicer may have a
repurchase or substitution obligation as described below under "The
Agreements--Assignment of Trust Fund Assets".
DESCRIPTION OF THE SECURITIES
Each Series of Certificates will be issued pursuant to separate
agreements (each, a "Pooling and Servicing Agreement" or a "Trust Agreement")
among the Depositor, the Servicer, if the Series relates to Loans, and the
Trustee. A form of Pooling and Servicing Agreement and Trust Agreement has
been filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. Each Series of Notes will be issued pursuant to an
indenture (the "Indenture") between the related Trust Fund and the entity
named in the related Prospectus Supplement as trustee (the "Trustee") with
respect to such Series. A form of Indenture has been filed as an exhibit to
the Registration Statement of which this Prospectus forms a part. A Series
may consist of both Notes and Certificates. Each Agreement, dated as of the
related Cut-off Date, will be among the Depositor, the Master Servicer and
the Trustee for the benefit of the holders of the Securities of such Series.
The provisions of each Agreement will vary depending upon the nature of the
Securities to be issued thereunder and the nature of the related Trust Fund.
The following summaries describe certain provisions which may appear in each
Agreement. The Prospectus Supplement for a Series of Securities will
describe any provision of the Agreement relating to such Series that mainly
differs from the description thereof contained in this Prospectus. The
summaries do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, all of the provisions of the Agreement for
each Series of Securities and the applicable Prospectus Supplement. The
Depositor will provide a copy of the Agreement (without exhibits) relating to
any Series without charge upon written request of a holder of record of a
Security of such Series addressed to Financial Asset Securities Corp., 600
Steamboat Road, Greenwich, Connecticut 06830, Attention: Asset Backed Finance
Group.
GENERAL
Unless otherwise specified in the related Prospectus Supplement, the
Certificates of each Series will be issued in book-entry or fully registered
form, in the authorized denominations specified in the related Prospectus
Supplement, will evidence specified beneficial ownership interests in the
related Trust Fund created pursuant to each Agreement and will not be
entitled to payments in respect of the assets included in any other Trust
Fund established by the Depositor. Unless otherwise specified in the related
Prospectus Supplement, the Notes of each Series will be issued in book-entry
or fully registered form, in the authorized denominations specified in the
related Prospectus Supplement, will be secured by the pledge of the assets of
the related Trust Fund and will not be entitled to payments in respect of the
assets included in any other Trust Fund established by the Depositor. The
Securities will not represent obligations of the Depositor or any affiliate
of the Depositor. Certain of the Loans may be guaranteed or insured as set
forth in the related Prospectus Supplement. Each Trust Fund will consist of,
to the extent provided in the Agreement, (i) the Trust Fund Assets, as from
time to time are subject to the related Agreement (exclusive of any amounts
specified in the related Prospectus Supplement ("Retained Interest")),
including all payments of interest and principal received with respect to the
Loans after the Cut-off Date (to the extent not applied in computing the
Cut-off Date Principal Balance); (ii) such assets as from time to time are
required to be deposited in the related Security Account, as described below
under "The Agreements--Payments on Loans; Deposits to Security Account";
(iii) property which secured a Loan and which is acquired on behalf of the
Securityholders by foreclosure or deed in lieu of foreclosure and (iv) any
insurance policies or other forms of credit enhancement required to be
maintained pursuant to the related Agreement. If so specified in the related
Prospectus Supplement, a Trust Fund may also include one or more of the
following: reinvestment income on payments received on the Trust Fund
Assets, a Reserve Account, a mortgage pool insurance policy, a Special Hazard
Insurance Policy, a Bankruptcy Bond, one or more letters of credit, a surety
bond, guaranties or similar instruments or other agreements.
Each Series of Securities will be issued in one or more classes. Each
class of Securities of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Trust Fund Assets in the related Trust Fund. A Series of
Securities may include one or more classes that are senior in right to
payment to one or more other classes of Securities of such Series. One or
more classes of Securities of a Series may be entitled to receive
distributions of principal, interest or any combination thereof.
Distributions on one or more classes of a Series of Securities may be made
prior to one or more other classes, after the occurrence of specified events,
in accordance with a schedule or formula, on the basis of collections from
designated portions of the Trust Fund Assets in the related Trust Fund or on
a different basis, in each case as specified in the related Prospectus
Supplement. The timing and amounts of such distributions may vary among
classes or over time as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal
only or interest only) on the related Securities will be made by the Trustee
on each Distribution Date (i.e., monthly or at such other intervals and on
the dates as are specified in the Prospectus Supplement) in proportion to the
percentages specified in the related Prospectus Supplement. Distributions
will be made to the persons in whose names the Securities are registered at
the close of business on the dates specified in the related Prospectus
Supplement (each, a "Record Date"). Distributions will be made in the manner
specified in the Prospectus Supplement to the persons entitled thereto at the
address appearing in the register maintained for holders of Securities (the
"Security Register"); provided, however, that the final distribution in
retirement of the Securities will be made only upon presentation and
surrender of the Securities at the office or agency of the Trustee or other
person specified in the notice to Securityholders of such final distribution.
The Securities will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange
or transfer of Securities of any Series but the Trustee may require payment
of a sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding of a class of Securities
entitled only to a specified percentage of payments of either interest or
principal or a notional amount of other interest or principal on the related
Loans or a class of Securities entitled to receive payments of interest and
principal on the Loans only after payments to other classes or after the
occurrence of certain specified events by or on behalf of any employee
benefit plan or other retirement arrangement (including individual retirement
accounts and annuities, Keogh plans and collective investment funds in which
such plans, accounts or arrangements are invested) subject to provisions of
ERISA or the Code may result in prohibited transactions within the meaning of
ERISA and the Code. See "ERISA Considerations". Unless otherwise specified
in the related Prospectus Supplement, the transfer of Securities of such a
class will not be registered unless the transferee (i) represents that it is
not, and is not purchasing on behalf of, any such plan, account or
arrangement or (ii) provides an opinion of counsel satisfactory to the
Trustee and the Depositor that the purchase of Securities of such a class by
or on behalf of such plan, account or arrangement is permissible under
applicable law and will not subject the Trustee, the Master Servicer or the
Depositor to any obligation or liability in addition to those undertaken in
the Agreements.
As to each Series, an election may be made to treat the related Trust
Fund or designated portions thereof as a "real estate mortgage investment
conduit" or "REMIC" as defined in the Code. The related Prospectus
Supplement will specify whether a REMIC election is to be made.
Alternatively, the Agreement for a Series may provide that a REMIC election
may be made at the discretion of the Depositor or the Master Servicer and may
only be made if certain conditions are satisfied. As to any such Series, the
terms and provisions applicable to the making of a REMIC election, as well as
any material federal income tax consequences to Securityholders not otherwise
described herein, will be set forth in the related Prospectus Supplement. If
such an election is made with respect to a Series, one of the classes will be
designated as evidencing the sole class of "residual interests" in the
related REMIC, as defined in the Code. All other classes of Securities in
such a Series will constitute "regular interests" in the related REMIC, as
defined in the Code. As to each Series with respect to which a REMIC
election is to be made, the Master Servicer or a holder of the related
residual certificate will be obligated to take all actions required in order
to comply with applicable laws and regulations and will be obligated to pay
any prohibited transaction taxes. The Master Servicer, to the extent set
forth in the related Prospectus Supplement, will be entitled to reimbursement
for any such payment from the assets of the Trust Fund or from any holder of
the related residual certificate.
DISTRIBUTIONS ON SECURITIES
General. In general, the method of determining the amount of
distributions on a particular Series of Securities will depend on the type of
credit support, if any, that is used with respect to such Series. See
"Credit Enhancement". Set forth below are descriptions of various methods
that may be used to determine the amount of distributions on the Securities
of a particular Series. The Prospectus Supplement for each Series of
Securities will describe the method to be used in determining the amount of
distributions on the Securities of such Series.
Distributions allocable to principal and interest on the Securities will
be made by the Trustee out of, and only to the extent of, funds in the
related Security Account, including any funds transferred from any Reserve
Account (a "Reserve Account"). As between Securities of different classes
and as between distributions of principal (and, if applicable, between
distributions of Principal Prepayments, as defined below, and scheduled
payments of principal) and interest, distributions made on any Distribution
Date will be applied as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
distributions to any class of Securities will be made pro rata to all
Securityholders of that class.
Available Funds. All distributions on the Securities of each Series on
each Distribution Date will be made from the Available Funds described below,
in accordance with the terms described in the related Prospectus Supplement
and specified in the Agreement. Unless otherwise provided in the related
Prospectus Supplement, "Available Funds" for each Distribution Date will
equal the sum of the following amounts:
(i) the aggregate of all previously undistributed payments on
account of principal (including Principal Prepayments, if any, and
prepayment penalties, if so provided in the related Prospectus
Supplement) and interest on the Loans in the related Trust Fund
(including Liquidation Proceeds and Insurance Proceeds and amounts drawn
under letters of credit or other credit enhancement instruments as
permitted thereunder and as specified in the related Agreement) received
by the Master Servicer after the Cut-off Date and on or prior to the day
of the month of the related Distribution Date specified in the related
Prospectus Supplement (the "Determination Date") except
(a) all payments which were due on or before the Cut-off Date;
(b) all Liquidation Proceeds and all Insurance Proceeds, all
Principal Prepayments and all other proceeds of any Loan purchased
by the Depositor, Master Servicer, any Sub-Servicer or any Seller
pursuant to the Agreement that were received after the prepayment
period specified in the related Prospectus Supplement and all
related payments of interest representing interest for any period
after the interest accrual period;
(c) all scheduled payments of principal and interest due on a
date or dates subsequent to the Due Period relating to such
Distribution Date;
(d) amounts received on particular Loans as late payments of
principal or interest or other amounts required to be paid by
borrowers, but only to the extent of any unreimbursed advance in
respect thereof made by the Master Servicer (including the related
Sub-Servicers, Support Servicers or the Trustee);
(e) amounts representing reimbursement, to the extent permitted
by the Agreement and as described under "Advances" below, for
advances made by the Master Servicer, Sub-Servicers, Support
Servicers or the Trustee that were deposited into the Security
Account, and amounts representing reimbursement for certain other
losses and expenses incurred by the Master Servicer or the Depositor
and described below;
(f) that portion of each collection of interest on a particular
Loan in such Trust Fund which represents servicing compensation
payable to the Master Servicer or Retained Interest which is to be
retained from such collection or is permitted to be retained from
related Insurance Proceeds, Liquidation Proceeds or proceeds of
Loans purchased pursuant to the Agreement;
(ii) the amount of any advance made by the Master Servicer, Sub
Servicer, Support Servicer or Trustee as described under "Advances"
below and deposited by it in the Security Account;
(iii) if applicable, amounts withdrawn from a Reserve Account;
(iv) if applicable, amounts provided under a letter of credit,
insurance policy, surety bond or other third-party guaranties; and
(v) if applicable, the amount of prepayment interest shortfall.
Distributions of Interest. Unless otherwise specified in the related
Prospectus Supplement, interest will accrue on the aggregate Security
Principal Balance (or, in the case of Securities (i) entitled only to
distributions allocable to interest, the aggregate notional principal balance
or (ii) which, under certain circumstances, allow for the accrual of interest
otherwise scheduled for payment to remain unpaid until the occurrence of
certain events specified in the related Prospectus Supplement) of each class
of Securities entitled to interest from the date, at the Pass-Through Rate
(which may be a fixed rate or rate adjustable as specified in such Prospectus
Supplement) and for the periods specified in such Prospectus Supplement. To
the extent funds are available therefor, interest accrued during each such
specified period on each class of Securities entitled to interest (other than
a class of Securities that provides for interest that accrues, but is not
currently payable, referred to hereafter as "Accrual Securities") will be
distributable on the Distribution Dates specified in the related Prospectus
Supplement until the aggregate Security Principal Balance of the Securities
of such class has been distributed in full or, in the case of Securities
entitled only to distributions allocable to interest, until the
aggregate notional principal balance of such Securities is reduced to zero
or for the period of time designated in the related Prospectus Supplement.
The original Security Principal Balance of each Security will equal the
aggregate distributions allocable to principal to which such Security is
entitled. Unless otherwise specified in the related Prospectus
Supplement, distributions allocable to interest on each Security that is
not entitled to distributions allocable to principal will be calculated
based on the notional principal balance of such Security. The notional
principal balance of a Security will not evidence an interest in or
entitlement to distributions allocable to principal but will be used solely
for convenience in expressing the calculation of interest and for certain
other purposes.
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending
two or more days prior to a Distribution Date, the effective yield to
Securityholders will be reduced from the yield that would otherwise be
obtainable if interest payable on the Security were to accrue through the day
immediately preceding each Distribution Date, and the effective yield (at
par) to Securityholders will be less than the indicated coupon rate.
With respect to any class of Accrual Securities, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid
on a given Distribution Date will be added to the aggregate Security
Principal Balance of such class of Securities on that Distribution Date.
Distributions of interest on any class of Accrual Securities will commence
only after the occurrence of the events specified in the related Prospectus
Supplement. Prior to such time, the beneficial ownership interest of such
class of Accrual Securities in the Trust Fund, as reflected in the aggregate
Security Principal Balance of such class of Accrual Securities, will increase
on each Distribution Date by the amount of interest that accrued on such
class of Accrual Securities during the preceding interest accrual period but
that was not required to be distributed to such class on such Distribution
Date. Any such class of Accrual Securities will thereafter accrue interest
on its outstanding Security Principal Balance as so adjusted.
Distributions of Principal. The related Prospectus Supplement will
specify the method by which the amount of principal to be distributed on the
Securities on each Distribution Date will be calculated and the manner in
which such amount will be allocated among the classes of Securities entitled
to distributions of principal. The aggregate Security Principal Balance of
any class of Securities entitled to distributions of principal generally will
be the aggregate original Security Principal Balance of such class of
Securities specified in such Prospectus Supplement, reduced by all
distributions reported to the holders of such Securities as allocable to
principal and, (i) in the case of Accrual Securities, increased by all
interest accrued but not then distributable on such Accrual Securities and
(ii) in the case of adjustable rate Securities, subject to the effect of
negative amortization, if applicable.
If so provided in the related Prospectus Supplement, one or more classes
of Securities will be entitled to receive all or a disproportionate
percentage of the payments of principal which are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the month of such payments
("Principal Prepayments") in the percentages and under the circumstances or
for the periods specified in such Prospectus Supplement. Any such allocation
of Principal Prepayments to such class or classes of Securityholders will
have the effect of accelerating the amortization of such Securities while
increasing the interests evidenced by other Securities in the Trust Fund.
Increasing the interests of the other Securities relative to that of certain
Securities allocated by the principal prepayments is intended to preserve the
availability of the subordination provided by such other Securities. See
"Credit Enhancement-Subordination".
Unscheduled Distributions. The Securities will be subject to receipt of
distributions before the next scheduled Distribution Date under the
circumstances and in the manner described below and in such Prospectus
Supplement. If applicable, the Trustee will be required to make such
unscheduled distributions on the day and in the amount specified in the
related Prospectus Supplement if, due to substantial payments of principal
(including Principal Prepayments) on the Trust Fund Assets, the Trustee or
the Master Servicer determines that the funds available or anticipated to be
available from the Security Account and, if applicable, any Reserve Account,
may be insufficient to make required distributions on the Securities on such
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, the amount of any such unscheduled distribution that is
allocable to principal will not exceed the amount that would otherwise
have been required to be distributed as principal on the Securities on
the next Distribution Date. Unless otherwise specified in the related
Prospectus Supplement, the unscheduled distributions will include
interest at the applicable Pass-Through Rate (if any) on the amount of
the unscheduled distribution allocable to principal for the period and
to the date specified in such Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
Securities would have been made on the next Distribution Date, and with
respect to Securities of the same class, unscheduled distributions of
principal will be made on the same basis as such distributions would have
been made on the next Distribution Date on a pro rata basis. Notice of any
unscheduled distribution will be given by the Trustee prior to the date of
such distribution.
ADVANCES
To the extent provided in the related Prospectus Supplement, the Master
Servicer will be required to advance on or before each Distribution Date
(from its own funds, funds advanced by Sub-Servicers or Support Servicers or
funds held in the Security Account for future distributions to the holders of
such Securities), an amount equal to the aggregate of payments of interest
and/or principal that were delinquent on the related Determination Date and
were not advanced by any Sub-Servicer, subject to the Master Servicer's
determination that such advances will be recoverable out of late payments by
borrowers, Liquidation Proceeds, Insurance Proceeds or otherwise. In
addition, to the extent provided in the related Prospectus Supplement, a cash
account may be established to provide for Advances to be made in the event of
certain Trust Fund Assets payment defaults or collection shortfalls.
In making Advances, the Master Servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to holders of the
Securities, rather than to guarantee or insure against losses. If Advances
are made by the Master Servicer from cash being held for future distribution
to Securityholders, the Master Servicer will replace such funds on or before
any future Distribution Date to the extent that funds in the applicable
Security Account on such Distribution Date would be less than the amount
required to be available for distributions to Securityholders on such date.
Any Master Servicer funds advanced will be reimbursable to the Master
Servicer out of recoveries on the specific Loans with respect to which such
Advances were made (e.g., late payments made by the related borrower, any
related Insurance Proceeds, Liquidation Proceeds or proceeds of any Loan
purchased by a Sub-Servicer or a Seller under the circumstances described
hereinabove). Advances by the Master Servicer (and any advances by a
Sub-Servicer or a Support Servicer) also will be reimbursable to the Master
Servicer (or Sub-Servicer or a Support Servicer) from cash otherwise
distributable to Securityholders (including the holders of Senior Securities)
to the extent that the Master Servicer determines that any such Advances
previously made are not ultimately recoverable as described above. To the
extent provided in the related Prospectus Supplement, the Master Servicer
also will be obligated to make Advances, to the extent recoverable out of
Insurance Proceeds, Liquidation Proceeds or otherwise, in respect of certain
taxes and insurance premiums not paid by borrowers on a timely basis. Funds
so advanced are reimbursable to the Master Servicer to the extent permitted
by the Agreement. The obligations of the Master Servicer to make advances
may be supported by a cash advance reserve fund, a surety bond or other
arrangement, in each case as described in such Prospectus Supplement.
The Master Servicer or Sub-Servicer may enter into an agreement (a
"Support Agreement") with a Support Servicer pursuant to which the Support
Servicer agrees to provide funds on behalf of the Master Servicer or Sub-
Servicer in connection with the obligation of the Master Servicer or Sub-
Servicer, as the case may be, to make Advances. The Support Agreement will
be delivered to the Trustee and the Trustee will be authorized to accept a
substitute Support Agreement in exchange for an original Support Agreement,
provided that such substitution of the Support Agreement will not adversely
affect the rating or ratings then in effect on the Securities.
Unless otherwise specified in the related Prospectus Supplement, in the
event the Master Servicer, a Sub-Servicer or a Support Servicer fails to make
a required Advance, the Trustee will be obligated to make such Advance in its
capacity as successor servicer. If the Trustee makes such an Advance, it
will be entitled to be reimbursed for such Advance to the same extent
and degree as the Master Servicer, a Sub-Servicer or a Support Servicer
is entitled to be reimbursed for Advances. See "Description of the
Securities--Distributions on Securities" herein.
COMPENSATING INTEREST
If so specified in the related Prospectus Supplement, the Master
Servicer will be required to remit to the Trustee, with respect to each Loan
in the related Trust Fund as to which a principal prepayment in full or a
principal payment which is in excess of the scheduled monthly payment and is
not intended to cure a delinquency was received during any Due Period, an
amount, from and to the extent of amounts otherwise payable to the Master
Servicer as servicing compensation, equal to the excess, if any, of (a) 30
days' interest on the principal balance of the related Loan at the Loan Rate
net of the per annum rate at which the Master Servicer's servicing fee
accrues, over (b) the amount of interest actually received on such Loan
during such Due Period, net of the Master Servicer's servicing fee.
REPORTS TO SECURITYHOLDERS
Prior to or concurrently with each distribution on a Distribution Date,
the Master Servicer or the Trustee will furnish to each Securityholder of
record of the related Series a statement setting forth, to the extent
applicable to such Series of Securities, among other things:
(i) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any Principal Prepayments
and any applicable prepayment penalties included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the aggregate amount (a) otherwise allocable to the
Subordinated Securityholders on such Distribution Date, and (b)
withdrawn from the Reserve Fund, if any, that is included in the amounts
distributed to the Senior Securityholders;
(v) the outstanding principal balance or notional principal balance
of such class after giving effect to the distribution of principal on
such Distribution Date;
(vi) the percentage of principal payments on the Loans (excluding
prepayments), if any, which such class will be entitled to receive on
the following Distribution Date;
(vii) the percentage of Principal Prepayments on the Loans, if
any, which such class will be entitled to receive on the following
Distribution Date;
(viii) the related amount of the servicing compensation retained or
withdrawn from the Security Account by the Master Servicer, and the
amount of additional servicing compensation received by the Master
Servicer attributable to penalties, fees, excess Liquidation Proceeds
and other similar charges and items;
(ix) the number and aggregate principal balances of Loans (A)
delinquent (exclusive of Loans in foreclosure) (1) 31 to 60 days, (2) 61
to 90 days and (3) 91 or more days and (B) in foreclosure and delinquent
(1) 31 to 60 days, (2) 61 to 90 days and (3) 91 or more days, as of the
close of business on the last day of the calendar month preceding such
Distribution Date;
(x) the book value of any real estate acquired through foreclosure
or grant of a deed in lieu of foreclosure;
(xi) if a class is entitled only to a specified portion of
payments of interest on the Loans in the related Pool, the Pass-Through
Rate, if adjusted from the date of the last statement, of the Loans
expected to be applicable to the next distribution to such class;
(xii) if applicable, the amount remaining in any Reserve Account
at the close of business on the Distribution Date;
(xiii) the Pass-Through Rate as of the day prior to the immediately
preceding Distribution Date;
and
(xiv) any amounts remaining under letters of credit, pool policies
or other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a
dollar amount per single Security of the relevant class having the Percentage
Interest specified in the related Prospectus Supplement. The report to
Securityholders for any Series of Securities may include additional or other
information of a similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Securityholder of record at any time during such calendar year a report (a)
as to the aggregate of amounts reported pursuant to (i) and (ii) above for
such calendar year or, in the event such person was a Securityholder of
record during a portion of such calendar year, for the applicable portion of
such year and (b) such other customary information as may be deemed necessary
or desirable for Securityholders to prepare their tax returns.
BOOK-ENTRY REGISTRATION OF SECURITIES
As described in the Prospectus Supplement, if not issued in fully
registered form, each class of Securities will be registered as book-entry
certificates (the "Book-Entry Securities"). Persons acquiring beneficial
ownership interests in the Securities ("Security Owners") will hold their
Securities through the Depository Trust Company ("DTC") in the United States,
or Cedel Bank, societe anonyme ("CEDEL") or the Euroclear System
("Euroclear") (in Europe) if they are participants ("Participants") of such
systems, or indirectly through organizations which are Participants in such
systems. The Book-Entry Securities will be issued in one or more
certificates which equal the aggregate principal balance of the Securities
and will initially be registered in the name of Cede & Co., the nominee of
DTC. CEDEL and Euroclear will hold omnibus positions on behalf of their
Participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank, N.A. will act as
depositary for CEDEL and the Brussels, Belgium branch of Morgan Guarantee
Trust Company of New York ("Morgan") will act as depositary for Euroclear (in
such capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). Except as described below, no Security Owner will
be entitled to receive a physical certificate representing such Security (a
"Definitive Security"). Unless and until Definitive Securities are issued,
it is anticipated that the only "Securityholders" of the Securities will be
Cede & Co., as nominee of DTC. Security Owners are only permitted to
exercise their rights indirectly through Participants and DTC.
The Security Owner's ownership of a Book-Entry Security will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Security Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Security will be recorded on the
records of DTC (or of a participating firm that acts as agent for the
Financial Intermediary, whose interest will in turn be recorded on the
records of DTC, if the Security Owner's Financial Intermediary is not a
Participant and on the records of CEDEL or Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and
interest on, the Securities from the Trustee through DTC and Participants.
While the Securities are outstanding (except under the circumstances
described below), under the rules, regulations and procedures creating and
affecting DTC and its operations (the "Rules"), DTC is required to make
book-entry transfers among Participants on whose behalf it acts with respect
to the Securities and is required to receive and transmit distributions of
principal of, and interest on, the Securities. Participants and indirect
participants with whom Security Owners have accounts with respect to
Securities are similarly required to make book-entry transfers and receive
and transmit such distributions on behalf of their respective Security
Owners. Accordingly, although Security Owners will not possess certificates,
the Rules provide a mechanism by which Security Owners will receive
distributions and will be able to transfer their interest.
Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive
Securities are issued, Security Owners who are not Participants may transfer
ownership of Securities only through Participants and indirect participants
by instructing such Participants and indirect participants to transfer
Securities, by book-entry transfer, through DTC for the account of the
purchasers of such Securities, which account is maintained with their
respective Participants. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of Securities will be executed through DTC
and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the Participants and indirect participants will make
debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Security Owners.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Such credits or any
transactions in such securities settled during such processing will be
reported to the relevant Euroclear or CEDEL Participants on such business
day. Cash received in CEDEL or Euroclear as a result of sales of securities
by or through a CEDEL Participant (as defined herein) or Euroclear
Participant (as defined herein) to a DTC Participant will be received with
value on the DTC settlement date but will be available in the relevant CEDEL
or Euroclear cash account only as of the business day following settlement in
DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system will,
if the transaction meets its settlement requirements, deliver instructions to
the Relevant Depositary to take action to effect final settlement on its
behalf by delivering or receiving securities in DTC, and making or receiving
payment in accordance with normal procedures for same day funds settlement
applicable to DTC. CEDEL Participants and Euroclear Participants may not
deliver instructions directly to the European Depositaries.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations
("CEDEL Participants") and facilitates the clearance and settlement of
securities transactions between CEDEL Participants through electronic
book-entry changes in accounts of CEDEL Participants, thereby eliminating the
need for physical movement of certificates. Transactions may be settled in
CEDEL in any of 28 currencies, including United States dollars. CEDEL
provides to its CEDEL Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally
traded securities and securities lending and borrowing. CEDEL interfaces
with domestic markets in several countries. As a professional depository,
CEDEL is subject to regulation by the Luxembourg Monetary Institute. CEDEL
participants are recognized financial institutions around the world,
including underwriters, securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. Indirect
access to CEDEL is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities
and cash. Transactions may be settled in any of 32 currencies, including
United States dollars. Euroclear includes various other services, including
securities lending and borrowing and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan, under contract with Euroclear Clearance Systems
S.C., a Belgian cooperative corporation (the "Cooperative"). All operations
are conducted by Morgan, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
Morgan is the Belgian branch of a New York banking corporation which is
a member bank of the Federal Reserve System. As such, it is regulated and
examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan are governed
by the Terms and Conditions Governing Use of Euroclear and the related
Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities
and cash from Euroclear, and receipts of payments with respect to securities
in Euroclear. All securities in Euroclear are held on a fungible basis
without attribution of specific certificates to specific securities clearance
accounts. The Euroclear Operator acts under the Terms and Conditions only on
behalf of Euroclear Participants, and has no record of or relationship with
persons holding through Euroclear Participants.
Under a book-entry format, beneficial owners of the Book-Entry
Securities may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with
respect to Securities held through CEDEL or Euroclear will be credited to the
cash accounts of CEDEL Participants or Euroclear Participants in accordance
with the relevant system's rules and procedures, to the extent received by
the Relevant Depositary. Such distributions will be subject to tax reporting
in accordance with relevant United States tax laws and regulations. See
"Certain Material Federal Income Tax Consequences--Tax Treatment of Foreign
Investors" and "--Tax Consequences to Holders of Notes--Backup Withholding"
herein. Because DTC can only act on behalf of Financial Intermediaries, the
ability of a beneficial owner to pledge Book-Entry Securities to persons or
entities that do not participate in the Depository system, or otherwise take
actions in respect of such Book-Entry Securities, may be limited due to the
lack of physical certificates for such Book-Entry Securities. In addition,
issuance of the Book-Entry Securities in book-entry form may reduce the
liquidity of such Securities in the secondary market since certain potential
investors may be unwilling to purchase Securities for which they cannot
obtain physical certificates.
Monthly and annual reports on the Trust will be provided to CEDE, as
nominee of DTC, and may be made available by CEDE to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose
DTC accounts the Book-Entry Securities of such beneficial owners are
credited.
DTC has advised the Trustee that, unless and until Definitive Securities
are issued, DTC will take any action permitted to be taken by the holders of
the Book-Entry Securities under the applicable Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Securities are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Securities. CEDEL or the Euroclear Operator, as the case may be, will take
any other action permitted to be taken by a Securityholder under the
Agreement on behalf of a CEDEL Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the
ability of the Relevant Depositary to effect such actions on its
behalf through DTC. DTC may take actions, at the direction of the
related Participants, with respect to some Securities which conflict with
actions taken with respect to other Securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee will recognize the holders of such Definitive Securities as
Securityholders under the applicable Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued
at any time.
None of the Servicer, the Depositor or the Trustee will have any
responsibility for any aspect of the records relating, to or payments made
on account of beneficial ownership interests of the Book-Entry Securities
held by Cede & Co., as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes
of a Series of Securities or with respect to the Trust Fund Assets in the
related Trust Fund. Credit enhancement may be in the form of a limited
financial guaranty policy issued by an entity named in the related Prospectus
Supplement, the subordination of one or more classes of the Securities of
such Series, the establishment of one or more Reserve Accounts, the use of a
cross-support feature, use of a mortgage pool insurance policy, FHA
Insurance, VA Guarantee, bankruptcy bond, special hazard insurance policy,
surety bond, letter of credit, guaranteed investment contract or another
method of credit enhancement described in the related Prospectus Supplement,
or any combination of the foregoing. Unless otherwise specified in the
related Prospectus Supplement, credit enhancement will not provide protection
against all risks of loss and will not guarantee repayment of the entire
principal balance of the Securities and interest thereon. If losses occur
which exceed the amount covered be credit enhancement or which are not
covered by the credit enhancement, Securityholders will bear their allocable
share of deficiencies.
SUBORDINATION
Protection afforded to holders of one or more classes of Securities of a
Series by means of the subordination feature may be accomplished by the
preferential right of holders of one or more other classes of such Series
(the "Senior Securities") to distributions in respect of scheduled principal,
Principal Prepayments, interest or any combination thereof that otherwise
would have been payable to holders of Subordinated Securities under the
circumstances and to the extent specified in the related Prospectus
Supplement. Protection may also be afforded to the holders of Senior
Securities of a Series by: (i) reducing the ownership interest of the related
Subordinated Securities; (ii) a combination of the immediately preceding
sentence and clause (i) above; or (iii) as otherwise described in the related
Prospectus Supplement. Delays in receipt of scheduled payments on the Loans
and losses on defaulted Loans may be borne first by the various classes of
Subordinated Securities and thereafter by the various classes of Senior
Securities, in each case under the circumstances and subject to the
limitations specified in such related Prospectus Supplement. The aggregate
distributions in respect of delinquent payments on the Loans over the lives
of the Securities or at any time, the aggregate losses in respect of
defaulted Loans which must be borne by the Subordinated Securities by virtue
of subordination and the amount of the distributions otherwise distributable
to the Subordinated Securityholders that will be distributable to Senior
Securityholders on any Distribution Date may be limited as specified in the
related Prospectus Supplement. If aggregate distributions in respect of
delinquent payments on the Loans or aggregate losses in respect of such
Loans were to exceed an amount specified in the related Prospectus
Supplement, holders of Senior Securities would experience losses on the
Securities.
In addition to or in lieu of the foregoing, if so specified in the
related Prospectus Supplement, all or any portion of distributions otherwise
payable to holders of Subordinated Securities on any Distribution Date may
instead be deposited into one or more Reserve Accounts established with the
Trustee or distributed to holders of Senior Securities. Such deposits may be
made on each Distribution Date, for specified periods or until the balance in
the Reserve Account has reached a specified amount and, following payments
from the Reserve Account to holders of Senior Securities or otherwise,
thereafter to the extent necessary to restore the balance in the Reserve
Account to required levels, in each case as specified in the related
Prospectus Supplement. Amounts on deposit in the Reserve Account may be
released to the holders of certain classes of Securities at the times and
under the circumstances specified in such Prospectus Supplement.
Various classes of Senior Securities and Subordinated Securities may
themselves be subordinate in their right to receive certain distributions to
other classes of Senior and Subordinated Securities, respectively, through a
cross support mechanism or otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among such classes
(i) in the order of their scheduled final distribution dates, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise, in each case as specified in the related
Prospectus Supplement. As between classes of Subordinated Securities,
payments to holders of Senior Securities on account of delinquencies or
losses and payments to any Reserve Account will be allocated as specified in
the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
A separate Special Hazard Insurance Policy may be obtained for the Pool
and issued by the insurer (the "Special Hazard Insurer") named in the related
Prospectus Supplement. Each Special Hazard Insurance Policy will, subject to
limitations described below, protect holders of the related Securities from
(i) loss by reason of damage to Properties caused by certain hazards
(including earthquakes and, to a limited extent, tidal waves and related
water damage or as otherwise specified in the related Prospectus Supplement)
not insured against under the standard form of hazard insurance policy for
the respective states in which the Properties are located or under a flood
insurance policy if the Property is located in a federally designated flood
area, and (ii) loss caused by reason of the application of the coinsurance
clause contained in hazard insurance policies. See "The Agreements-Hazard
Insurance". Each Special Hazard Insurance Policy will not cover losses
occasioned by fraud or conversion by the Trustee or Master Servicer, war,
insurrection, civil war, certain governmental action, errors in design,
faulty workmanship or materials (except under certain circumstances), nuclear
or chemical reactions, flood (if the Property is located in a federally
designated flood area), nuclear or chemical contamination and certain other
risks. The amount of coverage under any Special Hazard Insurance Policy will
be specified in the related Prospectus Supplement. Each Special Hazard
Insurance Policy will provide that no claim may be paid unless hazard and, if
applicable, flood insurance on the Property securing the Loan have been kept
in force and other protection and preservation expenses have been paid.
Subject to the foregoing limitations, and unless otherwise specified in
the related Prospectus Supplement, each Special Hazard Insurance Policy will
provide that where there has been damage to Property securing a foreclosed
Loan (title to which has been acquired by the insured) and to the extent such
damage is not covered by the hazard insurance policy or flood insurance
policy, if any, maintained by the borrower or the Master Servicer, the
Special Hazard Insurer will pay the lesser of (i) the cost of repair or
replacement of such property or (ii) upon transfer of the Property to the
Special Hazard Insurer, the unpaid principal balance of such Loan at the time
of acquisition of such Property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim settlement and
certain expenses incurred by the Master Servicer with respect to such
Property. If the unpaid principal balance of a Loan plus accrued interest
and certain expenses is paid by the Special Hazard Insurer, the amount of
further coverage under the related Special Hazard Insurance Policy will be
reduced by such amount less any net proceeds from the sale of the
Property. Any amount paid as the cost of repair of the Property will
further reduce coverage by such amount.
The Master Servicer may deposit cash, an irrevocable letter of credit or
any other instrument acceptable to each Rating Agency rating the Securities
of the related Series in a special trust account to provide protection in
lieu of or in addition to that provided by a Special Hazard Insurance Policy.
The amount of any Special Hazard Insurance Policy or of the deposit to the
special trust account relating to such Securities in lieu thereof may be
reduced so long as any such reduction will not result in a downgrading of the
rating of such Securities by any such Rating Agency.
BANKRUPTCY BONDS
A bankruptcy bond ("Bankruptcy Bond") for proceedings under the federal
Bankruptcy Code may be issued by an insurer named in such Prospectus
Supplement. Each Bankruptcy Bond will cover certain losses resulting from a
reduction by a bankruptcy court of scheduled payments of principal and
interest on a Loan or a reduction by such court of the principal amount of a
Loan and will cover certain unpaid interest on the amount of such a principal
reduction from the date of the filing of a bankruptcy petition. The required
amount of coverage under each Bankruptcy Bond will be set forth in the
related Prospectus Supplement. The Master Servicer may deposit cash, an
irrevocable letter of credit or any other instrument acceptable to each
Rating Agency rating the Securities of the related Series in a special trust
account to provide protection in lieu of or in addition to that provided by a
Bankruptcy Bond. Coverage under a Bankruptcy Bond may be cancelled or
reduced by the Master Servicer if such cancellation or reduction would not
adversely affect the then current rating or ratings of the related
Securities. See "Certain Legal Aspects of the Loans-Anti-Deficiency
Legislation and Other Limitations on Lenders".
RESERVE ACCOUNTS
Credit support with respect to a Series of Securities may be provided by
the establishment and maintenance with the Trustee for such Series of
Securities, in trust, of one or more Reserve Accounts for such Series. The
related Prospectus Supplement will specify whether or not any such Reserve
Accounts will be included in the Trust Fund for such Series.
The Reserve Account for a Series will be funded (i) by the deposit
therein of cash, United States Treasury securities, instruments evidencing
ownership of principal or interest payments thereon, letters of credit,
demand notes, certificates of deposit or a combination thereof in the
aggregate amount specified in the related Prospectus Supplement, (ii) by the
deposit therein from time to time of certain amounts, as specified in the
related Prospectus Supplement to which the Subordinate Securityholders, if
any, would otherwise be entitled or (iii) in such other manner as may be
specified in the related Prospectus Supplement.
Any amounts on deposit in the Reserve Account and the proceeds of any
other instrument upon maturity will be held in cash or will be invested in
Permitted Investments which may include obligations of the United States and
certain agencies thereof, certificates of deposit, certain commercial paper,
time deposits and bankers acceptances sold by eligible commercial banks and
certain repurchase agreements of United States government securities with
eligible commercial banks. If a letter of credit is deposited with the
Trustee, such letter of credit will be irrevocable. Any instrument deposited
therein will name the Trustee, in its capacity as trustee for the holders of
the Securities, as beneficiary and will be issued by an entity acceptable to
each Rating Agency that rates the Securities. Additional information with
respect to such instruments deposited in the Reserve Accounts will be set
forth in the related Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the Reserve Account for distribution to the
holders of Securities for the purposes, in the manner and at the times
specified in the related Prospectus Supplement.
POOL INSURANCE POLICIES
A separate pool insurance policy ("Pool Insurance Policy") may be
obtained for the Pool and issued by the insurer (the "Pool Insurer") named in
the related Prospectus Supplement. Each Pool Insurance Policy will, subject
to the limitations described below, cover loss by reason of default in
payment on Loans in the Pool in an amount equal to a percentage specified in
such Prospectus Supplement of the aggregate principal balance of such Loans
on the Cut-off Date which are not covered as to their entire outstanding
principal balances by Primary Mortgage Insurance Policies. As more fully
described below, the Master Servicer will present claims thereunder to the
Pool Insurer on behalf of itself, the Trustee and the holders of the
Securities. The Pool Insurance Policies, however, are not blanket policies
against loss, since claims thereunder may only be made respecting particular
defaulted Loans and only upon satisfaction of certain conditions precedent
described below. Unless otherwise specified in the related Prospectus
Supplement, the Pool Insurance Policies will not cover losses due to a
failure to pay or denial of a claim under a Primary Mortgage Insurance
Policy.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will provide that no claims may be validly presented
unless (i) any required Primary Mortgage Insurance Policy is in effect for
the defaulted Loan and a claim thereunder has been submitted and settled;
(ii) hazard insurance on the related Property has been kept in force and real
estate taxes and other protection and preservation expenses have been paid;
(iii) if there has been physical loss or damage to the Property, it has been
restored to its physical condition (reasonable wear and tear excepted) at the
time of issuance of the policy; and (iv) the insured has acquired good and
merchantable title to the Property free and clear of liens except certain
permitted encumbrances. Upon satisfaction of these conditions, the Pool
Insurer will have the option either (a) to purchase the property securing the
defaulted Loan at a price equal to the principal balance thereof plus accrued
and unpaid interest at the Loan Rate to the date of purchase and certain
expenses incurred by the Master Servicer on behalf of the Trustee and
Securityholders, or (b) to pay the amount by which the sum of the principal
balance of the defaulted Loan plus accrued and unpaid interest at the Loan
Rate to the date of payment of the claim and the aforementioned expenses
exceeds the proceeds received from an approved sale of the Property, in
either case net of certain amounts paid or assumed to have been paid under
the related Primary Mortgage Insurance Policy. If any Property securing a
defaulted Loan is damaged and proceeds, if any, from the related hazard
insurance policy or the applicable Special Hazard Insurance Policy are
insufficient to restore the damaged Property to a condition sufficient to
permit recovery under the Pool Insurance Policy, the Master Servicer will not
be required to expend its own funds to restore the damaged Property unless it
determines that (i) such restoration will increase the proceeds to
securityholders on liquidation of the Loan after reimbursement of the Master
Servicer for its expenses and (ii) such expenses will be recoverable by it
through proceeds of the sale of the Property or proceeds of the related Pool
Insurance Policy or any related Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will not insure (and many Primary Mortgage Insurance
Policies do not insure) against loss sustained by reason of a default arising
from, among other things, (i) fraud or negligence in the origination or
servicing of a Loan, including misrepresentation by the borrower, the
originator or persons involved in the origination thereof, or (ii) failure to
construct a Property in accordance with plans and specifications. A failure
of coverage attributable to one of the foregoing events might result in a
breach of the related Seller's representations described above, and, in such
events might give rise to an obligation on the part of such Seller to
purchase the defaulted Loan if the breach cannot be cured by such Seller. No
Pool Insurance Policy will cover (and many Primary Mortgage Insurance
Policies do not cover) a claim in respect of a defaulted Loan occurring when
the servicer of such Loan, at the time of default or thereafter, was not
approved by the applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Pool Insurance Policy will be reduced
over the life of the related Securities by the aggregate dollar amount of
claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all foreclosed properties. The amount of claims
paid may include certain expenses incurred by the Master Servicer as well as
accrued interest on delinquent Loans to the date of payment of the claim.
Accordingly, if aggregate net claims paid under any Pool Insurance Policy
reach the original policy limit, coverage under that Pool Insurance
Policy will be exhausted and any further losses will be borne by the
Securityholders.
FHA INSURANCE; VA GUARANTEES
Loans designated in the related Prospectus Supplement as insured by the
FHA will be insured by the FHA as authorized under the United States Housing
Act of 1934, as amended. In addition to the Title I Program of the FHA, see
"Certain Legal Considerations -- Title I Program", certain Loans will be
insured under various FHA programs including the standard FHA 203(b) program
to finance the acquisition of one- to four-family housing units and the FHA
245 graduated payment mortgage program. These programs generally limit the
principal amount and interest rates of the mortgage loans insured.
The insurance premiums for Loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development ("HUD")
or by the Master Servicer or any Sub-Servicer and are paid to the FHA. The
regulations governing FHA single-family mortgage insurance programs provide
that insurance benefits are payable either upon foreclosure (or other
acquisition of possession) and conveyance of the mortgaged premises to the
United States of America or upon assignment of the defaulted Loan to the
United States of America. With respect to a defaulted FHA-insured Loan, the
Master Servicer or any Sub-Servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the Master
Servicer or any Sub-Servicer or HUD, that default was caused by circumstances
beyond the mortgagor's control, the Master Servicer or any Sub-Servicer is
expected to make an effort to avoid foreclosure by entering, if feasible,
into one of a number of available forms of forbearance plans with the
mortgagor. Such plans may involve the reduction or suspension of regular
mortgage payments for a specified period, with such payments to be made upon
or before the maturity date of the mortgage, or the recasting of payments due
under the mortgage up to or, other than Loans originated under the Title I
Program of the FHA, beyond the maturity date. In addition, when a default
caused by such circumstances is accompanied by certain other criteria, HUD
may provide relief by making payments to the Master Servicer or any Sub-
Servicer in partial or full satisfaction of amounts due under the Loan (which
payments are to be repaid by the mortgagor to HUD) or by accepting assignment
of the loan from the Master Servicer or any Sub-Servicer. With certain
exceptions, at least three full monthly installments must be due and unpaid
under the Loan, and HUD must have rejected any request for relief from the
mortgagor before the Master Servicer or any Sub-Servicer may initiate
foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. The Master Servicer or any Sub-Servicer of each
FHA-insured Single Family Loan will be obligated to purchase any such
debenture issued in satisfaction of such Loan upon default for an amount
equal to the principal amount of any such debenture.
Other than in relation to the Title I Program of the FHA, the amount of
insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted Loan adjusted to reimburse the Master
Servicer or Sub-Servicer for certain costs and expenses and to deduct certain
amounts received or retained by the Master Servicer or Sub-Servicer after
default. When entitlement to insurance benefits results from foreclosure (or
other acquisition of possession) and conveyance to HUD, the Master Servicer
or Sub-Servicer is compensated for no more than two-thirds of its foreclosure
costs, and is compensated for interest accrued and unpaid prior to such date
but in general only to the extent it was allowed pursuant to a forbearance
plan approved by HUD. When entitlement to insurance benefits results from
assignment of the Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Loan, bears
interest from a date 30 days after the borrower's first uncorrected failure
to perform any obligation to make any payment due under the mortgage and,
upon assignment, from the date of assignment to the date of payment of the
claim, in each case at the same interest rate as the applicable HUD debenture
interest rate as described above.
Loans designated in the related Prospectus Supplement as guaranteed by
the VA will be partially guaranteed by the VA under the Serviceman's
Readjustment Act of 1944, as amended (a "VA Guaranty Policy"). The
Serviceman's Readjustment Act of 1944, as amended, permits a veteran (or in
certain instances the spouse of a veteran) to obtain a mortgage loan
guarantee by the VA covering mortgage financing of the purchase of a one- to
four-family dwelling unit at interest rates permitted by the VA. The program
has no mortgage loan limits, requires no down payment from the purchaser and
permits the guarantee of mortgage loans of up to 30 years' duration.
However, no Loan guaranteed by the VA will have an original principal amount
greater than five times the partial VA guarantee for such Loan.
The maximum guarantee that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage
loan, as further described in 38 United States Code Section 1803(a), as
amended. As of January 1, 1990, the maximum guarantee that may be issued by
the VA under a VA guaranteed mortgage loan of more than $144,000 is the
lesser of 25% of the original principal amount of the mortgage loan and
$46,000. The liability on the guarantee is reduced or increased pro rata
with any reduction or increase in the amount of indebtedness, but in no event
will the amount payable on the guarantee exceed the amount of the original
guarantee. The VA may, at its option and without regard to the guarantee,
make full payment to a mortgage holder of unsatisfied indebtedness on a
mortgage upon its assignment to the VA.
With respect to a defaulted VA guaranteed Loan, the Master Servicer or
Sub-Servicer is, absent exceptional circumstances, authorized to announce its
intention to foreclose only when the default has continued for three months.
Generally, a claim for the guarantee is submitted after liquidation of the
Property.
The amount payable under the guarantee will be the percentage of the VA-
insured Loan originally guaranteed applied to indebtedness outstanding as of
the applicable date of computation specified in the VA regulations. Payments
under the guarantee will be equal to the unpaid principal amount of the Loan,
interest accrued on the unpaid balance of the Loan to the appropriate date of
computation and limited expenses of the mortgagee, but in each case only to
the extent that such amounts have not been recovered through liquidation of
the Property. The amount payable under the guarantee may in no event exceed
the amount of the original guarantee.
CROSS-SUPPORT
The beneficial ownership of separate groups of assets included in a
Trust Fund may be evidenced by separate classes of the related Series of
Securities. In such case, credit support may be provided by a cross-support
feature which requires that distributions be made with respect to Securities
evidencing a beneficial ownership interest in, or secured by, other asset
groups within the same Trust Fund. The related Prospectus Supplement for a
Series which includes a cross-support feature will describe the manner and
conditions for applying such cross-support feature.
The coverage provided by one or more forms of credit support may apply
concurrently to two or more related Trust Funds. If applicable, the related
Prospectus Supplement will identify the Trust Funds to which such credit
support relates and the manner of determining the amount of the coverage
provided thereby and of the application of such coverage to the identified
Trust Funds.
OTHER INSURANCE, SURETY BONDS, GUARANTIES, LETTERS OF CREDIT AND SIMILAR
INSTRUMENTS OR AGREEMENTS
A Trust Fund may also include insurance, guaranties, surety bonds,
letters of credit or similar arrangements for the purpose of (i) maintaining
timely payments or providing additional protection against losses on the
assets included in such Trust Fund, (ii) paying administrative expenses or
(iii) establishing a minimum reinvestment rate on the payments made in
respect of such assets or principal payment rate on such assets. Such
arrangements may include agreements under which Securityholders are entitled
to receive amounts deposited in various accounts held by the Trustee upon the
terms specified in such Prospectus Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Securities will
be affected primarily by the amount and timing of principal payments received
on or in respect of the Trust Fund Assets included in the related Trust Fund.
With respect to a Trust Fund which includes Private Asset Backed Securities,
the possible effects of the amount and timing of principal payments received
with respect to the underlying mortgage loans will be described in the
related Prospectus Supplement. The original terms to maturity of the Loans
in a given Pool will vary depending upon the type of Loans included therein.
Each Prospectus Supplement will contain information with respect to the type
and maturities of the Loans in the related Pool. Unless otherwise specified
in the related Prospectus Supplement, Loans may be prepaid without penalty in
full or in part at any time. The prepayment experience on the Loans in a
Pool will affect the life of the related Series of Securities.
The rate of prepayment on the Loans cannot be predicted. Home equity
loans and home improvement contracts have been originated in significant
volume only during the past few years and the Depositor is not aware of any
publicly available studies or statistics on the rate of prepayment of such
loans. Generally, home equity loans and home improvement contracts are not
viewed by borrowers as permanent financing. Accordingly, the Loans may
experience a higher rate of prepayment than traditional first mortgage loans.
On the other hand, because home equity loans such as the Revolving Credit
Line Loans generally are not fully amortizing, the absence of voluntary
borrower prepayments could cause rates of principal payments lower than, or
similar to, those of traditional fully-amortizing first mortgages. The
prepayment experience of the related Trust Fund may be affected by a wide
variety of factors, including general economic conditions, prevailing
interest rate levels, the availability of alternative financing and homeowner
mobility and the frequency and amount of any future draws on any Revolving
Credit Line Loans. Other factors that might be expected to affect the
prepayment rate of a pool of home equity mortgage loans or home improvement
contracts include the amounts of, and interest rates on, the underlying
senior mortgage loans, and the use of first mortgage loans as long-term
financing for home purchase and subordinate mortgage loans as shorter-term
financing for a variety of purposes, including home improvement, education
expenses and purchases of consumer durables such as automobiles.
Accordingly, the Loans may experience a higher rate of prepayment than
traditional fixed-rate mortgage loans. In addition, any future limitations
on the right of borrowers to deduct interest payments on home equity loans
for federal income tax purposes may further increase the rate of prepayments
of the Loans. The enforcement of a "due-on-sale" provision (as described
below) will have the same effect as a prepayment of the related Loan. See
"Certain Legal Aspects of the Loans--Due-on-Sale Clauses". The yield to an
investor who purchases Securities in the secondary market at a price other
than par will vary from the anticipated yield if the rate of prepayment on
the Loans is actually different than the rate anticipated by such investor at
the time such Securities were purchased.
Collections on Revolving Credit Line Loans may vary because, among other
things, borrowers may (i) make payments during any month as low as the
minimum monthly payment for such month or, during the interest-only period
for certain Revolving Credit Line Loans and, in more limited circumstances,
Closed-End Loans, with respect to which an interest-only payment option has
been selected, the interest and the fees and charges for such month or (ii)
make payments as high as the entire outstanding principal balance plus
accrued interest and the fees and charges thereon. It is possible that
borrowers may fail to make the required periodic payments. In addition,
collections on the Loans may vary due to seasonal purchasing and the payment
habits of borrowers.
Unless otherwise specified in the related Prospectus Supplement, the
Loans will contain due-on-sale provisions permitting the mortgagee to
accelerate the maturity of the loan upon sale or certain transfers by the
borrower. Loans insured by the FHA, and Single Family Loans partially
guaranteed by the VA, are assumable with the consent of the FHA and the VA,
respectively. Thus, the rate of prepayments on such Loans may be lower than
that of conventional Loans bearing comparable interest rates. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
generally will enforce any due-on-sale or due-on-encumbrance clause, to the
extent it has knowledge of the conveyance or further encumbrance or the
proposed conveyance or proposed further encumbrance of the Property and
reasonably believes that it is entitled to do so under applicable law;
provided, however, that the Master Servicer will not take any enforcement
action that would impair or threaten to impair any recovery under any related
insurance policy. See "The Agreements-Collection Procedures" and "Certain
Legal Aspects of the Loans" for a description of certain provisions
of each Agreement and certain legal developments that may affect the
prepayment experience on the Loans.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. If prevailing rates fall
significantly below the Loan Rates borne by the Loans, such Loans may be
subject to higher prepayment rates than if prevailing interest rates remain
at or above such Loan Rates. Conversely, if prevailing interest rates rise
appreciably above the Loan Rates borne by the Loans, such Loans may
experience a lower prepayment rate than if prevailing rates remain at or
below such Loan Rates. However, there can be no assurance that such will be
the case.
When a full prepayment is made on a Loan, the borrower is charged
interest on the principal amount of the Loan so prepaid only for the number
of days in the month actually elapsed up to the date of the prepayment,
rather than for a full month. Unless the Master Servicer remits amounts
otherwise payable to it as servicing compensation, see "Description of the
Securities-Compensating Interest", the effect of prepayments in full will be
to reduce the amount of interest passed through in the following month to
holders of Securities because interest on the principal amount of any Loan so
prepaid will be paid only to the date of prepayment. Partial prepayments in
a given month may be applied to the outstanding principal balances of the
Loans so prepaid on the first day of the month of receipt or the month
following receipt. In the latter case, partial prepayments will not reduce
the amount of interest passed through in such month. Unless otherwise
specified in the related Prospectus Supplement, neither full nor partial
prepayments will be passed through until the month following receipt.
Even assuming that the Properties provide adequate security for the
Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Loans and corresponding delays in the receipt of
related proceeds by Securityholders could occur. An action to foreclose on a
Property securing a Loan is regulated by state statutes and rules and is
subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a property. In the event of a
default by a borrower, these restrictions among other things, may impede the
ability of the Master Servicer to foreclose on or sell the Property or to
obtain liquidation proceeds sufficient to repay all amounts due on the
related Loan. In addition, the Master Servicer will be entitled to deduct
from related liquidation proceeds all expenses reasonably incurred in
attempting to recover amounts due on defaulted Loans and not yet repaid,
including payments to senior lienholders, legal fees and costs of legal
action, real estate taxes and maintenance and preservation expenses.
Liquidation expenses with respect to defaulted mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time
of default. Therefore, assuming that a servicer took the same steps in
realizing upon a defaulted mortgage loan having a small remaining principal
balance as it would in the case of a defaulted mortgage loan having a large
remaining principal balance, the amount realized after expenses of
liquidation would be smaller as a percentage of the remaining principal
balance of the small mortgage loan than would be the case with the other
defaulted mortgage loan having a large remaining principal balance.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of certain
originators and servicers of Loans. In addition, most have other laws,
public policy and general principles of equity relating to the protection of
consumers, unfair and deceptive practices and practices which may apply to
the origination, servicing and collection of the Loans. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Master Servicer to collect all or part of the principal of or
interest on the Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Master Servicer to
damages and administrative sanctions.
If the rate at which interest is passed through to the holders of
Securities of a Series is calculated on a Loan-by-Loan basis,
disproportionate principal prepayments among Loans with different Loan Rates
will affect the yield on such Securities. In most cases, the effective yield
to Securityholders will be lower than the yield otherwise produced by the
applicable Pass-Through Rate and purchase price, because while interest will
accrue on each Loan from the first day of the month (unless otherwise
specified in the related Prospectus Supplement), the distribution of such
interest will not be made earlier than the month following the month of
accrual.
Under certain circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or any person specified in the related
Prospectus Supplement may have the option to purchase the assets of a Trust
Fund thereby effecting earlier retirement of the related Series of
Securities. See "The Agreements--Termination; Optional Termination".
Factors other than those identified herein and in the related Prospectus
Supplement could significantly affect principal prepayments at any time and
over the lives of the Securities. The relative contribution of the various
factors affecting prepayment may also vary from time to time. There can be
no assurance as to the rate of payment of principal of the Trust Fund Assets
at any time or over the lives of the Securities.
The Prospectus Supplement relating to a Series of Securities will
discuss in greater detail the effect of the rate and timing of principal
payments (including prepayments), delinquencies and losses on the yield,
weighted average lives and maturities of such Securities.
THE AGREEMENTS
Set forth below is a summary of certain provisions of each Agreement
which are not described elsewhere in this Prospectus. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of each Agreement. Where particular provisions
or terms used in the Agreements are referred to, such provisions or terms are
as specified in the Agreements. Except as otherwise specified, the Agreement
described herein contemplates a Trust Fund comprised of Loans. The
provisions of an Agreement with respect to a Trust Fund which consists of or
includes Private Asset Backed Securities may contain provisions similar to
those described herein but will be more fully described in the related
Prospectus Supplement.
ASSIGNMENT OF THE TRUST FUND ASSETS
Assignment of the Loans. At the time of issuance of the Securities of a
Series, the Depositor will cause the Loans comprising the related Trust Fund
to be assigned to the Trustee, together with all principal and interest
received by or on behalf of the Depositor on or with respect to such Loans
after the Cut-off Date, other than principal and interest due on or before
the Cut-off Date and other than any Retained Interest specified in the
related Prospectus Supplement. The Trustee will, concurrently with such
assignment, deliver the Securities to the Depositor in exchange for the
Loans. Each Loan will be identified in a schedule appearing as an exhibit to
the related Agreement. Such schedule will include information as to the
outstanding principal balance of each Loan after application of payments due
on or before the Cut-off Date, as well as information regarding the Loan Rate
or APR, the current scheduled monthly payment of principal and interest, the
maturity of the Loan, the Combined Loan-to-Value Ratios at origination and
certain other information.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will as to each Home Improvement Contract, deliver or cause to be
delivered to the Trustee the original Home Improvement Contract and copies of
documents and instruments related to each Home Improvement Contract and,
other than in the case of unsecured Home Improvement Contracts, the security
interest in the Property securing such Home Improvement Contract. In order
to give notice of the right, title and interest of Securityholders to the
Home Improvement Contracts, the Depositor will cause a UCC-1 financing
statement to be executed by the Depositor or the Seller identifying the
Trustee as the secured party and identifying all Home Improvement Contracts
as collateral. Unless otherwise specified in the related Prospectus
Supplement, the Home Improvement Contracts will not be stamped or otherwise
marked to reflect their assignment to the Trustee. Therefore, if, through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Home Improvement Contracts without notice of such
assignment, the interest of Securityholders in the Home Improvement Contracts
could be defeated. See "Certain Legal Aspects of the Loans--The Home
Improvement Contracts."
Unless otherwise specified in the related Prospectus Supplement, the
Agreement will require that, within the time period specified therein, the
Depositor will also deliver or cause to be delivered to the Trustee (or to
the custodian hereinafter referred to) as to each Home Equity Loan, among
other things, (i) the mortgage note or contract endorsed without recourse in
blank or to the order of the Trustee, (ii) the mortgage, deed of trust or
similar instrument (a "Mortgage") with evidence of recording indicated
thereon (except for any Mortgage not returned from the public recording
office, in which case the Depositor will deliver or cause to be delivered a
copy of such Mortgage together with a certificate that the original of such
Mortgage was delivered to such recording office), (iii) an assignment of the
Mortgage to the Trustee, which assignment will be in recordable form in the
case of a Mortgage assignment, and (iv) such other security documents,
including those relating to any senior interests in the Property, as may be
specified in the related Prospectus Supplement. Unless otherwise specified
in the related Prospectus Supplement, the Depositor will promptly cause the
assignments of the related Loans to be recorded in the appropriate public
office for real property records, except in states in which, in the opinion
of counsel acceptable to the Trustee, such recording is not required to
protect the Trustee's interest in such Loans against the claim of any
subsequent transferee or any successor to or creditor of the Depositor or the
originator of such Loans.
The Trustee (or the custodian hereinafter referred to) will review such
Loan documents within the time period specified in the related Prospectus
Supplement after receipt thereof, and the Trustee will hold such documents in
trust for the benefit of the Securityholders. Unless otherwise specified in
the related Prospectus Supplement, if any such document is found to be
missing or defective in any material respect, the Trustee (or such custodian)
will notify the Master Servicer and the Depositor, and the Master Servicer
will notify the related Seller. If the Seller cannot cure the omission or
defect within a specified number of days after receipt of such notice (or
such other period as may be specified in the related Prospectus Supplement),
the Seller will be obligated either (i) to purchase the related Loan from the
Trust at the Purchase Price or (ii) to remove such Loan from the Trust Fund
and substitute in its place one or more other Loans. There can be no
assurance that a Seller will fulfill this purchase or substitution
obligation. Although the Master Servicer may be obligated to enforce such
obligation to the extent described above under "Loan Program-Representations
by Sellers; Repurchases", neither the Master Servicer nor the Depositor will
be obligated to purchase or replace such Loan if the Seller defaults on its
obligation, unless such breach also constitutes a breach of the
representations or warranties of the Master Servicer or the Depositor, as the
case may be. Unless otherwise specified in the related Prospectus
Supplement, this purchase obligation constitutes the sole remedy available to
the Securityholders or the Trustee for omission of, or a material defect in,
a constituent document.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review
the documents relating to the Loans as agent of the Trustee.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Agreement. Upon a breach of any such representation
of the Master Servicer which materially and adversely affects the interests
of the Securityholders in a Loan, the Master Servicer will be obligated
either to cure the breach in all material respects or to purchase or replace
the Loan at the Purchase Price. Unless otherwise specified in the related
Prospectus Supplement, this obligation to cure, purchase or substitute
constitutes the sole remedy available to the Securityholders or the Trustee
for such a breach of representation by the Master Servicer.
Assignment of Private Asset Backed Securities. The Depositor will cause
Private Asset Backed Securities to be registered in the name of the Trustee.
The Trustee (or the custodian) will have possession of any certificated
Private Asset Backed Securities. Unless otherwise specified in the related
Prospectus Supplement, the Trustee will not be in possession of or be
assignee of record of any underlying assets for a Private Asset Backed
Security. See "The Trust Fund-Private Asset Backed Securities" herein. Each
Private Asset Backed Security will be identified in a schedule appearing as
an exhibit to the related Agreement which will specify the original principal
amount, outstanding principal balance as of the Cut-off Date, annual pass-
through rate or interest rate and maturity date and certain other pertinent
information for each Private Asset Backed Security conveyed to the Trustee.
Notwithstanding the foregoing provisions, with respect to a Trust Fund
for which a REMIC election is to be made, no purchase or substitution of a
Loan will be made if such purchase or substitution would result in a
prohibited transaction tax under the Code.
PAYMENTS ON LOANS; DEPOSITS TO SECURITY ACCOUNT
Each Sub-Servicer servicing a Loan pursuant to a Sub-Servicing Agreement
(as defined below under "-Sub-Servicing of Loans") will establish and
maintain an account (the "Sub-Servicing Account") which meets the following
requirements and is otherwise acceptable to the Master Servicer. A Sub-
Servicing Account must be established with a Federal Home Loan Bank or with a
depository institution (including the Sub-Servicer itself) whose accounts are
insured by either the Bank Insurance Fund (the "BIF") of the FDIC or the
Savings Association Insurance Fund (as successor to the Federal Savings and
Loan Insurance Corporation ("SAIF")) of the FDIC. If a Sub-Servicing Account
is maintained at an institution that is a Federal Home Loan Bank or an FDIC-
insured institution and, in either case, the amount on deposit in the Sub-
Servicing Account exceeds the FDIC insurance coverage amount, then such
excess amount must be remitted to the Master Servicer within one business day
of receipt. In addition, the Sub-Servicer must maintain a separate account
for escrow and impound funds relating to the Loans. Each Sub-Servicer is
required to deposit into its Sub-Servicing Account on a daily basis all
amounts described below under "-Sub-Servicing of Loans" that are received by
it in respect of the Loans, less its servicing or other compensation. On or
before the date specified in the Sub-Servicing Agreement, the Sub-Servicer
will remit or cause to be remitted to the Master Servicer or the Trustee all
funds held in the Sub-Servicing Account with respect to Loans that are
required to be so remitted. The Sub-Servicer may also be required to advance
on the scheduled date of remittance an amount corresponding to any monthly
installment of interest and/or principal, less its servicing or other
compensation, on any Loan for which payment was not received from the
mortgagor. Unless otherwise specified in the related Prospectus Supplement,
any such obligation of the Sub-Servicer to advance will continue up to and
including the first of the month following the date on which the related
Property is sold at a foreclosure sale or is acquired on behalf of the
Securityholders by deed in lieu of foreclosure, or until the related Loan is
liquidated.
The Master Servicer will establish and maintain or cause to be
established and maintained with respect to the related Trust Fund a separate
account or accounts for the collection of payments on the related Trust Fund
Assets in the Trust Fund (the "Security Account") must be either (i)
maintained with a depository institution the debt obligations of which (or in
the case of a depository institution that is the principal subsidiary of a
holding company, the obligations of which) are rated in one of the two
highest rating categories by the Rating Agency or Rating Agencies that rated
one or more classes of the related Series of Securities, (ii) an account or
accounts the deposits in which are fully insured by either the BIF or SAIF,
(iii) an account or accounts the deposits in which are insured by the BIF or
SAIF (to the limits established by the FDIC), and the uninsured deposits in
which are otherwise secured such that, as evidenced by an opinion of counsel,
the Securityholders have a claim with respect to the funds in the Security
Account or a perfected first priority security interest against any
collateral securing such funds that is superior to the claims of any other
depositors or general creditors of the depository institution with which the
Security Account is maintained, or (iv) an account or accounts otherwise
acceptable to each Rating Agency. The collateral eligible to secure amounts
in the Security Account is limited to United States government securities and
other high-quality investments ("Permitted Investments"). A Security Account
may be maintained as an interest bearing account or the funds held therein
may be invested pending each succeeding Distribution Date in Permitted
Investments. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer or its designee will be entitled to receive
any such interest or other income earned on funds in the Security Account as
additional compensation and will be obligated to deposit in the Security
Account the amount of any loss immediately as realized. The Security Account
may be maintained with the Master Servicer or with a depository institution
that is an affiliate of the Master Servicer, provided it meets the standards
set forth above.
The Master Servicer will deposit or cause to be deposited in the
Security Account for each Trust Fund on a daily basis, to the extent
applicable and provided in the Agreement, the following payments and
collections received or advances made by or on behalf of it subsequent to the
Cut-off Date (other than payments due on or before the Cut-off Date and
exclusive of any amounts representing Retained Interest):
(i) all payments on account of principal, including Principal
Prepayments and any applicable prepayment penalties, on the Loans;
(ii) all payments on account of interest on the Loans, net of
applicable servicing compensation;
(iii) all proceeds (net of unreimbursed payments of property taxes,
insurance premiums and similar items ("Insured Expenses") incurred, and
unreimbursed advances made, by the related Sub-Servicer, if any) of the
hazard insurance policies and any Primary Mortgage Insurance Policies,
to the extent such proceeds are not applied to the restoration of the
property or released to the Mortgagor in accordance with the Master
Servicer's normal servicing procedures (collectively, "Insurance
Proceeds") and all other cash amounts (net of unreimbursed expenses
incurred in connection with liquidation or foreclosure ("Liquidation
Expenses") and unreimbursed advances made, by the related Sub-Servicer,
if any) received and retained in connection with the liquidation of
defaulted Loans, by foreclosure or otherwise ("Liquidation Proceeds"),
together with any net proceeds received on a monthly basis with respect
to any properties acquired on behalf of the Securityholders by
foreclosure or deed in lieu of foreclosure;
(iv) all proceeds of any Loan or property in respect thereof
purchased by the Master Servicer, the Depositor, any Sub-Servicer or any
Seller as described under "Loan Program-Representations by Sellers;
Repurchases" or "-Assignment of Trust Fund Assets" above and all
proceeds of any Loan repurchased as described under "-Termination;
Optional Termination" below;
(v) all payments required to be deposited in the Security Account
with respect to any deductible clause in any blanket insurance policy
described under "-Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments for the benefit of the
Master Servicer of funds held in the Security Account; and
(vii) all other amounts required to be deposited in the Security
Account pursuant to the Agreement.
PRE-FUNDING ACCOUNT
If so provided in the related Prospectus Supplement, the Master Servicer
will establish and maintain a Pre-Funding Account, in the name of the related
Trustee on behalf of the related Securityholders, into which the Depositor
will deposit the Pre-Funded Amount on the related Closing Date. The Pre-
Funded Amount will not exceed 25% of the initial aggregate principal amount
of the Certificates and Notes of the related Series. The Pre-Funded Amount
will be used by the related Trustee to purchase Subsequent Loans from the
Depositor from time to time during the Funding Period. The Funding Period,
if any, for a Trust Fund will begin on the related Closing Date and will end
on the date specified in the related Prospectus Supplement, which in no event
will be later than the date that is three months after the Closing Date. Any
amounts remaining in the Pre-Funding Account at the end of the Funding Period
will be distributed to the related Securityholders in the manner and priority
specified in the related Prospectus Supplement, as a prepayment of principal
of the related Securities.
SUB-SERVICING OF LOANS
Each Seller of a Loan or any other servicing entity may act as the Sub-
Servicer for such Loan pursuant to an agreement (each, a "Sub-Servicing
Agreement"), which will not contain any terms inconsistent with the related
Agreement. While each Sub-Servicing Agreement will be a contract solely
between the Master Servicer and the Sub-Servicer, the Agreement pursuant to
which a Series of Securities is issued will provide that, if for any reason
the Master Servicer for such Series of Securities is no longer the Master
Servicer of the related Loans, the Trustee or any successor Master Servicer
must recognize the Sub-Servicer's rights and obligations under such Sub-
Servicing Agreement.
With the approval of the Master Servicer, a Sub-Servicer may delegate
its servicing obligations to third-party servicers, but such Sub-Servicer
will remain obligated under the related Sub-Servicing Agreement. Each Sub-
Servicer will be required to perform the customary functions of a servicer of
mortgage loans. Such functions generally include collecting payments from
mortgagors or obligors and remitting such collections to the Master Servicer;
maintaining hazard insurance policies as described herein and in any related
Prospectus Supplement, and filing and settling claims thereunder, subject in
certain cases to the right of the Master Servicer to approve in advance any
such settlement; maintaining escrow or impoundment accounts of mortgagors or
obligors for payment of taxes, insurance and other items required to be paid
by the mortgagor or obligor pursuant to the related Loan; processing
assumptions or substitutions, although, the Master Servicer is generally
required to exercise due-on-sale clauses to the extent such exercise is
permitted by law and would not adversely affect insurance coverage;
attempting to cure delinquencies; supervising foreclosures; inspecting and
managing Properties under certain circumstances; maintaining accounting
records relating to the Loans; and, to the extent specified in the related
Prospectus Supplement, maintaining additional insurance policies or credit
support instruments and filing and settling claims thereunder. A Sub-
Servicer will also be obligated to make advances in respect of delinquent
installments of interest and/or principal on Loans, as described more fully
above under "-Payments on Loans; Deposits to Security Account", and in
respect of certain taxes and insurance premiums not paid on a timely basis by
mortgagors or obligors.
As compensation for its servicing duties, each Sub-Servicer will be
entitled to a monthly servicing fee (to the extent the scheduled payment on
the related Loan has been collected) in the amount set forth in the related
Prospectus Supplement. Each Sub-Servicer is also entitled to collect and
retain, as part of its servicing compensation, any prepayment or late charges
provided in the Mortgage Note or related instruments. Each Sub-Servicer will
be reimbursed by the Master Servicer for certain expenditures which it makes,
generally to the same extent the Master Servicer would be reimbursed under
the Agreement. The Master Servicer may purchase the servicing of Loans if
the Sub-Servicer elects to release the servicing of such Loans to the Master
Servicer. See "-Servicing and Other Compensation and Payment of Expenses".
Each Sub-Servicer may be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Sub-Servicer in its
servicing capacity. Each Sub-Servicer will be required to maintain a
fidelity bond and an errors and omissions policy with respect to its
officers, employees and other persons acting on its behalf or on behalf of
the Master Servicer.
Each Sub-Servicer will be required to service each Loan pursuant to the
terms of the Sub-Servicing Agreement for the entire term of such Loan, unless
the Sub-Servicing Agreement is earlier terminated by the Master Servicer or
unless servicing is released to the Master Servicer. The Master Servicer may
terminate a Sub-Servicing Agreement without cause, upon written notice to the
Sub-Servicer in the manner specified in such Sub-Servicing Agreement.
The Master Servicer may agree with a Sub-Servicer to amend a Sub-
Servicing Agreement or, upon termination of the Sub-Servicing Agreement, the
Master Servicer may act as servicer of the related Loans or enter into new
Sub-Servicing Agreements with other Sub-Servicers. If the Master Servicer
acts as servicer, it will not assume liability for the representations and
warranties of the Sub-Servicer which it replaces. Each Sub-Servicer must be
a Seller or meet the standards for becoming a Seller or have such servicing
experience as to be otherwise satisfactory to the Master Servicer and the
Depositor. The Master Servicer will make reasonable efforts to have the new
Sub-Servicer assume liability for the representations and warranties of the
terminated Sub-Servicer, but no assurance can be given that such an
assumption will occur. In the event of such an assumption, the Master
Servicer may in the exercise of its business judgment release the terminated
Sub-Servicer from liability in respect of such representations and
warranties. Any amendments to a Sub-Servicing Agreement or new Sub-Servicing
Agreements may contain provisions different from those which are in effect in
the original Sub-Servicing Agreement. However, each Agreement will provide
that any such amendment or new agreement may not be inconsistent with or
violate such Agreement.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers, will
make reasonable efforts to collect all payments called for under the Loans
and will, consistent with each Agreement and any Pool Insurance Policy,
Primary Mortgage Insurance Policy, FHA Insurance, VA Guaranty Policy and
Bankruptcy Bond or alternative arrangements, follow such collection
procedures as are customary with respect to loans that are comparable to the
Loans. Consistent with the above, the Master Servicer may, in its
discretion, (i) waive any assumption fee, late payment or other charge in
connection with a Loan and (ii) to the extent not inconsistent with the
coverage of such Loan by a Pool Insurance Policy, Primary Mortgage Insurance
Policy, FHA Insurance, VA Guaranty or Bankruptcy Bond or alternative
arrangements, if applicable, arrange with a borrower a schedule for the
liquidation of delinquencies running for no more than 125 days after the
applicable due date for each payment. Both the Sub-Servicer and the Master
Servicer may be obligated to make Advances during any period of such an
arrangement.
Except as otherwise specified in the related Prospectus Supplement, in
any case in which property securing a Loan has been, or is about to be,
conveyed by the mortgagor or obligor, the Master Servicer will, to the extent
it has knowledge of such conveyance or proposed conveyance, exercise or cause
to be exercised its rights to accelerate the maturity of such Loan under any
due-on-sale clause applicable thereto, but only if the exercise of such
rights is permitted by applicable law. If these conditions are not met or if
the Master Servicer reasonably believes it is unable under applicable law to
enforce such due-on-sale clause, or the Master Servicer will enter into or
cause to be entered into an assumption and modification agreement with the
person to whom such property has been or is about to be conveyed, pursuant to
which such person becomes liable for repayment of the Loan and, to the extent
permitted by applicable law, the mortgagor remains liable thereon. Any fee
collected by or on behalf of the Master Servicer for entering into an
assumption agreement will be retained by or on behalf of the Master Servicer
as additional servicing compensation. See "Certain Legal Aspects of the
Loans-Due-on-Sale Clauses". In connection with any such assumption, the
terms of the related Loan may not be changed.
HAZARD INSURANCE
Except as otherwise specified in the related Prospectus Supplement, the
Master Servicer will require the mortgagor or obligor on each Loan to
maintain a hazard insurance policy providing for no less than the coverage of
the standard form of fire insurance policy with extended coverage customary
for the type of Property in the state in which such Property is located. All
amounts collected by the Master Servicer under any hazard policy (except for
amounts to be applied to the restoration or repair of the Property or
released to the mortgagor or obligor in accordance with the Master Servicer's
normal servicing procedures) will be deposited in the related Security
Account. In the event that the Master Servicer maintains a blanket policy
insuring against hazard losses on all the Loans comprising part of a Trust
Fund, it will conclusively be deemed to have satisfied its obligation
relating to the maintenance of hazard insurance. Such blanket policy may
contain a deductible clause, in which case the Master Servicer will be
required to deposit from its own funds into the related Security Account the
amounts which would have been deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements securing a Loan
by fire, lightning, explosion, smoke, windstorm and hail, riot, strike and
civil commotion, subject to the conditions and exclusions particularized in
each policy. Although the policies relating to the Loans may have been
underwritten by different insurers under different state laws in accordance
with different applicable forms and therefore may not contain identical terms
and conditions, the basic terms thereof are dictated by respective state
laws, and most such policies typically do not cover any physical damage
resulting from the following: war, revolution, governmental actions, floods
and other water-related causes, earth movement (including earthquakes,
landslides and mud flows), nuclear reactions, wet or dry rot, vermin,
rodents, insects or domestic animals, theft and, in certain cases, vandalism.
The foregoing list is merely indicative of certain kinds of uninsured risks
and is not intended to be all inclusive. If the Property securing a Loan is
located in a federally designated special flood area at the time of
origination, the Master Servicer will require the mortgagor or obligor to
obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Loans
typically contain a clause which in effect requires the insured at all time
to carry insurance of a specified percentage of the full replacement value of
the insured property in order to recover the full amount of any partial loss.
If the insured's coverage falls below this specified percentage, then the
insurer's liability in the event of partial loss will not exceed the larger
of (i) the actual cash value (generally defined as replacement cost at the
time and place of loss, less physical depreciation) of the improvements
damaged or destroyed or (ii) such proportion of the loss as the amount of
insurance carried bears to the specified percentage of the full replacement
cost of such improvements. Since the amount of hazard insurance the Master
Servicer may cause to be maintained on the improvements securing the Loans
declines as the principal balances owing thereon decrease, and since improved
real estate generally has appreciated in value over time in the past, the
effect of this requirement in the event of partial loss may be that hazard
insurance proceeds will be insufficient to restore fully the damaged
property. If specified in the related Prospectus Supplement, a special
hazard insurance policy will be obtained to insure against certain of the
uninsured risks described above. See "Credit Enhancement-Special Hazard
Insurance Policies".
If the Property securing a defaulted Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged Property, the Master Servicer is not required to expend its own funds
to restore the damaged Property unless it determines (i) that such
restoration will increase the proceeds to Securityholders on liquidation of
the Loan after reimbursement of the Master Servicer for its expenses and (ii)
that such expenses will be recoverable by it from related Insurance Proceeds
or Liquidation Proceeds.
If recovery on a defaulted Loan under any related Insurance Policy is
not available for the reasons set forth in the preceding paragraph, or if the
defaulted Loan is not covered by an Insurance Policy, the Master Servicer
will be obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Loan. If the proceeds of any liquidation of the Property securing the
defaulted Loan are less than the principal balance of such Loan plus interest
accrued thereon that is payable to Securityholders, the Trust Fund will
realize a loss in the amount of such difference plus the aggregate of
expenses incurred by the Master Servicer in connection with such proceedings
and which are reimbursable under the Agreement. In the unlikely event that
any such proceedings result in a total recovery which is, after reimbursement
to the Master Servicer of its expenses, in excess of the principal balance of
such Loan plus interest accrued thereon that is payable to Securityholders,
the Master Servicer will be entitled to withdraw or retain from the Security
Account amounts representing its normal servicing compensation with respect
to such Loan and, unless otherwise specified in the related Prospectus
Supplement, amounts representing the balance of such excess, exclusive of any
amount required by law to be forwarded to the related borrower, as additional
servicing compensation.
Unless otherwise specified in the related Prospectus Supplement, if the
Master Servicer or its designee recovers Insurance Proceeds which, when added
to any related Liquidation Proceeds and after deduction of certain expenses
reimbursable to the Master Servicer, exceed the principal balance of such
Loan plus interest accrued thereon that is payable to Securityholders, the
Master Servicer will be entitled to withdraw or retain from the Security
Account amounts representing its normal servicing compensation with respect
to such Loan. In the event that the Master Servicer has expended its own
funds to restore the damaged Property and such funds have not been reimbursed
under the related hazard insurance policy, it will be entitled to withdraw
from the Security Account out of related Liquidation Proceeds or Insurance
Proceeds in an amount equal to such expenses incurred by it, in which event
the Trust Fund may realize a loss up to the amount so charged. Since
Insurance Proceeds cannot exceed deficiency claims and certain expenses
incurred by the Master Servicer, no such payment or recovery will result in a
recovery to the Trust Fund which exceeds the principal balance of the
defaulted Loantogether withaccrued interest thereon. See"Credit Enhancement".
REALIZATION UPON DEFAULTED LOANS
Primary Mortgage Insurance Policies. The Master Servicer will maintain
or cause each Sub-Servicer to maintain, as the case may be, in full force and
effect, to the extent specified in the related Prospectus Supplement, a
Primary Mortgage Insurance Policy with regard to each Loan for which such
coverage is required. The Master Servicer will not cancel or refuse to renew
any such Primary Mortgage Insurance Policy in effect at the time of the
initial issuance of a Series of Securities that is required to be kept in
force under the applicable Agreement unless the replacement Primary Mortgage
Insurance Policy for such cancelled or nonrenewed policy is maintained with
an insurer whose claims-paying ability is sufficient to maintain the current
rating of the classes of Securities of such Series that have been rated.
Although the terms and conditions of primary mortgage insurance vary,
the amount of a claim for benefits under a Primary Mortgage Insurance Policy
covering a Loan will consist of the insured percentage of the unpaid
principal amount of the covered Loan and accrued and unpaid interest thereon
and reimbursement of certain expenses, less (i) all rents or other payments
collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to the Property, (ii)
hazard insurance proceeds in excess of the amount required to restore the
Property and which have not been applied to the payment of the Loan, (iii)
amounts expended but not approved by the issuer of the related Primary
Mortgage Insurance Policy (the "Primary Insurer"), (iv) claim payments
previously made by the Primary Insurer and (v) unpaid premiums.
Primary Mortgage Insurance Policies reimburse certain losses sustained
by reason of defaults in payments by borrowers. Primary Mortgage Insurance
Policies will not insure against, and exclude from coverage, a loss sustained
by reason of a default arising from or involving certain matters, including
(i) fraud or negligence in origination or servicing of the Loans, including
misrepresentation by the originator, borrower or other persons involved in
the origination of the Loans; (ii) failure to construct the Property subject
to the Loan in accordance with specified plans; (iii) physical damage to the
Property; and (iv) the related Master Servicer or Sub-servicer not being
approved as a servicer by the Primary Insurer.
Recoveries Under a Primary Mortgage Insurance Policy. As conditions
precedent to the filing of or payment of a claim under a Primary Mortgage
Insurance Policy covering a Loan, the insured will be required to (i) advance
or discharge (a) all hazard insurance policy premiums and (b) as necessary
and approved in advance by the Primary Insurer, (1) real estate property
taxes, (2) all expenses required to maintain the related Property in at least
as good a condition as existed at the effective date of such Primary Mortgage
Insurance Policy, ordinary wear and tear excepted, (3) Property sales
expenses, (4) any outstanding liens (as defined in such Primary Mortgage
Insurance Policy) on the Property and (5) foreclosure costs, including court
costs and reasonable attorneys' fees; (ii) in the event of any physical loss
or damage to the Property, to have the Property restored and repaired to at
least as good a condition as existed at the effective date of such Primary
Mortgage Insurance Policy, ordinary wear and tear excepted; and (iii) tender
to the Primary Insurer good and merchantable title to and possession of the
Property.
In those cases in which a Loan is serviced by a Sub-Servicer, the Sub-
Servicer, on behalf of itself, the Trustee and Securityholders, will present
claims to the Primary Insurer, and all collection thereunder will be
deposited in the Sub-Servicing Account. In all other cases, the Master
Servicer, on behalf of itself, the Trustee and the Securityholders, will
present claims to the insurer under each Primary Mortgage Insurance Policy,
and will take such reasonable steps as are necessary to receive payment or to
permit recovery thereunder with respect to defaulted Loans. As set forth
above, all collections by or on behalf of the Master Servicer under any
Primary Mortgage Insurance Policy and, when the Property has not been
restored, the hazard insurance policy, are to be deposited in the Security
Account, subject to withdrawal as heretofore described.
If the Property securing a defaulted Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged Property to a condition sufficient to permit recovery under the
related Primary Mortgage Insurance Policy, if any, the Master Servicer is not
required to expend its own funds to restore the damaged Property unless it
determines (i) that such restoration will increase the proceeds to
Securityholders on liquidation of the Loan after reimbursement of the Master
Servicer for its expenses and (ii) that such expenses will be recoverable by
it from related Insurance Proceeds or Liquidation Proceeds.
If recovery on a defaulted Loan under any related Primary Mortgage
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Loan is not covered by a Primary Mortgage
Insurance Policy, the Master Servicer will be obligated to follow or cause to
be followed such normal practices and procedures as it deems necessary or
advisable to realize upon the defaulted Loan. If the proceeds of any
liquidation of the Property securing the defaulted Loan are less than
the principal balance of such Loan plus interest accrued thereon that
is payable to Securityholders, the Trust Fund will realize a loss in
the amount of such difference plus the aggregate of expenses incurred by
the Master Servicer in connection with such proceedings and which are
reimbursable under the Agreement. In the unlikely event that any such
proceedings result in a total recovery which is, after reimbursement to
the Master Servicer of its expenses, in excess of the principal
balance of such Loan plus interest accrued thereon that is payable to
Securityholders, the Master Servicer will be entitled to withdraw or
retain from the Security Account amounts representing its normal
servicing compensation with respect to such Loan and, except as otherwise
specified in the Prospectus Supplement, amounts representing the
balance of such excess, exclusive of any amount required by law to be
forwarded to the related borrower, as additional servicing
compensation.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer's primary servicing compensation with respect to a Series of
Securities will come from the monthly payment to it, out of each interest
payment on a Loan, of an amount equal to the percentage per annum specified
in the related Prospectus Supplement of the outstanding principal balance
thereof. Since the Master Servicer's primary compensation is a percentage of
the outstanding principal balance of each Loan, such amounts will decrease as
the Loans amortize. In addition to primary compensation, the Master Servicer
or the Sub-Servicers may be entitled to retain all assumption fees and late
payment charges, to the extent collected from borrowers, and, if so provided
in the related Prospectus Supplement, any prepayment penalties and any
interest or other income which may be earned on funds held in the Security
Account or any Sub-Servicing Account. Unless otherwise specified in the
related Prospectus Supplement, any Sub-Servicer will receive a portion of the
Master Servicer's primary compensation as its sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, the Master Servicer
will, unless otherwise specified in the related Prospectus Supplement, pay
from its servicing compensation certain expenses incurred in connection with
its servicing of the Loans, including, without limitation, payment of any
premium for any insurance policy, guaranty, surety or other form of credit
enhancement as specified in the related Prospectus Supplement, payment of the
fees and disbursements of the Trustee and independent accountants, payment of
expenses incurred in connection with distributions and reports to
Securityholders, and payment of any other expenses described in the related
Prospectus Supplement.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to
the Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with the Uniform Single Audit Program
for Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC,
the servicing by or on behalf of the Master Servicer of mortgage loans or
private asset backed securities, or under pooling and servicing agreements
substantially similar to each other (including the related Agreement) was
conducted in compliance with such agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, the Audit
Program for Mortgages serviced for FHLMC, or the Uniform Single Audit Program
for Mortgage Bankers, it is required to report. In rendering its statement
such firm may rely, as to matters relating to the direct servicing of Loans
or Private Asset Backed Securities by Sub-Servicers, upon comparable
statements for examinations conducted substantially in compliance with the
Uniform Single Audit Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FHLMC (rendered within one year of such statement) of
firms of independent public accountants with respect to the related Sub-
Servicer.
Each Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of
officers of the Master Servicer may be obtained by Securityholders of the
related Series without charge upon written request to the Master Servicer at
the address set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The Master Servicer under each Agreement will be named in the related
Prospectus Supplement. The entity serving as Master Servicer may have normal
business relationships with the Depositor or the Depositor's affiliates.
Each Agreement will provide that the Master Servicer may not resign from
its obligations and duties under the Agreement except upon a determination
that its duties thereunder are no longer permissible under applicable law.
The Master Servicer may, however, be removed from its obligations and duties
as set forth in the Agreement. No such resignation will become effective
until the Trustee or a successor servicer has assumed the Master Servicer's
obligations and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer,
the Depositor nor any director, officer, employee, or agent of the Master
Servicer or the Depositor will be under any liability to the related Trust
Fund or Securityholders for any action taken or for refraining from the
taking of any action in good faith pursuant to the Agreement, or for errors
in judgment; provided, however, that neither the Master Servicer, the
Depositor nor any such person will be protected against any liability which
would otherwise be imposed by reason of wilful misfeasance or gross
negligence in the performance of duties thereunder or by reasons of reckless
disregard of obligations and duties thereunder. To the extent provided in
the related Agreement, the Master Servicer, the Depositor and any director,
officer, employee or agent of the Master Servicer or the Depositor may be
entitled to indemnification by the related Trust Fund and may be held
harmless against any loss, liability or expense incurred in connection with
any legal action relating to the Agreement or the Securities, other than any
loss, liability or expense related to any specific Loan or Loans (except any
such loss, liability or expense otherwise reimbursable pursuant to the
Agreement) and any loss, liability or expense incurred by reason of willful
misfeasance or gross negligence in the performance of duties thereunder or by
reason of reckless disregard of obligations and duties thereunder. In
addition, each Agreement will provide that neither the Master Servicer nor
the Depositor will be under any obligation to appear in, prosecute or defend
any legal action which is not incidental to its respective responsibilities
under the Agreement and which in its opinion may involve it in any expense or
liability. The Master Servicer or the Depositor may, however, in its
discretion undertake any such action which it may deem necessary or desirable
with respect to the Agreement and the rights and duties of the parties
thereto and the interests of the Securityholders thereunder. In such event,
the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Trust Fund and the
Master Servicer or the Depositor, as the case may be, will be entitled to be
reimbursed therefor out of funds otherwise distributable to Securityholders.
Except as otherwise specified in the related Prospectus Supplement, any
person into which the Master Servicer may be merged or consolidated, or any
person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Agreement.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Servicing Agreement. Except as
otherwise specified in the related Prospectus Supplement, Events of Default
under each Agreement will consist of (i) any failure by the Master Servicer
to distribute or cause to be distributed to Securityholders of any class any
required payment (other than an Advance) which continues unremedied for five
business days after the giving of written notice of such failure to the
Master Servicer by the Trustee or the Depositor, or to the Master Servicer,
the Depositor and the Trustee by the holders of Securities of such class
evidencing not less than 25% of the aggregate Percentage Interests evidenced
by such class; (ii) any failure by the Master Servicer to make an Advance as
required under the Agreement, unless cured as specified therein; (iii) any
failure by the Master Servicer duly to observe or perform in any material
respect any of its other covenants or agreements in the Agreement which
continues unremedied for thirty days after the giving of written notice of
such failure to the Master Servicer by the Trustee or the Depositor, or
to the Master Servicer, the Depositor and the Trustee by the holders
of Securities of any class evidencing not less than 25% of the
aggregate Percentage Interests constituting such class; and (iv) certain
events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceeding and certain actions by or on behalf
of the Master Servicer indicating its insolvency, reorganization or
inability to pay its obligations.
If specified in the related Prospectus Supplement, the Agreement will
permit the Trustee to sell the Trust Fund Assets and the other assets of the
Trust Fund in the event that payments in respect thereto are insufficient to
make payments required in the Agreement. The assets of the Trust Fund will
be sold only under the circumstances and in the manner specified in the
related Prospectus Supplement.
So long as an Event of Default under an Agreement remains unremedied,
the Depositor or the Trustee may, and at the direction of holders of
Securities of any class evidencing not less than 51% of the aggregate
Percentage Interests constituting such class and under such other
circumstances as may be specified in such Agreement, the Trustee shall,
terminate all of its rights and obligations of the Master Servicer under the
Agreement relating to such Trust Fund and in and to the Trust Fund Assets,
whereupon the Trustee will succeed to all of the responsibilities, duties and
liabilities of the Master Servicer under the Agreement, including, if
specified in the related Prospectus Supplement, the obligation to make
advances, and will be entitled to similar compensation arrangements. In the
event that the Trustee is unwilling or unable so to act, it may appoint, or
petition a court of competent jurisdiction for the appointment of, a mortgage
loan servicing institution with a net worth of a least $10,000,000 to act as
successor to the Master Servicer under the Agreement. Pending such
appointment, the Trustee is obligated to act in such capacity. The Trustee
and any such successor may agree upon the servicing compensation to be paid,
which in no event may be greater than the compensation payable to the Master
Servicer under the Agreement.
No Securityholder, solely by virtue of such holder's status as a
Securityholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Securities of any class of such Series evidencing not less than 25% of the
aggregate Percentage Interests constituting such class have made written
request upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity, and
the Trustee for 60 days has neglected or refused to institute any such
proceeding.
Indenture. Except as otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for five (5) days or more in the payment of any
principal of or interest on any Note of such Series; (ii) failure to perform
any other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of thirty (30) days after notice thereof is given in
accordance with the procedures described in the related Prospectus
Supplement; (iii) any representation or warranty made by the Depositor or the
Trust Fund in the Indenture or in any certificate or other writing delivered
pursuant thereto or in connection therewith with respect to or affecting such
Series having been incorrect in a material respect as of the time made, and
such breach is not cured within thirty (30) days after notice thereof is
given in accordance with the procedures described in the related Prospectus
Supplement; (iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust Fund; or (v) any other Event of
Default provided with respect to Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, either the Trustee or the holders
of a majority of the then aggregate outstanding amount of the Notes of such
Series may declare the principal amount (or, if the Notes of that Series have
a Pass-Through Rate of 0%, such portion of the principal amount as may be
specified in the terms of that Series, as provided in the related Prospectus
Supplement) of all the Notes of such Series to be due and payable
immediately. Such declaration may, under certain circumstances, be rescinded
and annulled by the holders of more than 50% of the Percentage Interests of
the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes,
the Notes of such Series have been declared to be due and payable, the
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such Series and
to continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide
sufficient funds for the payment of principal of and interest on the Notes of
such Series as they would have become due if there had not been such a
declaration. In addition, the Trustee may not sell or otherwise liquidate
the collateral securing the Notes of a Series following an Event of Default,
unless (a) the holders of 100% of the Percentage Interests of the Notes of
such Series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued
interest, due and unpaid, on the outstanding Notes of such Series at the date
of such sale or (c) the Trustee determines that such collateral would not be
sufficient on an ongoing basis to make all payments on such Notes as such
payments would have become due if such Notes had not been declared due and
payable, and the Trustee obtains the consent of the holders of 662/3% of the
Percentage Interests of each Class of Notes of such Series.
Except as otherwise specified in the related Prospectus Supplement, in
the event the principal of the Notes of a Series is declared due and payable,
as described above, the holders of any such Notes issued at a discount from
par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount which is
unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with
respect to a Series of Notes, the Trustee shall be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of Notes of such Series, unless such holders
offered to the Trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying
with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the
holders of a majority of the then aggregate outstanding amount of the Notes
of such Series shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee with respect to the
Notes of such Series, and the holders of a majority of the then aggregate
outstanding amount of the Notes of such Series may, in certain cases, waive
any default with respect thereto, except a default in the payment of
principal or interest or a default in respect of a covenant or provision of
the Indenture that cannot be modified without the waiver or consent of all
the holders of the outstanding Notes of such Series affected thereby.
AMENDMENT
Except as otherwise specified in the related Prospectus Supplement, each
Agreement may be amended by the Depositor, the Master Servicer and the
Trustee, without the consent of any of the Securityholders, (i) to cure any
ambiguity; (ii) to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein; or (iii) to make
any other revisions with respect to matters or questions arising under the
Agreement which are not inconsistent with the provisions thereof, provided
that such action will not adversely affect in any material respect the
interests of any Securityholder. In addition, to the extent provided in the
related Agreement, an Agreement may be amended without the consent of any of
the Securityholders, to change the manner in which the Security Account is
maintained, provided that any such change does not adversely affect the then
current rating on the class or classes of Securities of such Series that have
been rated. In addition, if a REMIC election is made with respect to a Trust
Fund, the related Agreement may be amended to modify, eliminate or add to any
of its provisions to such extent as may be necessary to maintain the
qualification of the related Trust Fund as a REMIC, provided that the Trustee
has received an opinion of counsel to the effect that such action is
necessary or helpful to maintain such qualification. Except as otherwise
specified in the related Prospectus Supplement, each Agreement may also be
amended by the Depositor, the Master Servicer and the Trustee with consent of
holders of Securities of such Series evidencing not less than 66% of the
aggregate Percentage Interests of each class affected thereby for the purpose
of adding any provisions to or changing in an manner or eliminating any of
the provisions of the Agreement or of modifying in any manner the rights of
the holders of the related Securities; provided, however, that no such
amendment may (i) reduce in any manner the amount of or delay the timing of,
payments received on Loans which are required to be distributed on any
Security without the consent of the holder of such Security, or (ii) reduce
the aforesaid percentage of Securities of any class of holders which are
required to consent to any such amendment without the consent of the holders
of all Securities of such class covered by such Agreement then outstanding.
If a REMIC election is made with respect to a Trust Fund, the Trustee
will not be entitled to consent to an amendment to the related
Agreement without having first received an opinion of counsel to the
effect that such amendment will not cause such Trust Fund to fail to
qualify as a REMIC.
TERMINATIONS; OPTIONAL TERMINATION
Pooling and Servicing Agreement; Trust Agreement. Unless otherwise
specified in the related Agreement, the obligations created by each Pooling
and Servicing Agreement and Trust Agreement for each Series of Securities
will terminate upon the payment to the related Securityholders of all amounts
held in the Security Account or by the Master Servicer and required to be
paid to them pursuant to such Agreement following the later of (i) the final
payment of or other liquidation of the last of the Trust Fund Assets subject
thereto or the disposition of all property acquired upon foreclosure of any
such Trust Fund Assets remaining in the Trust Fund and (ii) the purchase by
the Master Servicer or, if REMIC treatment has been elected and if specified
in the related Prospectus Supplement, by the holder of the residual interest
in the REMIC (see "Certain Material Federal Income Tax Consequences" below),
from the related Trust Fund of all of the remaining Trust Fund Assets and all
property acquired in respect of such Trust Fund Assets.
Unless otherwise specified by the related Prospectus Supplement, any
such purchase of Trust Fund Assets and property acquired in respect of Trust
Fund Assets evidenced by a Series of Securities will be made at the option of
the Master Servicer or, if applicable, such holder of the REMIC residual
interest, at a price, and in accordance with the procedures, specified in the
related Prospectus Supplement. The exercise of such right will effect early
retirement of the Securities of that Series, but the right of the Master
Servicer or, if applicable, such holder of the REMIC residual interest, to so
purchase is subject to the principal balance of the related Trust Fund Assets
being less than the percentage specified in the related Prospectus Supplement
of the aggregate principal balance of the Trust Fund Assets at the Cut-off
Date for the Series. The foregoing is subject to the provision that if a
REMIC election is made with respect to a Trust Fund, any repurchase pursuant
to clause (ii) above will be made only in connection with a "qualified
liquidation" of the REMIC within the meaning of Section 860F(g)(4) of the
Code.
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes
of such Series or, with certain limitations, upon deposit with the Trustee of
funds sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture
will provide that, if so specified with respect to the Notes of any Series,
the related Trust Fund will be discharged from any and all obligations in
respect of the Notes of such Series (except for certain obligations relating
to temporary Notes and exchange of Notes, to register the transfer of or
exchange Notes of such Series, to replace stolen, lost or mutilated Notes of
such Series, to maintain paying agencies and to hold monies for payment in
trust) upon the deposit with the Trustee, in trust, of money and/or direct
obligations of or obligations guaranteed by the United States of America
which through the payment of interest and principal in respect thereof in
accordance with their terms will provide money in an amount sufficient to pay
the principal of and each installment of interest on the Notes of such Series
on the last scheduled Distribution Date for such Notes and any installment of
interest on such Notes in accordance with the terms of the Indenture and the
Notes of such Series. In the event of any such defeasance and discharge of
Notes of such Series, holders of Notes of such Series would be able to look
only to such money and/or direct obligations for payment of principal and
interest, if any, on their Notes until maturity.
THE TRUSTEE
The Trustee under each Agreement will be named in the applicable
Prospectus Supplement. The commercial bank or trust company serving as
Trustee may have normal banking relationships with the Depositor, the Master
Servicer and any of their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the Loans. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect
the laws of any particular state, nor to encompass the laws of all states in
which the security for the Loans is situated. The summaries are qualified in
their entirety by reference to the applicable federal laws and the
appropriate laws of the states in which Loans may be originated.
GENERAL
The Loans for a Series may be secured by deeds of trust, mortgages,
security deeds or deeds to secure debt, depending upon the prevailing
practice in the state in which the property subject to the loan is located.
A mortgage creates a lien upon the real property encumbered by the mortgage,
which lien is generally not prior to the lien for real estate taxes and
assessments. Priority between mortgages depends on their terms and generally
on the order of recording with a state or county office. There are two
parties to a mortgage, the mortgagor, who is the borrower and owner of the
mortgaged property, and the mortgagee, who is the lender. Under the mortgage
instrument, the mortgagor delivers to the mortgagee a note or bond and the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
formally has three parties, the borrower-property owner called the trustor
(similar to a mortgagor), a lender (similar to a mortgagee) called the
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid,
in trust, generally with a power of sale, to the trustee to secure payment of
the obligation. A security deed and a deed to secure debt are special types
of deeds which indicate on their face that they are granted to secure an
underlying debt. By executing a security deed or deed to secure debt, the
grantor conveys title to, as opposed to merely creating a lien upon, the
subject property to the grantee until such time as the underlying debt is
repaid. The trustee's authority under a deed of trust, the mortgagee's
authority under a mortgage and the grantee's authority under a security deed
or deed to secure debt are governed by law and, with respect to some deeds of
trust, the directions of the beneficiary.
FORECLOSURE/REPOSSESSION
Foreclosure of a deed of trust is generally accomplished by a non-
judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any
default by the borrower under the terms of the note or deed of trust. In
addition to any notice requirements contained in a deed of trust, in some
states, the trustee must record a notice of default and send a copy to the
borrower-trustor, to any person who has recorded a request for a copy of any
notice of default and notice of sale, to any successor in interest to the
borrower-trustor, to the beneficiary of any junior deed of trust and to
certain other persons. In general, the borrower, or any other person having
a junior encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender.
After the reinstatement period has expired without the default having been
cured, the borrower or junior lienholder no longer has the right to reinstate
the loan and must pay the loan in full to prevent the scheduled foreclosure
sale. If the deed of trust is not reinstated, a notice of sale must be
posted in a public place and, in most states, published for a specific period
of time in one or more newspapers. In addition, some state laws require that
a copy of the notice of sale be posted on the property and sent to all
parties having an interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings are often not contested by any of
the parties. When the mortgagee's right to foreclosure is contested, the
legal proceedings necessary to resolve the issue can be time consuming.
After the completion of a judicial foreclosure proceeding, the court
generally issues a judgment of foreclosure and appoints a referee or other
court officer to conduct the sale of the property. In some states,
mortgages may also be foreclosed by advertisement, pursuant to a power
of sale provided in the mortgage.
Although foreclosure sales are typically public sales, frequently no
third party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and
a requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding
under the loan, accrued and unpaid interest and the expenses of foreclosure
in which event the mortgagor's debt will be extinguished or the lender may
purchase for a lesser amount in order to preserve its right against a
borrower to seek a deficiency judgment in states where such judgment is
available. Thereafter, subject to the right of the borrower in some states
to remain in possession during the redemption period, the lender will assume
the burden of ownership, including obtaining hazard insurance and making such
repairs at its own expense as are necessary to render the property suitable
for sale. The lender will commonly obtain the services of a real estate
broker and pay the broker's commission in connection with the sale of the
property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Any loss may be reduced by the receipt of any mortgage guaranty insurance
proceeds.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of
the borrower's defaults under the loan documents. Some courts have been
faced with the issue of whether federal or state constitutional provisions
reflecting due process concerns for fair notice require that borrowers under
deeds of trust receive notice longer than that prescribed by statute. For the
most part, these cases have upheld the notice provisions as being reasonable
or have found that the sale by a trustee under a deed of trust does not
involve sufficient state action to afford constitutional protection to the
borrower.
When the beneficiary under a junior mortgage or deed of trust cures the
default and reinstates or redeems by paying the full amount of the senior
mortgage or deed of trust, the amount paid by the beneficiary so to cure or
redeem becomes a part of the indebtedness secured by the junior mortgage or
deed of trust. See "Junior Mortgages; Rights of Senior Mortgagees".
ENVIRONMENTAL RISKS
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and
safety. These include laws and regulations governing air pollutant
emissions, hazardous and toxic substances, impacts to wetlands, leaks from
underground storage tanks, and the management, removal and disposal of lead-
and asbestos-containing materials. In certain circumstances, these laws and
regulations impose obligations on the owners or operators of residential
properties such as those subject to the Loans. The failure to comply with
such laws and regulations may result in fines and penalties.
Moreover, under various federal, state and local laws and regulations,
an owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs. Such
liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of such substances, and could exceed
the value of the property and the aggregate assets of the owner or operator.
In addition, persons who transport or dispose of hazardous substances, or
arrange for the transportation, disposal or treatment of hazardous
substances, at off-site locations may also be held liable if there are
releases or threatened releases of hazardous substances at such off-site
locations.
In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), contamination of property may give rise to a lien on the property
to assure the payment of the costs of clean-up. In several states, such a
lien has priority over the lien of an existing mortgage against such
property. Under CERCLA, such a lien is subordinate to pre-existing,
perfected security interests.
Under the laws of some states, and under CERCLA, there is a possibility
that a lender may be held liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by a current or prior owner or operator. CERCLA and some state laws
provide an exemption from the definition of "owner or operator" for a secured
creditor who, without "participating in the management" of a facility, holds
indicia of ownership primarily to protect its security interest in the
facility. The Solid Waste Disposal Act ("SWDA") provides similar protection
to secured creditors in connection with liability for releases of petroleum
from certain underground storage tanks. However, if a lender "participates
in the management" of the facility in question or is found not to have held
its interest primarily to protect a security interest, the lender may forfeit
its secured creditor exemption status.
A regulation promulgated by the U.S. Environmental Protection Agency
("EPA") in April 1992 attempted to clarify the activities in which lenders
could engage both prior to and subsequent to foreclosure of a security
interest without forfeiting the secured creditor exemption under CERCLA. The
rule was struck down in 1994 by the United States Court of Appeals for the
District of Columbia Circuit in Kelley ex rel State of Michigan v.
Environmental Protection Agency, 15 F.3d 1100 (D.C Cir. 1994), reh'g denied,
25 F.3d 1088, cert. denied sub nom. Am. Bankers Ass'n v. Kelley, 115 S.Ct.
900 (1995). Another EPA regulation promulgated in 1995 clarifies the
activities in which lenders may engage without forfeiting the secured
creditor exemption under the underground storage tank provisions of the SWDA.
That regulation has not been struck down.
On September 30, 1996, Congress amended both CERCLA and the SWDA to
provide additional clarification regarding the scope of the lender liability
exemptions under the two statutes. Among other things, the 1996 amendments
specify the circumstances under which a lender will be protected by the
CERCLA and SWDA exemptions, both while the borrower is still in possession of
the secured property and following foreclosure on the secured property.
Generally, the amendments state that a lender who holds indicia of
ownership primarily to protect a security interest in a facility will be
considered to participate in management only if, while the borrower is still
in possession of the facility encumbered by the security interest, the lender
(i) exercises decision-making control over environmental compliance related
to the facility such that the lender has undertaken responsibility for
hazardous substance handling or disposal practices related to the facility or
(ii) exercises control at a level comparable to that of a manager of the
facility such that the lender has assumed or manifested responsibility for
(x) overall management of the facility encompassing daily-decision making
with respect to environmental compliance or (y) overall or substantially all
of the operational functions (as distinguished from financial or
administrative functions) of the facility other than the function of
environmental compliance. The amendments also specify certain activities
that are not considered to be "participation in management", including
monitoring or enforcing the terms of the extension of credit or security
interest, inspecting the facility, and requiring a lawful means of addressing
the release or threatened release of a hazardous substance.
The 1996 amendments also specify that a lender who did not participate
in management of a facility prior to foreclosure will not be considered an
"owner or operator", even if the lender forecloses on the facility and after
foreclosure sells or liquidates the facility, maintains business activities,
winds up operations, undertakes an appropriate response action, or takes any
other measure to preserve, protect, or prepare the facility prior to sale or
disposition, if the lender seeks to sell or otherwise divest the facility at
the earliest practicable, commercially reasonable time, on commercially
reasonable terms, taking into account market conditions and legal and
regulatory requirements.
The CERCLA and SWDA lender liability amendments specifically address the
potential liability of lenders who hold mortgages or similar conventional
security interests in real property, such as the Trust Fund does in
connection with the Home Equity Loans and the Home Improvement Contracts.
The amendments do not clearly address the potential liability of lenders who
retain legal title to a property and enter into an agreement with the
purchaser for the payment of the purchase price and interest over the term of
the contract, such as the Trust Fund does in connection with the Installment
Contracts.
If a lender (including a lender under an Installment Contract) is or
becomes liable under CERCLA, it may be authorized to bring a statutory action
for contribution against any other "responsible parties", including a
previous owner or operator. However, such persons or entities may be
bankrupt or otherwise judgment proof, and the costs associated with
environmental cleanup and related actions may be substantial. Moreover, some
state laws imposing liability for addressing hazardous substances do not
contain exemptions from liability for lenders. Whether the costs of
addressing a release or threatened release at a property pledged as
collateral for one of the Loans (or at a property subject to an Installment
Contract), would be imposed on the Trust Fund, and thus occasion a loss to
the Securityholders, therefore depends on the specific factual and legal
circumstances at issue.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of
a mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption would
defeat the title of any purchaser from the lender subsequent to foreclosure
or sale under a deed of trust. Consequently, the practical effect of the
redemption right is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run. In some states,
there is no right to redeem property after a trustee's sale under a deed of
trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have adopted statutory prohibitions restricting the right
of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or certain other foreclosure proceedings. A deficiency
judgment is a personal judgment against the borrower equal in most cases to
the difference between the amount due to the lender and the fair market value
of the real property sold at the foreclosure sale. Other statutes require
the beneficiary or mortgagee to exhaust the security afforded under a deed of
trust or mortgage by foreclosure in an attempt to satisfy the full debt
before bringing a personal action against the borrower. In certain other
states, the lender has the option of bringing a personal action against the
borrower on the debt without first exhausting such security; however, in some
of these states, the lender, following judgment on such personal action, may
be deemed to have elected a remedy and may be precluded from exercising
remedies with respect to the security. Consequently, the practical effect of
the election requirement, when applicable, is that lenders will usually
proceed first against the security rather than bringing a personal action
against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a foreclosure sale
to the excess of the outstanding debt over the fair market value of the
property at the time of the public sale. The purpose of these statutes is
generally to prevent a beneficiary or a mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids
at the foreclosure sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy
laws, the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state
laws affording relief to debtors, may interfere with or affect the ability of
the secured mortgage lender to realize upon its security. For example, in a
proceeding under the federal Bankruptcy Code, a lender may not foreclose on
the Property without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the Property is
not the debtor's principal residence and the court determines that the value
of the Property is less than the principal balance of the mortgage loan, for
the reduction of the secured indebtedness to the value of the Property as of
the date of the commencement of the bankruptcy, rendering the lender a
general unsecured creditor for the difference, and also may reduce the
monthly payments due under such mortgage loan, change the rate of interest
and alter the mortgage loan repayment schedule. The effect of any such
proceedings under the federal Bankruptcy Code, including but not limited to
any automatic stay, could result in delays in receiving payments on the Loans
underlying a Series of Securities and possible reductions in the aggregate
amount of such payments.
The federal tax laws provide priority to certain tax liens over the lien
of a mortgage or secured party. Numerous federal and state consumer
protection laws impose substantive requirements upon mortgage lenders in
connection with the origination, servicing and enforcement of loans secured
by Single Family Properties. These laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act,
Fair Credit Billing Act, Fair Credit Reporting Act and related statutes and
regulations. These federal and state laws impose specific statutory
liabilities upon lenders who fail to comply with the provisions of the law.
In some cases, this liability may affect assignees of the loans or contracts.
DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement, each
conventional Loan will contain a due-on-sale clause which will provide that
if the mortgagor or obligor sells, transfers or conveys the Property, the
loan or contract may be accelerated by the mortgagee or secured party. The
Garn-St. Germain Depository Institutions Act of 1982 (the "Garn-St. Germain
Act"), subject to certain exceptions, preempts state constitutional,
statutory and case law prohibiting the enforcement of due-on-sale clauses.
As a result, due-on-sale clauses have become generally enforceable except in
those states whose legislatures exercised their authority to regulate the
enforceability of such clauses with respect to mortgage loans that were (i)
originated or assumed during the "window period" under the Garn-St. Germain
Act which ended in all cases not later than October 15, 1982, and (ii)
originated by lenders other than national banks, federal savings institutions
and federal credit unions. FHLMC has taken the position in its published
mortgage servicing standards that, out of a total of eleven "window period
states," five states (Arizona, Michigan, Minnesota, New Mexico and Utah) have
enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of window period loans. Also, the Garn-St. Germain Act does
"encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
As to loans secured by an owner-occupied residence, the Garn-St. Germain
Act sets forth nine specific instances in which a mortgagee covered by the
Act may not exercise its rights under a due-on-sale clause, notwithstanding
the fact that a transfer of the property may have occurred. The inability to
enforce a due-on-sale clause may result in transfer of the related Property
to an uncreditworthy person, which could increase the likelihood of default
or may result in a mortgage bearing an interest rate below the current market
rate being assumed by a new home buyer, which may affect the average life of
the Loans and the number of Loans which may extend to maturity.
In addition, under federal bankruptcy law, due-on-sale clauses may not
be enforceable in bankruptcy proceedings and may, under certain
circumstances, be eliminated in any modified mortgage resulting from such
bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states,
there are or may be specific limitations upon the late charges which a lender
may collect from a borrower for delinquent payments. Certain states also
limit the amounts that a lender may collect from a borrower as an additional
charge if the loan is prepaid. Late charges and prepayment fees are
typically retained by servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles
are generally designed to relieve the borrower from the legal effect of his
defaults under the loan documents. Examples of judicial remedies that have
been fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes of the borrower's
default and the likelihood that the borrower will be able to reinstate the
loan. In some cases, courts have substituted their judgment for the lender's
judgment and have required that lenders reinstate loans or recast payment
schedules in order to accommodate borrowers who are suffering from temporary
financial disability. In other cases, courts have limited the right of a
lender to realize upon his security if the default under the security
agreement is not monetary, such as the borrower's failure to adequately
maintain the property or the borrower's execution of secondary financing
affecting the property. Finally, some courts have been faced with the issue
of whether or not federal or state constitutional provisions reflecting due
process concerns for adequate notice require that borrowers under security
agreements receive notices in addition to the statutorily-prescribed
minimums. For the most part, these cases have upheld the notice provisions
as being reasonable or have found that, in some cases involving the sale by a
trustee under a deed of trust or by a mortgagee under a mortgage having a
power of sale, there is insufficient state action to afford constitutional
protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or
in part without penalty. The regulations of the Federal Home Loan Bank Board
(the "FHLBB") prohibit the imposition of a prepayment penalty or equivalent
fee in connection with the acceleration of a loan by exercise of a due-on-
sale clause. A mortgagee to whom a prepayment in full has been tendered may
be compelled to give either a release of the mortgage or an instrument
assigning the existing mortgage. The absence of a restraint on prepayment,
particularly with respect to Loans having higher mortgage rates, may increase
the likelihood of refinancing or other early retirements of the Loans.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V") provides that state usury
limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. The Office of
Thrift Supervision, as successor to the Federal Home Loan Bank Board, is
authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V. The statute authorized the states to
reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision which expressly rejects an application of the
federal law. Fifteen states adopted such a law prior to the April 1, 1993
deadline. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. Certain states have taken
action to reimpose interest rate limits and/or to limit discount points or
other charges.
THE HOME IMPROVEMENT CONTRACTS
General. The Home Improvement Contracts, other than those Home
Improvement Contracts that are unsecured or secured by mortgages on real
estate (such Home Improvement Contracts are hereinafter referred to in this
section as "contracts") generally are "chattel paper" or constitute "purchase
money security interests" each as defined in the Uniform Commercial Code (the
"UCC"). Pursuant to the UCC, the sale of chattel paper is treated in a
manner similar to perfection of a security interest in chattel paper. Under
the related Agreement, the Depositor will transfer physical possession of the
contracts to the Trustee or a designated custodian or may retain possession
of the contracts as custodian for the Trustee. In addition, the Depositor
will make an appropriate filing of a UCC-1 financing statement in the
appropriate states to give notice of the Trustee's ownership of the
contracts. Unless otherwise specified in the related Prospectus Supplement,
the contracts will not be stamped or otherwise marked to reflect their
assignment from the Depositor to the Trustee. Therefore, if through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of such assignment, the
Trustee's interest in the contracts could be defeated.
Security Interests in Home Improvements. The contracts that are secured
by the Home Improvements financed thereby grant to the originator of such
contracts a purchase money security interest in such Home Improvements to
secure all or part of the purchase price of such Home Improvements and
related services. A financing statement generally is not required to be
filed to perfect a purchase money security interest in consumer goods. Such
purchase money security interests are assignable. In general, a purchase
money security interest grants to the holder a security interest that
has priority over a conflicting security interest in the same collateral
and the proceeds of such collateral. However, to the extent that the
collateral subject to a purchase money security interest becomes a
fixture, in order for the related purchase money security interest to take
priority over a conflicting interest in the fixture, the holder's
interest in such Home Improvement must generally be perfected by a timely
fixture filing. In general, a security interest does not exist under the
UCC in ordinary building material incorporated into an improvement on
land. Home Improvement Contracts that finance lumber, bricks, other types
of ordinary building material or other goods that are deemed to lose such
characterization upon incorporation of such materials into the related
property, will not be secured by a purchase money security interest in the
Home Improvement being financed.
Enforcement of Security Interest in Home Improvements. So long as the
Home Improvement has not become subject to the real estate law, a creditor
can repossess a Home Improvement securing a contract by voluntary surrender,
by "self-help" repossession that is "peaceful" (i.e., without breach of the
peace) or, in the absence of voluntary surrender and the ability to repossess
without breach of the peace, by judicial process. The holder of a contract
must give the debtor a number of days' notice, which varies from 10 to 30
days depending on the state, prior to commencement of any repossession. The
UCC and consumer protection laws in most states place restrictions on
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states
also requires that the debtor be given notice of any sale prior to resale of
the unit that the debtor may redeem at or before such resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments, and in many cases
the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
Consumer Protection Laws. The so-called "Holder-in-Due Course" rule of
the Federal Trade Commission is intended to defeat the ability of the
transferor of a consumer credit contract which is the seller of goods which
gave rise to the transaction (and certain related lenders and assignees) to
transfer such contract free of notice of claims by the debtor thereunder.
The effect of this rule is to subject the assignee of such a contract to all
claims and defenses which the debtor could assert against the seller of
goods. Liability under this rule is limited to amounts paid under a
contract; however, the obligor also may be able to assert the rule to set off
remaining amounts due as a defense against a claim brought by the Trustee
against such obligor. Numerous other federal and state consumer protection
laws impose requirements applicable to the origination and lending pursuant
to the contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act,
the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and
the Uniform Consumer Credit Code. In the case of some of these laws, the
failure to comply with their provisions may affect the enforceability of the
related contract.
Applicability of Usury Laws. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, as amended ("Title V"),
provides that, subject to the following conditions, state usury limitations
shall not apply to any contract which is secured by a first lien on certain
kinds of consumer goods. The contracts would be covered if they satisfy
certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice
period prior to instituting any action leading to repossession of the related
unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V was not so rejected, any state is authorized by the law
to adopt a provision limiting discount points or other charges on loans
covered by Title V.
INSTALLMENT CONTRACTS
The Loans may also consist of installment contracts. Under an
installment contract ("Installment Contract") the seller (hereinafter
referred to in this section as the "lender") retains legal title to the
property and enters into an agreement with the purchaser hereinafter referred
to in this section as the "borrower") for the payment of the purchase price,
plus interest, over the term of such contract. Only after full performance
by the borrower of the contract is the lender obligated to convey title to
the property to the purchaser. As with mortgage or deed of trust financing,
during the effective period of the Installment Contract, the borrower is
generally responsible for maintaining the property in good condition and for
paying real estate taxes, assessments and hazard insurance premiums
associated with the property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his
or her right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The lender
in such a situation does not have to foreclose in order to obtain title to
the property, although in some cases a quiet title action is in order if the
borrower has filed the Installment Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Contracts from the harsh consequences of
forfeiture. Under such statutes, a judicial or nonjudicial foreclosure may
be required, the lender may be required to give notice of default and the
borrower may be granted some grace period during which the Installment
Contract may be reinstated upon full payment of the default amount and the
borrower may have a post-foreclosure statutory redemption right. In other
states, courts in equity may permit a borrower with significant investment in
the property under an Installment Contract for the sale of real estate to
share in the proceeds of sale of the property after the indebtedness is
repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally speaking, the lender's procedures for obtaining
possession and clear title under an Installment Contract in a given state are
simpler and less time-consuming and costly than are the procedures for
foreclosing and obtaining clear title to a property subject to one or more
liens.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act"), a borrower who enters military
service after the origination of such borrower's Loan (including a borrower
who is a member of the National Guard or is in reserve status at the time of
the origination of the Loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that such interest rate limitation
could have an effect, for an indeterminate period of time, on the ability of
the Master Servicer to collect full amounts of interest on certain of the
Loans. Any shortfall in interest collections resulting from the application
of the Relief Act could result in losses to the Securityholders. The Relief
Act also imposes limitations which would impair the ability of the Master
Servicer to foreclose on an affected Loan during the borrower's period of
active duty status. Moreover, the Relief Act permits the extension of a
Loan's maturity and the re-adjustment of its payment schedule beyond the
completion of military service. Thus, in the event that such a Loan goes
into default, there may be delays and losses occasioned by the inability to
realize upon the Property in a timely fashion.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
To the extent that the Loans comprising the Trust Fund for a Series are
secured by mortgages which are junior to other mortgages held by other
lenders or institutional investors, the rights of the Trust Fund (and
therefore the Securityholders), as mortgagee under any such junior
mortgage, are subordinate to those of any mortgagee under any senior
mortgage. The senior mortgagee has the right to receive hazard insurance
and condemnation proceeds and to cause the property securing the Loan to
be sold upon default of the mortgagor, thereby extinguishing the junior
mortgagee's lien unless the junior mortgagee asserts its subordinate
interest in the property in foreclosure litigation and, possibly,
satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure such
default and bring the senior loan current, in either event adding the
amounts expended to the balance due on the junior loan. In most states,
absent a provision in the mortgage or deed of trust, no notice of default
is required to be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with
condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the mortgage, in such order as the mortgagee may
determine. Thus, in the event improvements on the property are damaged or
destroyed by fire or other casualty, or in the event the property is taken by
condemnation, the mortgagee or beneficiary under underlying senior mortgages
will have the prior right to collect any insurance proceeds payable under a
hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the senior
mortgages. Proceeds in excess of the amount of senior mortgage indebtedness,
in most cases, may be applied to the indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding
purporting to affect the property or the rights of the mortgagee under the
mortgage. Upon a failure of the mortgagor to perform any of these
obligations, the mortgagee is given the right under certain mortgages to
perform the obligation itself, at its election, with the mortgagor agreeing
to reimburse the mortgagee for any sums expended by the mortgagee on behalf
of the mortgagor. All sums so expended by the mortgagee become part of the
indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make Revolving Credit Line Loans typically
contains a "future advance" clause, which provides, in essence, that
additional amounts advanced to or on behalf of the borrower by the
beneficiary or lender are to be secured by the deed of trust or mortgage.
Any amounts so advanced after the Cut-off Date with respect to any mortgage
will not be included in the Trust Fund. The priority of the lien securing
any advance made under the clause may depend in most states on whether the
deed of trust or mortgage is called and recorded as a credit line deed of
trust or mortgage. If the beneficiary or lender advances additional amounts,
the advance is entitled to receive the same priority as amounts initially
advanced under the trust deed or mortgage, notwithstanding the fact that
there may be junior trust deeds or mortgages and other liens which intervene
between the date of recording of the trust deed or mortgage and the date of
the future advance, and notwithstanding that the beneficiary or lender had
actual knowledge of such intervening junior trust deeds or mortgages and
other liens at the time of the advance. In most states, the trust deed or
mortgage lien securing mortgage loans of the type which includes home equity
credit lines applies retroactively to the date of the original recording of
the trust deed or mortgage, provided that the total amount of advances under
the home equity credit line does not exceed the maximum specified principal
amount of the recorded trust deed or mortgage, except as to advances made
after receipt by the lender of a written notice of lien from a judgment lien
creditor of the trustor.
THE TITLE I PROGRAM
General. Certain of the Loans contained in a Trust Fund may be loans
insured under the FHA Title I Credit Insurance program created pursuant to
Sections 1 and 2(a) of the National Housing Act of 1934 (the "Title I
Program"). Under the Title I Program, the FHA is authorized and empowered to
insure qualified lending institutions against losses on eligible loans. The
Title I Program operates as a coinsurance program in which the FHA insures up
to 90% of certain losses incurred on an individual insured loan, including
the unpaid principal balance of the loan, but only to the extent of
the insurance coverage available in the lender's FHA insurance coverage
reserve account. The owner of the loan bears the uninsured loss on each
loan.
The types of loans which are eligible for insurance by the FHA under the
Title I Program include property improvement loans ("Property Improvement
Loans" or "Title I Loans"). A Property Improvement Loan or Title I Loan
means a loan made to finance actions or items that substantially protect or
improve the basic livability or utility of a property and includes single
family improvement loans.
There are two basic methods of lending or originating such loans which
include a "direct loan" or a "dealer loan". With respect to a direct loan,
the borrower makes application directly to a lender without any assistance
from a dealer, which application may be filled out by the borrower or by a
person acting at the direction of the borrower who does not have a financial
interest in the loan transaction, and the lender may disburse the loan
proceeds solely to the borrower or jointly to the borrower and other parties
to the transaction. With respect to a dealer loan, the dealer, who has a
direct or indirect financial interest in the loan transaction, assists the
borrower in preparing the loan application or otherwise assists the borrower
in obtaining the loan from the lender. The lender may disburse proceeds
solely to the dealer or the borrower or jointly to the borrower and the
dealer or other parties to the transaction. With respect to a dealer Title I
Loan, a dealer may include a seller, a contractor or supplier of goods or
services.
Loans insured under the Title I Program are required to have fixed
interest rates and generally provide for equal installment payments due
weekly, biweekly, semi-monthly or monthly, except that a loan may be payable
quarterly or semi-annually where a borrower has an irregular flow of income.
The first or last payments (or both) may vary in amount but may not exceed
150% of the regular installment payment, and the first payment may be due no
later than two months from the date of the loan. The note must contain a
provision permitting full or partial prepayment of the loan. The interest
rate must be negotiated and agreed to by the borrower and the lender and must
be fixed for the term of the loan and recited in the note. Interest on an
insured loan must accrue from the date of the loan and be calculated
according to the actuarial method. The lender must assure that the note and
all other documents evidencing the loan are in compliance with applicable
federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence
and diligence to determine whether the borrower and any co-maker is solvent
and an acceptable credit risk, with a reasonable ability to make payments on
the loan obligation. The lender's credit application and review must
determine whether the borrower's income will be adequate to meet the periodic
payments required by the loan, as well as the borrower's other housing and
recurring expenses, which determination must be made in accordance with the
expense-to-income ratios published by the Secretary of HUD unless the lender
determines and documents in the loan file the existence of compensating
factors concerning the borrower's creditworthiness which support approval of
the loan.
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the
time of approval by the lending institution (as is typically the case with
other federal loan programs). If, after a loan has been made and reported
for insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the
FHA. In such case, provided that the validity of any lien on the property
has not been impaired, the insurance of the loan under the Title I Program
will not be affected unless such material misstatements of fact or misuse of
loan proceeds was caused by (or was knowingly sanctioned by) the lender or
its employees.
Requirements for Title I Loans. The maximum principal amount for Title
I Loans must not exceed the actual cost of the project plus any applicable
fees and charges allowed under the Title I Program; provided that such
maximum amount does not exceed $25,000 (or the current applicable amount) for
a single family property improvement loan. Generally, the term of a Title I
Loan may not be less than six months nor greater than 20 years and 32 days.
A borrower may obtain multiple Title I Loans with respect to multiple
properties, and a borrower may obtain more than one Title I Loan with
respect to a single property, in each case as long as the total
outstanding balance of all Title I Loans in the same property does not
exceed the maximum loan amount for the type of Title I Loan thereon having
the highest permissible loan amount.
Borrower eligibility for a Title I Loan requires that the borrower have
at least a one-half interest in either fee simple title to the real property,
a lease thereof for a term expiring at least six months after the final
maturity of the Title I Loan or a recorded land installment contract for the
purchase of the real property. In the case of a Title I Loan with a total
principal balance in excess of $15,000, if the property is not occupied by
the owner, the borrower must have equity in the property being improved at
least equal to the principal amount of the loan, as demonstrated by a current
appraisal. Any Title I Loan in excess of $7,500 must be secured by a
recorded lien on the improved property which is evidenced by a mortgage or
deed of trust executed by the borrower and all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary
of HUD has published a list of items and activities which cannot be financed
with proceeds from any Title I Loan and from time to time the Secretary of
HUD may amend such list of items and activities. With respect to any dealer
Title I Loan, before the lender may disburse funds, the lender must have in
its possession a completion certificate on a HUD approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan, the lender
is required to obtain, promptly upon completion of the improvements but not
later than 6 months after disbursement of the loan proceeds with one 6 month
extension if necessary, a completion certificate, signed by the borrower.
The lender is required to conduct an on-site inspection on any Title I Loan
where the principal obligation is $7,500 or more, and on any direct Title I
Loan where the borrower fails to submit a completion certificate.
FHA Insurance Coverage. Under the Title I Program, the FHA establishes
an insurance coverage reserve account for each lender which has been granted
a Title I contract of insurance. The amount of insurance coverage in this
account is a maximum of 10% of the amount disbursed, advanced or expended by
the lender in originating or purchasing eligible loans registered with the
FHA for Title I insurance, with certain adjustments. The balance in the
insurance coverage reserve account is the maximum amount of insurance claims
the FHA is required to pay to the Title I lender. Loans to be insured under
the Title I Program will be registered for insurance by the FHA and the
insurance coverage attributable to such loans will be included in the
insurance coverage reserve account for the originating or purchasing lender
following the receipt and acknowledgment by the FHA of a loan report on the
prescribed form pursuant to the Title I regulations. For each eligible loan
reported and acknowledged for insurance, the FHA charges a fee (the
"Premium"). For loans having a maturity of 25 months or less, the FHA bills
the lender for the entire Premium in an amount equal to the product of 0.50%
of the original loan amount and the loan term. For home improvement loans
with a maturity greater than 25 months, each year that a loan is outstanding
the FHA bills the lender for a Premium in an amount equal to 0.50% of the
original loan amount. If a loan is prepaid during the year, the FHA will not
refund or abate the Premium paid for such year.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect
to loans insured under the lender's contract of insurance by (i) the amount
of the FHA insurance claims approved for payment relating to such insured
loans and (ii) the amount of insurance coverage attributable to insured loans
sold by the lender, and such insurance coverage may be reduced for any FHA
insurance claims rejected by the FHA. The balance of the lender's FHA
insurance coverage reserve account will be further adjusted as required under
Title I or by the FHA, and the insurance coverage therein may be earmarked
with respect to each or any eligible loans insured thereunder, if a
determination is made by the Secretary of HUD that it is in its interest to
do so. Originations and acquisitions of new eligible loans will continue to
increase a lender's insurance coverage reserve account balance by 10% of the
amount disbursed, advanced or expended in originating or acquiring such
eligible loans registered with the FHA for insurance under the Title I
Program. The Secretary of HUD may transfer insurance coverage between
insurance coverage reserve accounts with earmarking with respect to a
particular insured loan or group of insured loans when a determination is
made that it is in the Secretary's interest to do so.
The lender may transfer (except as collateral in a bona fide
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an
insured loan is transferred with recourse or with a guaranty or repurchase
agreement, the FHA, upon receipt of written notification of the transfer of
such loan in accordance with the Title I regulations, will transfer from the
transferor's insurance coverage reserve account to the transferee's insurance
coverage reserve account an amount, if available, equal to 10% of the actual
purchase price or the net unpaid principal balance of such loan (whichever is
less). However, under the Title I Program not more than $5,000 in insurance
coverage shall be transferred to or from a lender's insurance coverage
reserve account during any October 1 to September 30 period without the prior
approval of the Secretary of HUD. Amounts which may be recovered by the
Secretary of HUD after payment of an insurance claim are not added to the
amount of insurance coverage in the related lender's insurance coverage
reserve account.
Claims Procedures Under Title I. Under the Title I Program the lender
may accelerate an insured loan following a default on such loan only after
the lender or its agent has contacted the borrower in a face-to-face meeting
or by telephone to discuss the reasons for the default and to seek its cure.
If the borrower does not cure the default or agree to a modification
agreement or repayment plan, the lender will notify the borrower in writing
that, unless within 30 days the default is cured or the borrower enters into
a modification agreement or repayment plan, the loan will be accelerated and
that, if the default persists, the lender will report the default to an
appropriate credit agency. The lender may rescind the acceleration of
maturity after full payment is due and reinstate the loan only if the
borrower brings the loan current, executes a modification agreement or agrees
to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the
lender may either (a) proceed against the property under any security
instrument, or (b) make a claim under the lender's contract of insurance. If
the lender chooses to proceed against the property under a security
instrument (or if it accepts a voluntary conveyance or surrender of the
property), the lender may file an insurance claim only with the prior
approval of the Secretary of HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation
of the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender
has properly filed proofs of claims, where the borrower is bankrupt or
deceased. Generally, a claim for reimbursement for loss on any Title I Loan
must be filed with the FHA no later than 9 months after the date of default
of such loan. Concurrently with filing the insurance claim, the lender shall
assign to the United States of America the lender's entire interest in the
loan note (or a judgment in lien of the note), in any security held and in
any claim filed in any legal proceedings. If, at the time the note is
assigned to the United States, the Secretary has reason to believe that the
note is not valid or enforceable against the borrower, the FHA may deny the
claim and reassign the note to the lender. If either such defect is
discovered after the FHA has paid a claim, the FHA may require the lender to
repurchase the paid claim and to accept a reassignment of the loan note. If
the lender subsequently obtains a valid and enforceable judgment against the
borrower, the lender may resubmit a new insurance claim with an assignment of
the judgment. Although the FHA may contest any insurance claim and make a
demand for repurchase of the loan at any time up to two years from the date
the claim was certified for payment and may do so thereafter in the event of
fraud or misrepresentation on the part of the lender, the FHA has expressed
an intention to limit the period of time within which it will take such
action to one year from the date the claim was certified for payment.
Under the Title I Program the amount of an FHA insurance claim payment,
when made, is equal to the Claimable Amount, up to the amount of insurance
coverage in the lender's insurance coverage reserve account. For the
purposes hereof, the "Claimable Amount" means an amount equal to 90% of the
sum of: (a) the unpaid loan obligation (net unpaid principal and the
uncollected interest earned to the date of default) with adjustments thereto
if the lender has proceeded against property securing such loan; (b) the
interest on the unpaid amount of the loan obligation from the date of default
to the date of the claim's initial submission for payment plus 15 calendar
days (but not to exceed 9 months from the date of default), calculated at the
rate of 7% per annum; (c) the uncollected court costs; (d) the attorney's
fees not to exceed $500; and (e) the expenses for recording the assignment
of the security to the United States.
The Secretary of HUD may deny a claim for insurance in whole or in part
for any violations of the regulations governing the Title I Program; however,
the Secretary of HUD may waive such violations if it determines that
enforcement of the regulations would impose an injustice upon a lender which
has substantially complied with the regulations in good faith.
OTHER LEGAL CONSIDERATIONS
The Loans are also subject to federal laws, including: (i) Regulation Z,
which requires certain disclosures to the borrowers regarding the terms of
the Loans; (ii) the Equal Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public assistance
or the exercise of any right under the Consumer Credit Protection Act, in the
extension of credit; and (iii) the Fair Credit Reporting Act, which regulates
the use and reporting of information related to the borrower's credit
experience. Violations of certain provisions of these federal laws may limit
the ability of the Sellers to collect all or part of the principal of or
interest on the Loans and in addition could subject the Sellers to damages
and administrative enforcement.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of certain anticipated material federal
income tax consequences of the purchase, ownership, and disposition of the
Securities and is based on the opinion of Brown & Wood LLP, special counsel
to the Depositor (in such capacity, "Tax Counsel"). The summary is based
upon the provisions of the Code, the regulations promulgated thereunder,
including, where applicable, proposed regulations, and the judicial and
administrative rulings and decisions now in effect, all of which are subject
to change or possible differing interpretations. The statutory provisions,
regulations, and interpretations on which this interpretation is based are
subject to change, and such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances. This summary focuses primarily upon investors who will hold
Securities as "capital assets" (generally, property held for investment)
within the meaning of Section 1221 of the Code. Prospective investors may
wish to consult their own tax advisers concerning the federal, state, local
and any other tax consequences as relates specifically to such investors in
connection with the purchase, ownership and disposition of the Securities.
The federal income tax consequences to holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii)
an election is made to treat the Trust Fund relating to a particular Series
of Securities as a real estate mortgage investment conduit ("REMIC") under
the Internal Revenue Code of 1986, as amended (the "Code"); (iii) the
Securities represent an ownership interest in some or all of the assets
included in the Trust Fund for a Series; or (iv) an election is made to treat
the Trust Fund relating to a particular Series of Certificates as a
partnership. The Prospectus Supplement for each Series of Securities will
specify how the Securities will be treated for federal income tax purposes
and will discuss whether a REMIC election, if any, will be made with respect
to such Series.
TAXATION OF DEBT SECURITIES
Status as Real Property Loans. Except to the extent otherwise provided
in the related Prospectus Supplement, if the Securities are regular interests
in a REMIC ("Regular Interest Securities") or represent interests in a
grantor trust, Tax Counsel is of the opinion that: (i) Securities held by a
domestic building and loan association will constitute "loans... secured by
an interest in real property" within the meaning of Code section
7701(a)(19)(C)(v); and (ii) Securities held by a real estate investment trust
will constitute "real estate assets" within the meaning of Code section
856(c)(5)(A) and interest on Securities will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code section 856(c)(3)(B).
Interest and Acquisition Discount. In the opinion of Tax Counsel,
Regular Interest Securities are generally taxable to holders in the same
manner as evidences of indebtedness issued by the REMIC. Stated interest on
the Regular Interest Securities will be taxable as ordinary income and taken
into account using the accrual method of accounting, regardless of the
holder's normal accounting method. Interest (other than original issue
discount) on Securities (other than Regular Interest Securities) that are
characterized as indebtedness for federal income tax purposes will be
includible in income by holders thereof in accordance with their usual
methods of accounting. Securities characterized as debt for federal income
tax purposes and Regular Interest Securities will be referred to hereinafter
collectively as "Debt Securities."
Tax Counsel is of the opinion that Debt Securities that are Compound
Interest Securities will, and certain of the other Debt Securities issued at
a discount may, be issued with "original issue discount" ("OID"). The
following discussion is based in part on the rules governing OID which are
set forth in Sections 1271-1275 of the Code and the Treasury regulations
issued thereunder on February 2, 1994, as amended on June 11, 1996 (the "OID
Regulations"). A holder should be aware, however, that the OID Regulations
do not adequately address certain issues relevant to prepayable securities,
such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. In the
opinion of Tax Counsel, a holder of a Debt Security must include such OID in
gross income as ordinary interest income as it accrues under a method taking
into account an economic accrual of the discount. In general, OID must be
included in income in advance of the receipt of the cash representing that
income. The amount of OID on a Debt Security will be considered to be zero
if it is less than a de minimis amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than
a substantial amount of a particular class of Debt Securities is sold for
cash on or prior to the Closing Date, the issue price for such class will be
treated as the fair market value of such class on the Closing Date. The
issue price of a Debt Security also includes the amount paid by an initial
Debt Security holder for accrued interest that relates to a period prior to
the issue date of the Debt Security. The stated redemption price at maturity
of a Debt Security includes the original principal amount of the Debt
Security, but generally will not include distributions of interest if such
distributions constitute "qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as
described below) provided that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Debt
Security. The OID Regulations state that interest payments are
unconditionally payable only if a late payment or nonpayment is expected to
be penalized or reasonable remedies exist to compel payment. Certain Debt
Securities may provide for default remedies in the event of late payment or
nonpayment of interest. In the opinion of Tax Counsel, the interest on such
Debt Securities will be unconditionally payable and constitute qualified
stated interest, not OID. However, absent clarification of the OID
Regulations, where Debt Securities do not provide for default remedies, the
interest payments will be included in the Debt Security's stated redemption
price at maturity and taxed as OID. Interest is payable at a single fixed
rate only if the rate appropriately takes into account the length of the
interval between payments. Distributions of interest on Debt Securities with
respect to which deferred interest will accrue, will not constitute qualified
stated interest payments, in which case the stated redemption price at
maturity of such Debt Securities includes all distributions of interest as
well as principal thereon. Where the interval between the issue date and the
first Distribution Date on a Debt Security is either longer or shorter than
the interval between subsequent Distribution Dates, all or part of the
interest foregone, in the case of the longer interval, and all of the
additional interest, in the case of the shorter interval, will be included in
the stated redemption price at maturity and tested under the de minimis
rule described below. In the case of a Debt Security with a long first
period which has non-de minimis OID, all stated interest in excess of
interest payable at the effective interest rate for the long first
period will be included in the stated redemption price at maturity and
the Debt Security will generally have OID. Holders of Debt Securities
should consult their own tax advisors to determine the issue price and
stated redemption price at maturity of a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered to
be zero if such OID is less than 0.25% of the stated redemption price at
maturity of the Debt Security multiplied by the weighted average maturity of
the Debt Security. For this purpose, the weighted average maturity of the
Debt Security is computed as the sum of the amounts determined by multiplying
the number of full years (i.e., rounding down partial years) from the issue
date until each distribution in reduction of stated redemption price at
maturity is scheduled to be made by a fraction, the numerator of which is the
amount of each distribution included in the stated redemption price at
maturity of the Debt Security and the denominator of which is the stated
redemption price at maturity of the Debt Security. Holders generally must
report de minimis OID pro rata as principal payments are received, and such
income will be capital gain if the Debt Security is held as a capital asset.
However, accrual method holders may elect to accrue all de minimis OID as
well as market discount under a constant interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a
qualified variable rate and not as contingent interest if, generally, (i)
such interest is unconditionally payable at least annually, (ii) the issue
price of the debt instrument does not exceed the total noncontingent
principal payments and (iii) interest is based on a "qualified floating
rate," an "objective rate," or a combination of "qualified floating rates"
that do not operate in a manner that significantly accelerates or defers
interest payments on such Debt Security. In the case of Compound Interest
Securities, certain Interest Weighted Securities, and certain of the other
Debt Securities, none of the payments under the instrument will be considered
qualified stated interest, and thus the aggregate amount of all payments will
be included in the stated redemption price.
The Internal Revenue Services (the "IRS") recently issued regulations
(the "Contingent Regulations") governing the calculation of OID on
instruments having contingent interest payments. The Contingent Regulations
represent the only guidance regarding the views of the IRS with respect to
contingent interest instruments and specifically do not apply for purposes of
calculating OID on debt instruments subject to Code Section 1272(a)(6), such
as the Debt Security. Additionally, the OID Regulations do not contain
provisions specifically interpreting Code Section 1272(a)(6). Until the
Treasury issues guidance to the contrary, the Trustee intends to base its
computation on Code Section 1272(a)(6) and the OID Regulations as described
in this Prospectus. However, because no regulatory guidance currently exists
under Code Section 1272(a)(6), there can be no assurance that such
methodology represents the correct manner of calculating OID.
The holder of a Debt Security issued with OID must include in gross
income, for all days during its taxable year on which it holds such Debt
Security, the sum of the "daily portions" of such original issue discount.
The amount of OID includible in income by a holder will be computed by
allocating to each day during a taxable year a pro rata portion of the
original issue discount that accrued during the relevant accrual period. In
the case of a Debt Security that is not a Regular Interest Security and the
principal payments on which are not subject to acceleration resulting from
prepayments on the Loans, the amount of OID includible in income of a holder
for an accrual period (generally the period over which interest accrues on
the debt instrument) will equal the product of the yield to maturity of the
Debt Security and the adjusted issue price of the Debt Security, reduced by
any payments of qualified stated interest. The adjusted issue price is the
sum of its issue price plus prior accruals or OID, reduced by the total
payments made with respect to such Debt Security in all prior periods, other
than qualified stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject
to acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account
the anticipated rate of prepayments assumed in pricing the debt instrument
(the "Prepayment Assumption"). The amount of OID that will accrue during
an accrual period on a Pay-Through Security is the excess (if any) of the sum
of (a) the present value of all payments remaining to be made on the
Pay-Through Security as of the close of the accrual period and (b) the
payments during the accrual period of amounts included in the stated
redemption price of the Pay-Through Security, over the adjusted issue price
of the Pay-Through Security at the beginning of the accrual period. The
present value of the remaining payments is to be determined on the basis of
three factors: (i) the original yield to maturity of the Pay-Through
Security (determined on the basis of compounding at the end of each accrual
period and properly adjusted for the length of the accrual period), (ii)
events which have occurred before the end of the accrual period and (iii) the
assumption that the remaining payments will be made in accordance with the
original Prepayment Assumption. The effect of this method is to increase the
portions of OID required to be included in income by a holder to take into
account prepayments with respect to the Loans at a rate that exceeds the
Prepayment Assumption, and to decrease (but not below zero for any period)
the portions of original issue discount required to be included in income by
a holder of a Pay-Through Security to take into account prepayments with
respect to the Loans at a rate that is slower than the Prepayment Assumption.
Although original issue discount will be reported to holders of Pay-Through
Securities based on the Prepayment Assumption, no representation is made to
holders that Loans will be prepaid at that rate or at any other rate.
The Depositor may adjust the accrual of OID on a Class of Regular
Interest Securities (or other regular interests in a REMIC) in a manner that
it believes to be appropriate, to take account of realized losses on the
Loans, although the OID Regulations do not provide for such adjustments. If
the Internal Revenue Service were to require that OID be accrued without such
adjustments, the rate of accrual of OID for a Class of Regular Interest
Securities could increase.
Certain classes of Regular Interest Securities may represent more than
one class of REMIC regular interests. Unless otherwise provided in the
related Prospectus Supplement, the Trustee intends, based on the OID
Regulations, to calculate OID on such Securities as if, solely for the
purposes of computing OID, the separate regular interests were a single debt
instrument.
A subsequent holder of a Debt Security will also be required to include
OID in gross income, but such a holder who purchases such Debt Security for
an amount that exceeds its adjusted issue price will be entitled (as will an
initial holder who pays more than a Debt Security's issue price) to offset
such OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. In the opinion of Tax Counsel,
holders will be required to report income with respect to the related
Securities under an accrual method without giving effect to delays and
reductions in distributions attributable to a default or delinquency on the
Loans, except possibly to the extent that it can be established that such
amounts are uncollectible. As a result, the amount of income (including OID)
reported by a holder of such a Security in any period could significantly
exceed the amount of cash distributed to such holder in that period. The
holder will eventually be allowed a loss (or will be allowed to report a
lesser amount of income) to the extent that the aggregate amount of
distributions on the Securities is deduced as a result of a Loan default.
However, the timing and character of such losses or reductions in income are
uncertain and, accordingly, holders of Securities should consult their own
tax advisors on this point.
Interest Weighted Securities. It is not clear how income should be
accrued with respect to Regular Interest Securities or Stripped Securities
(as defined under "--Tax Status as a Grantor Trust; General" herein) the
payments on which consist solely or primarily of a specified portion of the
interest payments on qualified mortgages held by the REMIC or on Loans
underlying Pass-Through Securities ("Interest Weighted Securities"). The
Issuer intends to take the position that all of the income derived from an
Interest Weighted Security should be treated as OID and that the amount and
rate of accrual of such OID should be calculated by treating the Interest
Weighted Security as a Compound Interest Security. However, in the case of
Interest Weighted Securities that are entitled to some payments of principal
and that are Regular Interest Securities the Internal Revenue Service could
assert that income derived from an Interest Weighted Security should be
calculated as if the Security were a security purchased at a premium equal to
the excess of the price paid by such holder for such Security over its stated
principal amount, if any. Under this approach, a holder would be entitled to
amortize such premium only if it has in effect an election under Section 171
of the Code with respect to all taxable debt instruments held by such
holder, as described below. Alternatively, the Internal Revenue Service
could assert that an Interest Weighted Security should be taxable under
the rules governing bonds issued with contingent payments. Such
treatment may be more likely in the case of Interest Weighted Securities
that are Stripped Securities as described below. See "--Tax Status as a
Grantor Trust--Discount or Premium on Pass-Through Securities."
Variable Rate Debt Securities. In the opinion of Tax Counsel, in the
case of Debt Securities bearing interest at a rate that varies directly,
according to a fixed formula, with an objective index, it appears that (i)
the yield to maturity of such Debt Securities and (ii) in the case of
Pay-Through Securities, the present value of all payments remaining to be
made on such Debt Securities, should be calculated as if the interest index
remained at its value as of the issue date of such Securities. Because the
proper method of adjusting accruals of OID on a variable rate Debt Security
is uncertain, holders of variable rate Debt Securities should consult their
own tax advisers regarding the appropriate treatment of such Securities for
federal income tax purposes.
Market Discount. In the opinion of Tax Counsel, a purchaser of a
Security may be subject to the market discount rules of Sections 1276-1278 of
the Code. A Holder that acquires a Debt Security with more than a prescribed
de minimis amount of "market discount" (generally, the excess of the
principal amount of the Debt Security over the purchaser's purchase price)
will be required to include accrued market discount in income as ordinary
income in each month, but limited to an amount not exceeding the principal
payments on the Debt Security received in that month and, if the Securities
are sold, the gain realized. Such market discount would accrue in a manner
to be provided in Treasury regulations but, until such regulations are
issued, such market discount would in general accrue either (i) on the basis
of a constant yield (in the case of a Pay-Through Security, taking into
account a prepayment assumption) or (ii) in the ratio of (a) in the case of
Securities (or in the case of a Pass-Through Security, as set forth below,
the Loans underlying such Security) not originally issued with original issue
discount, stated interest payable in the relevant period to total stated
interest remaining to be paid at the beginning of the period or (b) in the
case of Securities (or, in the case of a Pass-Through Security, as described
below, the Loans underlying such Security) originally issued at a discount,
OID in the relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination
date of the Debt Security (or, in the case of a Pass-Through Security, the
Loans), the excess of interest paid or accrued to purchase or carry a
Security (or, in the case of a Pass-Through Security, as described below, the
underlying Loans) with market discount over interest received on such
Security is allowed as a current deduction only to the extent such excess is
greater than the market discount that accrued during the taxable year in
which such interest expense was incurred. In general, the deferred portion
of any interest expense will be deductible when such market discount is
included in income, including upon the sale, disposition, or repayment of the
Security (or in the case of a Pass-Through Security, an underlying Loan). A
holder may elect to include market discount in income currently as it
accrues, on all market discount obligations acquired by such holder during
the taxable year such election is made and thereafter, in which case the
interest deferral rule will not apply.
Premium. In the opinion of Tax Counsel, a holder who purchases a Debt
Security (other than an Interest Weighted Security to the extent described
above) at a cost greater than its stated redemption price at maturity,
generally will be considered to have purchased the Security at a premium,
which it may elect to amortize as an offset to interest income on such
Security (and not as a separate deduction item) on a constant yield method.
The legislative history of the 1986 Act indicates that premium is to be
accrued in the same manner as market discount. Accordingly, it appears that
the accrual of premium on a class of Pay-Through Securities will be
calculated using the prepayment assumption used in pricing such class. If a
holder makes an election to amortize premium on a Debt Security, such
election will apply to all taxable debt instruments (including all REMIC
regular interests and all pass-through certificates representing ownership
interests in a trust holding debt obligations) held by the holder at the
beginning of the taxable year in which the election is made, and to all
taxable debt instruments acquired thereafter by such holder, and will be
irrevocable without the consent of the IRS. Purchasers who pay a premium for
the Securities should consult their tax advisers regarding the election to
amortize premium and the method to be employed.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt Security to elect to accrue all
interest, discount (including de minimis market or original issue discount)
and premium in income as interest, based on a constant yield method for Debt
Securities acquired on or after April 4, 1994. If such an election were to
be made with respect to a Debt Security with market discount, the holder of
the Debt Security would be deemed to have made an election to include in
income currently market discount with respect to all other debt instruments
having market discount that such holder of the Debt Security acquires during
the year of the election or thereafter. Similarly, a holder of a Debt
Security that makes this election for a Debt Security that is acquired at a
premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
holder owns or acquires. The election to accrue interest, discount and
premium on a constant yield method with respect to a Debt Security is
irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
General. In the opinion of Tax Counsel, if a REMIC election is made
with respect to a Series of Securities, then the arrangement by which the
Securities of that Series are issued will be treated as a REMIC as long as
all of the provisions of the applicable Agreement are complied with and the
statutory and regulatory requirements are satisfied. Securities will be
designated as "Regular Interests" or "Residual Interests" in a REMIC, as
specified in the related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if
a REMIC election is made with respect to a Series of Securities, in the
opinion of Tax Counsel (i) Securities held by a domestic building and loan
association will constitute "a regular or a residual interest in a REMIC"
within the meaning of Code Section 7701(a)(19)(C)(xi) (assuming that at least
95% of the REMIC's assets consist of cash, government securities, "loans
secured by an interest in real property," and other types of assets described
in Code Section 7701(a)(19)(C)); and (ii) Securities held by a real estate
investment trust will constitute "real estate assets" within the meaning of
Code Section 856(c)(6)(B), and income with respect to the Securities will be
considered "interest on obligations secured by mortgages on real property or
on interests in real property" within the meaning of Code Section
856(c)(3)(B) (assuming, for both purposes, that at least 95% of the REMIC's
assets are qualifying assets). If less than 95% of the REMIC's assets
consist of assets described in clause (i) or (ii) above, then a Security will
qualify for the tax treatment described in clause (i) or (ii) in the
proportion that such REMIC assets are qualifying assets.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, in the opinion of Tax Counsel, all of the expenses of
a REMIC will be taken into account by holders of the Residual Interest
Securities. In the case of a "single class REMIC," however, the expenses
will be allocated, under Treasury regulations, among the holders of the
Regular Interest Securities and the holders of the Residual Interest
Securities on a daily basis in proportion to the relative amounts of income
accruing to each holder on that day. In the case of a holder of a Regular
Interest Security who is an individual or a "pass-through interest holder"
(including certain pass-through entities but not including real estate
investment trusts), such expenses will be deductible only to the extent that
such expenses, plus other "miscellaneous itemized deductions" of the holder,
exceed 2% of such Holder's adjusted gross income. In addition, for taxable
years beginning after December 31, 1990, the amount of itemized deductions
otherwise allowable for the taxable year for an individual whose adjusted
gross income exceeds the applicable amount (which amount will be adjusted for
inflation for taxable years beginning after 1990) will be reduced by the
lesser of (i) 3% of the excess of adjusted gross income over the applicable
amount, or (ii) 80% of the amount of itemized deductions otherwise allowable
for such taxable year. The reduction or disallowance of this deduction may
have a significant impact on the yield of the Regular Interest Security to
such a holder. In general terms, a single class REMIC is one that either (i)
would qualify, under existing Treasury regulations, as a grantor trust if it
were not a REMIC (treating all interests as ownership interests, even if they
would be classified as debt for federal income tax purposes) or (ii) is
similar to such a trust and which is structured with the principal purpose of
avoiding the single class REMIC rules. Unless otherwise specified in the
related Prospectus Supplement, the expenses of the REMIC will be allocated to
holders of the related residual interest securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, in the opinion of Tax Counsel, a REMIC is not generally subject to
entity-level tax. Rather, the taxable income or net loss of a REMIC is taken
into account by the holders of residual interests. As described above, the
regular interests are generally taxable as debt of the REMIC.
Calculation of REMIC Income. In the opinion of Tax Counsel, the taxable
income or net loss of a REMIC is determined under an accrual method of
accounting and in the same manner as in the case of an individual, with
certain adjustments. In general, the taxable income or net loss will be the
difference between (i) the gross income produced by the REMIC's assets,
including stated interest and any original issue discount or market discount
on loans and other assets, and (ii) deductions, including stated interest and
original issue discount accrued on Regular Interest Securities, amortization
of any premium with respect to Loans, and servicing fees and other expenses
of the REMIC. A holder of a Residual Interest Security that is an individual
or a "pass-through interest holder" (including certain pass-through entities,
but not including real estate investment trusts) will be unable to deduct
servicing fees payable on the loans or other administrative expenses of the
REMIC for a given taxable year, to the extent that such expenses, when
aggregated with such holder's other miscellaneous itemized deductions for
that year, do not exceed two percent of such holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC
should have an initial aggregate tax basis in its assets equal to the
aggregate fair market value of the regular interests and the residual
interests on the Startup Day (generally, the day that the interests are
issued). That aggregate basis will be allocated among the assets of the
REMIC in proportion to their respective fair market values.
The OID provisions of the Code apply to loans of individuals originated
on or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of Pay-Through
Securities accrue original issue discount (i.e., under the constant yield
method taking into account the Prepayment Assumption). The REMIC will deduct
OID on the Regular Interest Securities in the same manner that the holders of
the Regular Interest Securities include such discount in income, but without
regard to the de minimis rules. See "Taxation of Debt Securities" above.
However, a REMIC that acquires loans at a market discount must include such
market discount in income currently, as it accrues, on a constant interest
basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the
life of the loans (taking into account the Prepayment Assumption) on a
constant yield method. Although the law is somewhat unclear regarding
recovery of premium attributable to loans originated on or before such date,
it is possible that such premium may be recovered in proportion to payments
of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be
subject to a 100% tax on any net income derived from a "prohibited
transaction." For this purpose, net income will be calculated without taking
into account any losses from prohibited transactions or any deductions
attributable to any prohibited transaction that resulted in a loss. In
general, prohibited transactions include: (i) subject to limited exceptions,
the sale or other disposition of any qualified mortgage transferred to the
REMIC; (ii) subject to a limited exception, the sale or other disposition of
a cash flow investment; (iii) the receipt of any income from assets not
permitted to be held by the REMIC pursuant to the Code; or (iv) the receipt
of any fees or other compensation for services rendered by the REMIC. It is
anticipated that a REMIC will not engage in any prohibited transactions in
which it would recognize a material amount of net income. In addition,
subject to a number of exceptions, a tax is imposed at the rate of 100% on
amounts contributed to a REMIC after the close of the three-month period
beginning on the Startup Day. The holders of Residual Interest Securities
will generally be responsible for the payment of any such taxes imposed on
the REMIC. To the extent not paid by such holders or otherwise, however,
such taxes will be paid out of the Trust Fund and will be allocated pro
rata to all outstanding classes of Securities of such REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
In the opinion of Tax Counsel, the holder of a Certificate representing
a residual interest (a "Residual Interest Security") will take into account
the "daily portion" of the taxable income or net loss of the REMIC for each
day during the taxable year on which such holder held the Residual Interest
Security. The daily portion is determined by allocating to each day in any
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC for such quarter, and by allocating that amount among the holders (on
such day) of the Residual Interest Securities in proportion to their
respective holdings on such day.
In the opinion of Tax Counsel, the holder of a Residual Interest
Security must report its proportionate share of the taxable income of the
REMIC whether or not it receives cash distributions from the REMIC
attributable to such income or loss. The reporting of taxable income without
corresponding distributions could occur, for example, in certain REMIC issues
in which the loans held by the REMIC were issued or acquired at a discount,
since mortgage prepayments cause recognition of discount income, while the
corresponding portion of the prepayment could be used in whole or in part to
make principal payments on REMIC Regular Interests issued without any
discount or at an insubstantial discount (if this occurs, it is likely that
cash distributions will exceed taxable income in later years). Taxable
income may also be greater in earlier years of certain REMIC issues as a
result of the fact that interest expense deductions, as a percentage of
outstanding principal on REMIC Regular Interest Securities, will typically
increase over time as lower yielding Securities are paid, whereas interest
income with respect to loans will generally remain constant over time as a
percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the
net income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond
or instrument.
Limitation on Losses. In the opinion of Tax Counsel, the amount of the
REMIC's net loss that a holder may take into account currently is limited to
the holder's adjusted basis at the end of the calendar quarter in which such
loss arises. A holder's basis in a Residual Interest Security will initially
equal such holder's purchase price, and will subsequently be increased by the
amount of the REMIC's taxable income allocated to the holder, and decreased
(but not below zero) by the amount of distributions made and the amount of
the REMIC's net loss allocated to the holder. Any disallowed loss may be
carried forward indefinitely, but may be used only to offset income of the
REMIC generated by the same REMIC. The ability of holders of Residual
Interest Securities to deduct net losses may be subject to additional
limitations under the Code, as to which such holders should consult their tax
advisers.
Distributions. In the opinion of Tax Counsel, distributions on a
Residual Interest Security (whether at their scheduled times or as a result
of prepayments) will generally not result in any additional taxable income or
loss to a holder of a Residual Interest Security. If the amount of such
payment exceeds a holder's adjusted basis in the Residual Interest Security,
however, the holder will recognize gain (treated as gain from the sale of the
Residual Interest Security) to the extent of such excess.
Sale or Exchange. In the opinion of Tax Counsel, a holder of a Residual
Interest Security will recognize gain or loss on the sale or exchange of a
Residual Interest Security equal to the difference, if any, between the
amount realized and such holder's adjusted basis in the Residual Interest
Security at the time of such sale or exchange. Except to the extent provided
in regulations, which have not yet been issued, any loss upon disposition of
a Residual Interest Security will be disallowed if the selling holder
acquires any residual interest in a REMIC or similar mortgage pool within six
months before or after such disposition.
Excess Inclusions. In the opinion of Tax Counsel, the portion of the
REMIC taxable income of a holder of a Residual Interest Security consisting
of "excess inclusion" income may not be offset by other deductions or losses,
including net operating losses, on such holder's federal income tax return.
Further, if the holder of a Residual Interest Security is an organization
subject to the tax on unrelated business income imposed by Code Section 511,
such holder's excess inclusion income will be treated as unrelated business
taxable income of such holder. In addition, under Treasury regulations yet
to be issued, if a real estate investment trust, a regulated investment
company, a common trust fund, or certain cooperatives were to own a Residual
Interest Security, a portion of dividends (or other distributions) paid by
the real estate investment trust (or other entity) would be treated as excess
inclusion income. If a Residual Security is owned by a foreign person excess
inclusion income is subject to tax at a rate of 30% which may not be reduced
by treaty, is not eligible for treatment as "portfolio interest" and is
subject to certain additional limitations. See "Tax Treatment of Foreign
Investors." The Small Business Job Protection Act of 1996 has eliminated the
special rule permitting Section 593 institutions ("thrift institutions") to
use net operating losses and other allowable deductions to offset their
excess inclusion income from REMIC residual certificates that have
"significant value" within the meaning of the REMIC Regulations, effective
for taxable years beginning after December 31, 1995, except with respect to
residual certificates continuously held by a thrift institution since
November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect on excess inclusions on the
alternative minimum taxable income of a residual holder. First, alternative
minimum taxable income for such residual holder is determined without regard
to the special rule that taxable income cannot be less than excess
inclusions. Second, a residual holder's alternative minimum taxable income
for a tax year cannot be less than excess inclusions for the year. Third,
the amount of any alternative minimum tax net operating loss deductions must
be computed without regard to any excess inclusions. These rules are
effective for tax years beginning after December 31, 1986, unless a residual
holder elects to have such rules apply only to tax years beginning after
August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to
the excess, if any, of REMIC taxable income for the quarterly period
allocable to a Residual Interest Security, over the daily accruals for such
quarterly period of (i) 120% of the long term applicable federal rate on the
Startup Day multiplied by (ii) the adjusted issue price of such Residual
Interest Security at the beginning of such quarterly period. The adjusted
issue price of a Residual Interest at the beginning of each calendar quarter
will equal its issue price (calculated in a manner analogous to the
determination of the issue price of a Regular Interest), increased by the
aggregate of the daily accruals for prior calendar quarters, and decreased
(but not below zero) by the amount of loss allocated to a holder and the
amount of distributions made on the Residual Interest Security before the
beginning of the quarter. The long-term federal rate, which is announced
monthly by the Treasury Department, is an interest rate that is based on the
average market yield of outstanding marketable obligations of the United
States government having remaining maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities.
As a condition to qualification as a REMIC, reasonable arrangements must be
made to prevent the ownership of a REMIC residual interest by any
"Disqualified Organization." Disqualified Organizations include the United
States, any State or political subdivision thereof, any foreign government,
any international organization, or any agency or instrumentality of any of
the foregoing, a rural electric or telephone cooperative described in Section
1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
Sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income. Accordingly, the applicable Pooling and Servicing
Agreement will prohibit Disqualified Organizations from owning a Residual
Interest Security. In addition, no transfer of a Residual Interest Security
will be permitted unless the proposed transferee shall have furnished to the
Trustee an affidavit representing and warranting that it is neither a
Disqualified Organization nor an agent or nominee acting on behalf of a
Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a
Disqualified Organization holds an interest in a pass-through entity after
March 31, 1988 (including, among others, a partnership, trust, real estate
investment trust, regulated investment company, or any person holding as
nominee), that owns a Residual Interest Security, the pass-through entity
will be required to pay an annual tax on its allocable share of the excess
inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all
Federal tax purposes unless no significant purpose of the transfer was to
impede the assessment or collection of tax. A Residual Interest Security is
a "noneconomic residual interest" unless, at the time of the transfer (i) the
present value of the expected future distributions on the Residual Interest
Security at least equals the product of the present value of the anticipated
excess inclusions and the highest rate of tax for the year in which the
transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which the taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. If a transfer of a Residual
Interest is disregarded, the transferor would be liable for any Federal
income tax imposed upon taxable income derived by the transferee from the
REMIC. The REMIC Regulations provide no guidance as to how to determine if a
significant purpose of a transfer is to impede the assessment or collection
of tax. A similar type of limitation exists with respect to certain
transfers of residual interests by foreign persons to United States persons.
See "--Tax Treatment of Foreign Investors."
Mark to Market Rules. Prospective purchasers of a REMIC Residual
Interest Security should be aware that the IRS recently finalized regulations
(the "Mark-to-Market Regulations") which provide that a REMIC Residual
Interest Security acquired after January 3, 1995 cannot be marked-to-market.
Prospective purchasers of a REMIC Residual Interest Security should consult
their tax advisors regarding the possible application of the Mark to Market
Regulations.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS
in a unified administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
General. As further specified in the related Prospectus Supplement, if
a REMIC election is not made and the Trust Fund is not structured as a
partnership, then, in the opinion of Tax Counsel, the Trust Fund relating to
a Series of Securities will be classified for federal income tax purposes as
a grantor trust under Subpart E, Part 1 of Subchapter J of the Code and not
as an association taxable as a corporation (the Securities of such Series,
"Pass-Through Securities"). In some Series there will be no separation of
the principal and interest payments on the Loans. In such circumstances, a
holder will be considered to have purchased a pro rata undivided interest in
each of the Loans. In other cases ("Stripped Securities"), sale of the
Securities will produce a separation in the ownership of all or a portion of
the principal payments from all or a portion of the interest payments on the
Loans.
In the opinion of Tax Counsel, each holder must report on its federal
income tax return its share of the gross income derived from the Loans (not
reduced by the amount payable as fees to the Trustee and the Servicer and
similar fees (collectively, the "Servicing Fee")), at the same time and in
the same manner as such items would have been reported under the Holder's tax
accounting method had it held its interest in the Loans directly, received
directly its share of the amounts received with respect to the Loans, and
paid directly its share of the Servicing Fees. In the case of Pass-Through
Securities other than Stripped Securities, such income will consist of a pro
rata share of all of the income derived from all of the Loans and, in
the case of Stripped Securities, such income will consist of a pro rata
share of the income derived from each stripped bond or stripped coupon in
which the holder owns an interest. The holder of a Security will
generally be entitled to deduct such Servicing Fees under Section 162 or
Section 212 of the Code to the extent that such Servicing Fees represent
"reasonable" compensation for the services rendered by the Trustee and the
Servicer (or third parties that are compensated for the performance of
services). In the case of a noncorporate holder, however, Servicing
Fees (to the extent not otherwise disallowed, e.g., because they
exceed reasonable compensation) will be deductible in computing such
holder's regular tax liability only to the extent that such fees, when
added to other miscellaneous itemized deductions, exceed 2% of adjusted
gross income and may not be deductible to any extent in computing such
holder's alternative minimum tax liability. In addition, for taxable
years beginning after December 31, 1990, the amount of itemized
deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds the applicable amount (which amount
will be adjusted for inflation in taxable years beginning after 1990) will
be reduced by the lesser of (i) 3% of the excess of adjusted gross
income over the applicable amount or (ii) 80% of the amount of itemized
deductions otherwise allowable for such taxable year.
Discount or Premium on Pass-Through Securities. In the opinion of Tax
Counsel, the holder's purchase price of a Pass-Through Security is to be
allocated among the Loans in proportion to their fair market values,
determined as of the time of purchase of the Securities. In the typical
case, the Trustee (to the extent necessary to fulfill its reporting
obligations) will treat each Loan as having a fair market value proportional
to the share of the aggregate principal balances of all of the Loans that it
represents, since the Securities, unless otherwise specified in the related
Prospectus Supplement, will have a relatively uniform interest rate and other
common characteristics. To the extent that the portion of the purchase price
of a Pass-Through Security allocated to a Loan (other than to a right to
receive any accrued interest thereon and any undistributed principal
payments) is less than or greater than the portion of the principal balance
of the Loan allocable to the Security, the interest in the Loan allocable to
the Pass-Through Security will be deemed to have been acquired at a discount
or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess
of a prescribed de minimis amount or a Stripped Security, a holder of a
Security will be required to report as interest income in each taxable year
its share of the amount of OID that accrues during that year in the manner
described above. OID with respect to a Loan could arise, for example, by
virtue of the financing of points by the originator of the Loan, or by virtue
of the charging of points by the originator of the Loan in an amount greater
than a statutory de minimis exception, in circumstances under which the
points are not currently deductible pursuant to applicable Code provisions.
Any market discount or premium on a Loan will be includible in income,
generally in the manner described above, except that in the case of Pass-
Through Securities, market discount is calculated with respect to the Loans
underlying the Certificate, rather than with respect to the Security. A
holder that acquires an interest in a Loan originated after July 18, 1984
with more than a de minimis amount of market discount (generally, the excess
of the principal amount of the Loan over the purchaser's allocable purchase
price) will be required to include accrued market discount in income in the
manner set forth above. See "--Taxation of Debt Securities; Market Discount"
and "--Premium" above.
In the case of market discount on a Pass-Through Security attributable
to Loans originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of such discount that is allocable to a loan
among the principal payments on the Loan and to include the discount
allocable to each principal payment in ordinary income at the time such
principal payment is made. Such treatment would generally result in discount
being included in income at a slower rate than discount would be required to
be included in income using the method described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to
receive only a portion of the interest payments on the Loans, a right to
receive only principal payments on the Loans, or a right to receive certain
payments of both interest and principal. Certain Stripped Securities ("Ratio
Strip Securities") may represent a right to receive differing percentages of
both the interest and principal on each Loan. Pursuant to Section 1286 of
the Code, the separation of ownership of the right to receive some or all of
the interest payments on an obligation from ownership of the right to receive
some or all of the principal payments results in the creation of "stripped
bonds" with respect to principal payments and "stripped coupons" with
respect to interest payments. Section 1286 of the Code applies the
OID rules to stripped bonds and stripped coupons. For purposes of
computing original issue discount, a stripped bond or a stripped coupon
is treated as a debt instrument issued on the date that such stripped
interest is purchased with an issue price equal to its purchase price or,
if more than one stripped interest is purchased, the ratable share of the
purchase price allocable to such stripped interest.
Servicing fees in excess of reasonable servicing fees ("excess
servicing") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (i.e., 1% interest on the Loan
principal balance) or the Securities are initially sold with a de minimis
discount (assuming no prepayment assumption is required), any non-de minimis
discount arising from a subsequent transfer of the Securities should be
treated as market discount. The IRS appears to require that reasonable
servicing fees be calculated on a Loan by Loan basis, which could result in
some Loans being treated as having more than 100 basis points of interest
stripped off.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and original issue discount rules are to
apply to Stripped Securities and other Pass-Through Securities. Under the
method described above for Pay-Through Securities (the "Cash Flow Bond
Method"), a prepayment assumption is used and periodic recalculations are
made which take into account with respect to each accrual period the effect
of prepayments during such period. However, the 1986 Act does not, absent
Treasury regulations, appear specifically to cover instruments such as the
Stripped Securities which technically represent ownership interests in the
underlying Loans, rather than being debt instruments "secured by" those
loans. Nevertheless, it is believed that the Cash Flow Bond Method is a
reasonable method of reporting income for such Securities, and it is expected
that OID will be reported on that basis unless otherwise specified in the
related Prospectus Supplement. In applying the calculation to Pass-Through
Securities, the Trustee will treat all payments to be received by a holder
with respect to the underlying Loans as payments on a single installment
obligation. The IRS could, however, assert that original issue discount must
be calculated separately for each Loan underlying a Security.
Under certain circumstances, if the Loans prepay at a rate faster than
the Prepayment Assumption, the use of the Cash Flow Bond Method may
accelerate a holder's recognition of income. If, however, the Loans prepay
at a rate slower than the Prepayment Assumption, in some circumstances the
use of this method may decelerate a holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted
Security, the Trustee intends, absent contrary authority, to report income to
Security holders as OID, in the manner described above for Interest Weighted
Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations
of the applicable Code provisions. Among other possibilities, the Internal
Revenue Service could contend that (i) in certain Series, each non-Interest
Weighted Security is composed of an unstripped undivided ownership interest
in Loans and an installment obligation consisting of stripped principal
payments; (ii) the non-Interest Weighted Securities are subject to the
contingent payment provisions of the Proposed Regulations; or (iii) each
Interest Weighted Stripped Security is composed of an unstripped undivided
ownership interest in Loans and an installment obligation consisting of
stripped interest payments.
Given the variety of alternatives for treatment of the Stripped
Securities and the different federal income tax consequences that result from
each alternative, potential purchasers are urged to consult their own tax
advisers regarding the proper treatment of the Securities for federal income
tax purposes.
Character as Qualifying Loans. In the case of Stripped Securities,
there is no specific legal authority existing regarding whether the character
of the Securities, for federal income tax purposes, will be the same as the
Loans. The IRS could take the position that the Loans character is not
carried over to the Securities in such circumstances. Pass-Through
Securities will be, and, although the matter is not free from doubt, Stripped
Securities should be considered to represent "real estate assets" within the
meaning of Section 856(c)(6)(B) of the Code, and "loans secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Code; and interest income attributable to the Securities should be
considered to represent "interest on obligations secured by mortgages on
real property or on interests in real property" within the meaning of
Section 856(c)(3)(B) of the Code. Reserves or funds underlying the
Securities may cause a proportionate reduction in the above-described
qualifying status categories of Securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to Trust Funds as to which
a partnership election is made, in the opinion of Tax Counsel, a holder's tax
basis in its Security is the price such holder pays for a Security, plus
amounts of original issue or market discount included in income and reduced
by any payments received (other than qualified stated interest payments) and
any amortized premium. Gain or loss recognized on a sale, exchange, or
redemption of a Security, measured by the difference between the amount
realized and the Security's basis as so adjusted, will generally be capital
gain or loss, assuming that the Security is held as a capital asset. In the
case of a Security held by a bank, thrift, or similar institution described
in Section 582 of the Code, however, gain or loss realized on the sale or
exchange of a Regular Interest Security will be taxable as ordinary income or
loss. In addition, gain from the disposition of a Regular Interest Security
that might otherwise be capital gain will be treated as ordinary income to
the extent of the excess, if any, of (i) the amount that would have been
includible in the holder's income if the yield on such Regular Interest
Security had equaled 110% of the applicable federal rate as of the beginning
of such holder's holding period, over the amount of ordinary income actually
recognized by the holder with respect to such Regular Interest Security. 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%. The Taxpayer Relief
Act of 1997 reduces the maximum rates on long-term capital gains recognized
on capital assets held by individual taxpayers for more than eighteen months
as of the date of disposition (and would further reduce the maximum rates on
such gains in the year 2001 and thereafter for certain individual taxpayers
who meet specified conditions). Prospective investors should consult their
tax advisors concerning these tax law changes.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. Subject to the discussion below with respect to
Trust Funds as to which a partnership election is made, a holder, other than
a holder of a REMIC Residual Security, may, under certain circumstances, be
subject to "backup withholding" at a rate of 31% with respect to
distributions or the proceeds of a sale of certificates to or through brokers
that represent interest or original issue discount on the Securities. This
withholding generally applies if the holder of a Security (i) fails to
furnish the Trustee with its taxpayer identification number ("TIN"); (ii)
furnishes the Trustee an incorrect TIN; (iii) fails to report properly
interest, dividends or other "reportable payments" as defined in the Code; or
(iv) under certain circumstances, fails to provide the Trustee or such
holder's securities broker with a certified statement, signed under penalty
of perjury, that the TIN provided is its correct number and that the holder
is not subject to backup withholding. Backup withholding will not apply,
however, with respect to certain payments made to holders, including payments
to certain exempt recipients (such as exempt organizations) and to certain
Nonresidents (as defined below). Holders should consult their tax advisers
as to their qualification for exemption from backup withholding and the
procedure for obtaining the exemption.
The Trustee will report to the holders and to the Servicer for each
calendar year the amount of any "reportable payments" during such year and
the amount of tax withheld, if any, with respect to payments on the
Securities.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds as to which
a partnership election is made, under the Code, unless interest (including
OID) paid on a Security (other than a Residual Interest Security) is
considered to be "effectively connected" with a trade or business conducted
in the United States by a nonresident alien individual, foreign partnership
or foreign corporation ("Nonresidents"), in the opinion of Tax Counsel, such
interest will normally qualify as portfolio interest (except where (i) the
recipient is a holder, directly or by attribution, of 10% or more of the
capital or profits interest in the issuer, or (ii) the recipient is a
controlled foreign corporation to which the issuer is a related person) and
will be exempt from federal income tax. Upon receipt of appropriate
ownership statements, the issuer normally will be relieved of obligations to
withhold tax from such interest payments. These provisions supersede the
generally applicable provisions of United States law that would otherwise
require the issuer to withhold at a 30% rate (unless such rate were reduced
or eliminated by an applicable tax treaty) on, among other things, interest
and other fixed or determinable, annual or periodic income paid to
Nonresidents. Holders of Pass-Through Securities and Stripped Securities,
including Ratio Strip Securities, however, may be subject to withholding to
the extent that the Loans were originated on or before July 18, 1984.
Interest and OID of holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the holder. They will, however, generally be subject to the
regular United States income tax.
Payments to holders of Residual Interest Securities who are foreign
persons will generally be treated as interest for purposes of the 30% (or
lower treaty rate) United States withholding tax. Holders should assume that
such income does not qualify for exemption from United States withholding tax
as "portfolio interest." It is clear that, to the extent that a payment
represents a portion of REMIC taxable income that constitutes excess
inclusion income, a holder of a Residual Interest Security will not be
entitled to an exemption from or reduction of the 30% (or lower treaty rate)
withholding tax rule. If the payments are subject to United States
withholding tax, they generally will be taken into account for withholding
tax purposes only when paid or distributed (or when the Residual Interest
Security is disposed of). The Treasury has statutory authority, however, to
promulgate regulations which would require such amounts to be taken into
account at an earlier time in order to prevent the avoidance of tax. Such
regulations could, for example, require withholding prior to the distribution
of cash in the case of Residual Interest Securities that do not have
significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest
Security to a Nonresident will be disregarded for all Federal tax purposes.
A Residual Interest Security has tax avoidance potential unless, at the time
of the transfer the transferor reasonably expects that the REMIC will
distribute to the transferee residual interest holder amounts that will equal
at least 30% of each excess inclusion, and that such amounts will be
distributed at or after the time at which the excess inclusions accrue and
not later than the calendar year following the calendar year of accrual. If
a Nonresident transfers a Residual Interest Security to a United States
person, and if the transfer has the effect of allowing the transferor to
avoid tax on accrued excess inclusions, then the transfer is disregarded and
the transferor continues to be treated as the owner of the Residual Interest
Security for purposes of the withholding tax provisions of the Code. See "--
Excess Inclusions."
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Tax Counsel is of the opinion that a Trust Fund structured as a
partnership will not be an association (or publicly traded partnership)
taxable as a corporation for federal income tax purposes. This opinion is
based on the assumption that the terms of the Trust Agreement and related
documents will be complied with, and on counsel's conclusions that the nature
of the income of the Trust Fund will exempt it from the rule that certain
publicly traded partnerships are taxable as corporations or the issuance of
the Certificates has been structured as a private placement under an IRS safe
harbor, so that the Trust Fund will not be characterized as a publicly traded
partnership taxable as a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, in the opinion of Tax Counsel, the Trust Fund would be subject to
corporate income tax on its taxable income. The Trust Fund's taxable income
would include all its income, possibly reduced by its interest expense on the
Notes. Any such corporate income tax could materially reduce cash available
to make payments on the Notes and distributions on the Certificates, and
Certificateholders could be liable for any such tax that is unpaid by the
Trust Fund.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and
the Noteholders will agree by their purchase of Notes, to treat the Notes as
debt for federal income tax purposes. In such a circumstance, Tax Counsel
is, except as otherwise provided in the related Prospectus Supplement, of the
opinion that the Notes will be classified as debt for federal income tax
purposes. The discussion below assumes this characterization of the Notes is
correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that
the interest formula for the Notes meets the requirements for "qualified
stated interest" under the OID regulations, and that any OID on the Notes
(i.e., any excess of the principal amount of the Notes over their issue
price) does not exceed a de minimis amount (i.e., 0.25% of their principal
amount multiplied by the number of full years included in their term), all
within the meaning of the OID regulations. If these conditions are not
satisfied with respect to any given series of Notes, additional tax
considerations with respect to such Notes will be disclosed in the applicable
Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, in the opinion of Tax Counsel, the
Notes will not be considered issued with OID. The stated interest thereon
will be taxable to a Noteholder as ordinary interest income when received or
accrued in accordance with such Noteholder's method of tax accounting. Under
the OID regulations, a holder of a Note issued with a de minimis amount of
OID must include such OID in income, on a pro rata basis, as principal
payments are made on the Note. It is believed that any prepayment premium
paid as a result of a mandatory redemption will be taxable as contingent
interest when it becomes fixed and unconditionally payable. A purchaser who
buys a Note for more or less than its principal amount will generally be
subject, respectively, to the premium amortization or market discount rules
of the Code.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (a "Short-Term Note") may be subject to
special rules. An accrual basis holder of a Short-Term Note (and certain
cash method holders, including regulated investment companies, as set forth
in Section 1281 of the Code) generally would be required to report interest
income as interest accrues on a straight-line basis over the term of each
interest period. Other cash basis holders of a Short-Term Note would, in
general, be required to report interest income as interest is paid (or, if
earlier, upon the taxable disposition of the Short-Term Note). However, a
cash basis holder of a Short-Term Note reporting interest income as it is
paid may be required to defer a portion of any interest expense otherwise
deductible on indebtedness incurred to purchase or carry the Short-Term Note
until the taxable disposition of the Short-Term Note. A cash basis taxpayer
may elect under Section 1281 of the Code to accrue interest income on all
nongovernment debt obligations with a term of one year or less, in which case
the taxpayer would include interest on the Short-Term Note in income as it
accrues, but would not be subject to the interest expense deferral rule
referred to in the preceding sentence. Certain special rules apply if a
Short-Term Note is purchased for more or less than its principal amount.
Sale or Other Disposition. In the opinion of Tax Counsel, if a
Noteholder sells a Note, the holder will recognize gain or loss in an amount
equal to the difference between the amount realized on the sale and the
holder's adjusted tax basis in the Note. The adjusted tax basis of a Note to
a particular Noteholder will equal the holder's cost for the Note, increased
by any market discount, acquisition discount, OID and gain previously
included by such Noteholder in income with respect to the Note and decreased
by the amount of bond premium (if any) previously amortized and by the amount
of principal payments previously received by such Noteholder with respect to
such Note. Any such gain or loss will be capital gain or loss if the Note
was held as a capital asset, except for gain representing accrued interest
and accrued market discount not previously included in income. Capital
losses generally may be used only to offset capital gains.
Foreign Holders. In the opinion of Tax Counsel, interest payments made
(or accrued) to a Noteholder who is a nonresident alien, foreign corporation
or other non-United States person (a "foreign person") generally will be
considered "portfolio interest", and generally will not be subject to United
States federal income tax and withholding tax, if the interest is not
effectively connected with the conduct of a trade or business within the
United States by the foreign person and the foreign person (i) is not
actually or constructively a "10 percent shareholder" of the Trust or
the Seller (including a holder of 10% of the outstanding Certificates)
or a "controlled foreign corporation" with respect to which the Trust or the
Seller is a "related person" within the meaning of the Code and (ii)
provides the Owner Trustee or other person who is otherwise required to
withhold U.S. tax with respect to the Notes with an appropriate statement
(on Form W-8 or a similar form), signed under penalties of perjury,
certifying that the beneficial owner of the Note is a foreign person and
providing the foreign person's name and address. If a Note is held
through a securities clearing organization or certain other
financial institutions, the organization or institution may provide the
relevant signed statement to the withholding agent; in that case, however,
the signe d 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 i nterest, then it will be subject to United States federal income
and withholding tax at a rate of 30 percent, unless reduced or eliminated
pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days
or more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's
name, address, correct federal taxpayer identification number and a statement
that the holder is not subject to backup withholding. Should a nonexempt
Noteholder fail to provide the required certification, the Trust Fund will be
required to withhold 31 percent of the amount otherwise payable to the
holder, and remit the withheld amount to the IRS as a credit against the
holder's federal income tax liability.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of Tax Counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for federal income tax purposes, the Notes might
be treated as equity interests in the Trust Fund. If so treated, the Trust
Fund might be treated as a publicly traded partnership that would not be
taxable as a corporation because it would meet certain qualifying income
tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including
pension funds) would be "unrelated business taxable income", income to
foreign holders generally would be subject to U.S. tax and U.S. tax return
filing and withholding requirements, and individual holders might be subject
to certain limitations on their ability to deduct their share of the Trust
Fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase
of Certificates, to treat the Trust Fund as a partnership for purposes of
federal and state income tax, franchise tax and any other tax measured in
whole or in part by income, with the assets of the partnership being the
assets held by the Trust Fund, the partners of the partnership being the
Certificateholders, and the Notes being debt of the partnership. However,
the proper characterization of the arrangement involving the Trust Fund, the
Certificates, the Notes, the Trust Fund and the Servicer is not clear because
there is no authority on transactions closely comparable to that contemplated
herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series
of Securities includes a single class of Certificates. If these conditions
are not satisfied with respect to any given Series of Certificates,
additional tax considerations with respect to such Certificates will be
disclosed in the applicable Prospectus Supplement.
Partnership Taxation. If the Trust Fund is a partnership, in the
opinion of Tax Counsel, the Trust Fund will not be subject to federal income
tax. Rather, in the opinion of Tax Counsel, each Certificateholder will be
required to separately take into account such holder's allocated share of
income, gains, losses, deductions and credits of the Trust Fund. The Trust
Fund's income will consist primarily of interest and finance charges earned
on the Loans (including appropriate adjustments for market discount, OID and
bond premium) and any gain upon collection or disposition of Loans. The
Trust Fund's deductions will consist primarily of interest accruing with
respect to the Notes, servicing and other fees, and losses or deductions upon
collection or disposition of Loans.
In the opinion of Tax Counsel, the tax items of a partnership are
allocable to the partners in accordance with the Code, Treasury regulations
and the partnership agreement (here, the Trust Agreement and related
documents). The Trust Agreement will provide, in general, that the
Certificateholders will be allocated taxable income of the Trust Fund for
each month equal to the sum of (i) the interest that accrues on the
Certificates in accordance with their terms for such month, including
interest accruing at the Pass-Through Rate for such month and interest on
amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Loans that corresponds to
any excess of the principal amount of the Certificates over their initial
issue price (iii) prepayment premium payable to the Certificateholders for
such month; and (iv) any other amounts of income payable to the
Certificateholders for such month. Such allocation will be reduced by any
amortization by the Trust Fund of premium on Loans that corresponds to any
excess of the issue price of Certificates over their principal amount. All
remaining taxable income of the Trust Fund will be allocated to the
Depositor. Based on the economic arrangement of the parties, in the opinion
of Tax Counsel, this approach for allocating Trust Fund income should be
permissible under applicable Treasury regulations, although no assurance can
be given that the IRS would not require a greater amount of income to be
allocated to Certificateholders. Moreover, in the opinion of Tax Counsel,
even under the foregoing method of allocation, Certificateholders may be
allocated income equal to the entire Pass-Through Rate plus the other items
described above even though the Trust Fund might not have sufficient cash to
make current cash distributions of such amount. Thus, cash basis holders
will in effect be required to report income from the Certificates on the
accrual basis and Certificateholders may become liable for taxes on Trust
Fund income even if they have not received cash from the Trust Fund to pay
such taxes. In addition, because tax allocations and tax reporting will be
done on a uniform basis for all Certificateholders but Certificateholders may
be purchasing Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns taxable
income that is greater or less than the amount reported to them by the Trust
Fund.
In the opinion of Tax Counsel, all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan
or other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
In the opinion of Tax Counsel, an individual taxpayer's share of
expenses of the Trust Fund (including fees to the Servicer but not interest
expense) would be miscellaneous itemized deductions. Such deductions might
be disallowed to the individual in whole or in part and might result in such
holder being taxed on an amount of income that exceeds the amount of cash
actually distributed to such holder over the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income
and allocations to Certificateholders on an aggregate basis. If the IRS were
to require that such calculations be made separately for each Loan, the Trust
Fund might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued
with OID, and, therefore, the Trust should not have OID income. However, the
purchase price paid by the Trust Fund for the Loans may be greater or less
than the remaining principal balance of the Loans at the time of purchase.
If so, in the opinion of Tax Counsel, the Loan will have been acquired at a
premium or discount, as the case may be. (As indicated above, the Trust Fund
will make this calculation on an aggregate basis, but might be required to
recompute it on a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium,
the Trust Fund will elect to include any such discount in income currently as
it accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. Pursuant to final Treasury regulations issued
May 9, 1997 under section 708 of the Cod a sale or exchange of 500 percent or
more of the capital and profits in the Issuer within a 12-month tax period
would cause a deemed contribution of assets of the Issuer (the "old
partnership") to a new partnership (the "new partnership") in exchange for
interest in the new partnership. Such interests would be deemed distributed
to the partners of the old partnership in liquidation thereof, which would
not constitute a sale or exchange.
Disposition of Certificates. Generally, in the opinion of Tax Counsel,
capital gain or loss will be recognized on a sale of Certificates in an
amount equal to the difference between the amount realized and the seller's
tax basis in the Certificates sold. A Certificateholder's tax basis in a
Certificate will generally equal the holder's cost increased by the holder's
share of Trust Fund income (includible in income) and decreased by any
distributions received with respect to such Certificate. In addition, both
the tax basis in the Certificates and the amount realized on a sale of a
Certificate would include the holder's share of the Notes and other
liabilities of the Trust Fund. A holder acquiring Certificates at different
prices may be required to maintain a single aggregate adjusted tax basis in
such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the
Certificates sold (rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate).
Any gain on the sale of a Certificate attributable to the holder's share
of unrecognized accrued market discount on the Receivables would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other
assets that would give rise to such special reporting requirements. Thus, to
avoid those special reporting requirements, the Trust Fund will elect to
include market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise
to a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the
Certificateholders in proportion to the principal amount of Certificates
owned by them as of the close of the last day of such month. As a result, a
holder purchasing Certificates may be allocated tax items (which will affect
its tax liability and tax basis) attributable to periods before the actual
transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or
losses of the Trust Fund might be reallocated among the Certificateholders.
The Trust Fund's method of allocation between transferors and transferees may
be revised to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder
had. The tax basis of the Trust Fund's assets will not be adjusted to
reflect that higher (or lower) basis unless the Trust Fund were to file an
election under Section 754 of the Code. In order to avoid the administrative
complexities that would be involved in keeping accurate accounting records,
as well as potentially onerous information reporting requirements, the Trust
Fund will not make such election. As a result, Certificateholders might be
allocated a greater or lesser amount of Trust Fund income than would be
appropriate based on their own purchase price for Certificates.
Administrative Matters. The Owner Trustee is required to keep or have
kept complete and accurate books of the Trust Fund. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and
the fiscal year of the Trust will be the calendar year. The Trustee will
file a partnership information return (IRS Form 1065) with the IRS for each
taxable year of the Trust Fund and will report each Certificateholder's
allocable share of items of Trust Fund income and expense to holders and the
IRS on Schedule K-1. The Trust Fund will provide the Schedule K-l
information to nominees that fail to provide the Trust Fund with the
information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Certificates.
Generally, holders must file tax returns that are consistent with the
information return filed by the Trust Fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies .
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust
Fund with a statement containing certain information on the nominee, the
beneficial owners and the Certificates so held. Such information includes
(i) the name, address and taxpayer identification number of the nominee and
(ii) as to each beneficial owner (x) the name, address and identification
number of such person, (y) whether such person is a United States person, a
tax-exempt entity or a foreign government, an international organization, or
any wholly owned agency or instrumentality of either of the foregoing, and
(z) certain information on Certificates that were held, bought or sold on
behalf of such person throughout the year. In addition, brokers and
financial institutions that hold Certificates through a nominee are required
to furnish directly to the Trust Fund information as to themselves and their
ownership of Certificates. A clearing agency registered under Section 17A of
the Exchange Act is not required to furnish any such information statement to
the Trust Fund. The information referred to above for any calendar year must
be furnished to the Trust Fund on or before the following January 31.
Nominees, brokers and financial institutions that fail to provide the Trust
Fund with the information described above may be subject to penalties.
The Depositor will be designated as the tax matters partner in the
related Trust Agreement and, as such, will be responsible for representing
the Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which
the partnership information return is filed. Any adverse determination
following an audit of the return of the Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may
be precluded from separately litigating a proposed adjustment to the items of
the Trust Fund. An adjustment could also result in an audit of a
Certificateholder's returns and adjustments of items not related to the
income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in
the United States for purposes of federal withholding taxes with respect to
non-U.S. persons because there is no clear authority dealing with that issue
under facts substantially similar to those described herein. Although it is
not expected that the Trust Fund would be engaged in a trade or business in
the United States for such purposes, the Trust Fund will withhold as if it
were so engaged in order to protect the Trust Fund from possible adverse
consequences of a failure to withhold. The Trust Fund expects to withhold on
the portion of its taxable income that is allocable to foreign
Certificateholders pursuant to Section 1446 of the Code, as if such income
were effectively connected to a U.S. trade or business, at a rate of 35% for
foreign holders that are taxable as corporations and 39.6% for all other
foreign holders. Subsequent adoption of Treasury regulations or the issuance
of other administrative pronouncements may require the Trust to change its
withholding procedures. In determining a holder's withholding status, the
Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the holder's
certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the
branch profits tax) on its share of the Trust Fund's income. Each foreign
holder must obtain a taxpayer identification number from the IRS and submit
that number to the Trust on Form W-8 in order to assure appropriate crediting
of the taxes withheld. A foreign holder generally would be entitled to file
with the IRS a claim for refund with respect to taxes withheld by the Trust
Fund taking the position that no taxes were due because the Trust Fund was
not engaged in a U.S. trade or business. However, interest payments made (or
accrued) to a Certificateholder who is a foreign person generally will be
considered guaranteed payments to the extent such payments are determined
without regard to the income of the Trust Fund. If these interest payments
are properly characterized as guaranteed payments, then the interest will not
be considered "portfolio interest." As a result, Certificateholders will be
subject to United States federal income tax and withholding tax at a rate of
30 percent, unless reduced or eliminated pursuant to an applicable treaty.
In such case, a foreign holder would only be entitled to claim a refund for
that portion of the taxes in excess of the taxes that should be withheld with
respect to the guaranteed payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding
tax of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain
Material Federal Income Tax Considerations," potential investors should
consider the state and local income tax consequences of the acquisition,
ownership, and disposition of the Securities. State and local income tax law
may differ substantially from the corresponding federal law, and this
discussion does not purport to describe any aspect of the income tax laws of
any state or locality. Therefore, potential investors should consult their
own tax advisors with respect to the various state and local tax consequences
of an investment in the Securities.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the Code,
which apply only to Securities of a Series that are not divided into
subclasses. If Securities are divided into subclasses the related Prospectus
Supplement will contain information concerning considerations relating to
ERISA and the Code that are applicable to such Securities.
ERISA imposes requirements on employee benefit plans (and on certain
other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and
separate accounts in which such plans, accounts or arrangements are invested)
(collectively "Plans") subject to ERISA and on persons who are fiduciaries
with respect to such Plans. Generally, ERISA applies to investments made by
Plans. Among other things, ERISA requires that the assets of Plans be held
in trust and that the trustee, or other duly authorized fiduciary, have
exclusive authority and discretion to manage and control the assets of such
Plans. ERISA also imposes certain duties on persons who are fiduciaries of
Plans. Under ERISA, any person who exercises any authority or control
respecting the management or disposition of the assets of a Plan is
considered to be a fiduciary of such Plan (subject to certain exceptions not
here relevant). Certain employee benefit plans, such as governmental plans
(as defined in ERISA Section 3(32)) and, if no election has been made under
Section 410(d) of the Code, church plans (as defined in ERISA Section 3(33)),
are not subject to ERISA requirements. Accordingly, assets of such plans may
be invested in Securities without regard to the ERISA considerations
described above and below, subject to the provisions of applicable state law.
Any such plan which is qualified and exempt from taxation under Code Sections
401(a) and 501(a), however, is subject to the prohibited transaction rules
set forth in Code Section 503.
On November 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations concerning the definition of what constitutes the
assets of a Plan. (Labor Reg. Section 2510.3-101) Under this regulation,
the underlying assets and properties of corporations, partnerships
and certain other entities in which a Plan makes an "equity" investment
could be deemed for purposes of ERISA to be assets of the investing
Plan in certain circumstances. However, the regulation provides that,
generally, the assets of a corporation or partnership in which a Plan
invests will not be deemed for purposes of ERISA to be assets of such Plan
if the equity interest acquired by the investing Plan is a publicly-
offered security. A publicly-offered security, as defined in the Labor Reg.
Section 2510.3-101, is a security that is widely held, freely transferable
and registered under the Securities Exchange Act of 1934, as amended.
In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA prohibits a broad range of
transactions involving Plan assets and persons ("Parties in Interest") having
certain specified relationships to a Plan and imposes additional prohibitions
where Parties in Interest are fiduciaries with respect to such Plan. Because
the Loans may be deemed Plan assets of each Plan that purchases Securities,
an investment in the Securities by a Plan might be a prohibited transaction
under ERISA Sections 406 and 407 and subject to an excise tax under Code
Section 4975 unless a statutory or administrative exemption applies.
In Prohibited Transaction Exemption 83-1 ("PTE 83-1"), which amended
Prohibited Transaction Exemption 81-7, the DOL exempted from ERISA's
prohibited transaction rules certain transactions relating to the operation
of residential mortgage pool investment trusts and the purchase, sale and
holding of "mortgage pool pass-through certificates" in the initial issuance
of such certificates. PTE 83-1 permits, subject to certain conditions,
transactions which might otherwise be prohibited between Plans and Parties in
Interest with respect to those Plans related to the origination, maintenance
and termination of mortgage pools consisting of mortgage loans secured by
first or second mortgages or deeds of trust on single-family residential
property, and the acquisition and holding of certain mortgage pool pass-
through certificates representing an interest in such mortgage pools by
Plans. If the general conditions (discussed below) of PTE 83-1 are
satisfied, investments by a Plan in Securities that represent interests in a
Pool consisting of Loans ("Single Family Securities") will be exempt from the
prohibitions of ERISA Sections 406(a) and 407 (relating generally to
transactions with Parties in Interest who are not fiduciaries) if the Plan
purchases the Single Family Securities at no more than fair market value and
will be exempt from the prohibitions of ERISA Sections 406(b)(1) and (2)
(relating generally to transactions with fiduciaries) if, in addition, the
purchase is approved by an independent fiduciary, no sales commission is paid
to the pool sponsor, the Plan does not purchase more than 25% of all Single
Family Securities, and at least 50% of all Single Family Securities are
purchased by persons independent of the pool sponsor or pool trustee. PTE
83-1 does not provide an exemption for transactions involving Subordinate
Securities. Accordingly, unless otherwise provided in the related Prospectus
Supplement, no transfer of a Subordinate Security or a Security which is not
a Single Family Security may be made to a Plan.
The discussion in this and the next succeeding paragraph applies only to
Single Family Securities. The Depositor believes that, for purposes of PTE
83-1, the term "mortgage pass-through certificate" would include: (i)
Securities issued in a Series consisting of only a single class of
Securities; and (ii) Securities issued in a Series in which there is only one
class of Trust Securities; provided that the Securities in the case of clause
(i), or the Securities in the case of clause (ii), evidence the beneficial
ownership of both a specified percentage of future interest payments (greater
than 0%) and a specified percentage (greater than 0%) of future principal
payments on the Loans. It is not clear whether a class of Securities that
evidences the beneficial ownership in a Trust Fund divided into Loan groups,
beneficial ownership of a specified percentage of interest payments only or
principal payments only, or a notional amount of either principal or interest
payments, or a class of Securities entitled to receive payments of interest
and principal on the Loans only after payments to other classes or after the
occurrence of certain specified events would be a "mortgage pass-through
certificate" for purposes of PTE 83-1.
PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system
of insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying Securityholders against reductions
in pass-through payments due to property damage or defaults in loan payments
in an amount not less than the greater of one percent of the aggregate
principal balance of all covered pooled mortgage loans or the principal
balance of the largest covered pooled mortgage loan; (ii) the existence of a
pool trustee who is not an affiliate of the pool sponsor; and (iii) a
limitation on the amount of the payment retained by the pool sponsor,
together with other funds inuring to its benefit, to not more than
adequate consideration for selling the mortgage loans plus reasonable
compensation for services provided by the pool sponsor to the Pool. The
Depositor believes that the first general condition referred to above
will be satisfied with respect to the Securities in a Series issued
without a subordination feature, or the Securities only in a Series
issued with a subordination feature, provided that the subordination and
Reserve Account, subordination by shifting of interests, the pool
insurance or other form of credit enhancement described herein
(such subordination, pool insurance or other form of credit enhancement
being the system of insurance or other protection referred to above) with
respect to a Series of Securities is maintained in an amount not less than
the greater of one percent of the aggregate principal balance of the Loans
or the principal balance of the largest Loan. See "Description of the
Securities" herein. In the absence of a ruling that the system of insurance
or other protection with respect to a Series of Securities satisfies the
first general condition referred to above, there can be no assurance that
these features will be so viewed by the DOL. The Trustee will not be
affiliated with the Depositor.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Single Family
Securities must make its own determination as to whether the first and third
general conditions, and the specific conditions described briefly in the
preceding paragraph, of PTE 83-1 have been satisfied, or as to the
availability of any other prohibited transaction exemptions. Each Plan
fiduciary should also determine whether, under the general fiduciary
standards of investment prudence and diversification, an investment in the
Securities is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
On September 6, 1990 the DOL issued to Greenwich Capital Markets, Inc.,
an individual exemption (Prohibited Transaction Exemption 90-59; Exemption
Application No. D-8374, 55 Fed. Reg. 36724) (the "Underwriter Exemption")
which applies to certain sales and servicing of "certificates" that are
obligations of a "trust" with respect to which Greenwich Capital Markets,
Inc. is the underwriter, manager or co-manager of an underwriting syndicate.
The Underwriter Exemption provides relief which is generally similar to that
provided by PTE 83-1, but is broader in several respects.
The Underwriter Exemption contains several requirements, some of which
differ from those in PTE 83-l. The Underwriter Exemption contains an
expanded definition of "certificate" which includes an interest which
entitles the holder to pass-through payments of principal, interest and/or
other payments. The Underwriter Exemption contains an expanded definition of
"trust" which permits the trust corpus to consist of secured consumer
receivables. The definition of "trust", however, does not include any
investment pool unless, inter alia, (i) the investment pool consists only of
assets of the type which have been included in other investment pools, (ii)
certificates evidencing interests in such other investment pools have been
purchased by investors other than Plans for at least one year prior to the
Plan's acquisition of certificates pursuant to the Underwriter Exemption, and
(iii) certificates in such other investment pools have been rated in one of
the three highest generic rating categories of the four credit rating
agencies noted below. Generally, the Underwriter Exemption holds that the
acquisition of the certificates by a Plan must be on terms (including the
price for the certificates) that are at least as favorable to the Plan as
they would be in an arm's length transaction with an unrelated party. The
Underwriter Exemption requires that the rights and interests evidenced by the
certificates not be "subordinated" to the rights and interests evidenced by
other certificates of the same trust. The Underwriter Exemption requires
that certificates acquired by a Plan have received a rating at the time of
their acquisition that is in one of the three highest generic rating
categories of Standard & Poor's Corporation, Moody's Investors Service, Inc.,
Duff & Phelps Inc. or Fitch Investors Service, Inc. The Underwriter
Exemption specifies that the pool trustee must not be an affiliate of the
pool sponsor, nor an affiliate of the Underwriter, the pool servicer, any
obligor with respect to mortgage loans included in the trust constituting
more than five percent of the aggregate unamortized principal balance of the
assets in the trust, or any affiliate of such entities. Finally, the
Underwriter Exemption stipulates that any Plan investing in the certificates
must be an "accredited investor" as defined in Rule 501(a)(1) of Regulation D
of the Securities and Exchange Commission under the Securities Act of 1933.
Any Plan fiduciary which proposes to cause a Plan to purchase Securities
should consult with their counsel concerning the impact of ERISA and the
Code, the applicability of PTE 83-1 and the Underwriter Exemption, and the
potential consequences in their specific circumstances, prior to making such
investment. Moreover, each Plan fiduciary should determine whether under
the general fiduciary standards of investment procedure and diversification
an investment in the Securities is appropriate for the Plan, taking into
account the overall investment policy of the Plan and the composition of
the Plan's investment portfolio.
LEGAL INVESTMENT
The Prospectus Supplement for each series of Securities will specify
which, if any, of the classes of Securities offered thereby constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Classes of Securities that qualify as
"mortgage related securities" will be legal investments for persons, trusts,
corporations, partnerships, associations, business trusts, and business
entities (including depository institutions, life insurance companies and
pension funds) created pursuant to or existing under the laws of the United
States or of any state (including the District of Columbia and Puerto Rico)
whose authorized investments are subject to state regulations to the same
extent as, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any such entities. Under
SMMEA, if a state enacted legislation prior to October 4, 1991 specifically
limiting the legal investment authority of any such entities with respect to
"mortgage related securities", securities will constitute legal investments
for entities subject to such legislation only to the extent provided therein.
Approximately twenty-one states adopted such legislation prior to the October
4, 1991 deadline. SMMEA provides, however, that in no event will the
enactment of any such legislation affect the validity of any contractual
commitment to purchase, hold or invest in securities, or require the sale or
other disposition of securities, so long as such contractual commitment was
made or such securities were acquired prior to the enactment of such
legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in Securities
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase certificates for their own account without regard to the
limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the
applicable federal authority may prescribe. In this connection, federal
credit unions should review the National Credit Union Administration ("NCUA")
Letter to Credit Unions No. 96, as modified by Letter to Credit Unions No.
108, which includes guidelines to assist federal credit unions in making
investment decisions for mortgage related securities and the NCUA's
regulation "Investment and Deposit Activities" (12 C.F.R. Part 703), which
sets forth certain restrictions on investment by federal credit unions in
mortgage related securities.
All depository institutions considering an investment in the Securities
(whether or not the class of Securities under consideration for purchase
constitutes a "mortgage related security") should review the Federal
Financial Institutions Examination Council's Supervisory Policy Statement on
the Securities Activities (to the extent adopted by their respective
regulators) (the "Policy Statement") setting forth, in relevant part, certain
securities trading and sales practices deemed unsuitable for an institution's
investment portfolio, and guidelines for (and restrictions on) investing in
mortgage derivative products, including "mortgage related securities", which
are "high-risk mortgage securities" as defined in the Policy Statement.
According to the Policy Statement such "high-risk mortgage securities"
include securities such as Securities not entitled to distributions allocated
to principal or interest, or Subordinated Securities. Under the Policy
Statement, it is the responsibility of each depository institution to
determine, prior to purchase (and at stated intervals thereafter), whether a
particular mortgage derivative product is a "high-risk mortgage security",
and whether the purchase (or retention) of such a product would be consistent
with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to "prudent investor" provisions which may restrict or prohibit
investment in securities which are not "interest bearing" or "income paying".
There may be other restrictions on the ability of certain investors,
including depositors institutions, either to purchase Securities or to
purchase Securities representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Securities constitute legal
investments for such investors.
METHOD OF DISTRIBUTION
The Securities offered hereby and by the Prospectus Supplement will be
offered in Series. The distribution of the Securities may be effected from
time to time in one or more transactions, including negotiated transactions,
at a fixed public offering price or at varying prices to be determined at the
time of sale or at the time of commitment therefor. If so specified in the
related Prospectus Supplement, the Securities will be distributed in a firm
commitment underwriting, subject to the terms and conditions of the
underwriting agreement, by Greenwich Capital Markets, Inc. ("GCM") acting as
underwriter with other underwriters, if any, named therein. In such event,
the related Prospectus Supplement may also specify that the underwriters will
not be obligated to pay for any Securities agreed to be purchased by
purchasers pursuant to purchase agreements acceptable to the Depositor. In
connection with the sale of the Securities, underwriters may receive
compensation from the Depositor or from purchasers of the Securities in the
form of discounts, concessions or commissions. The related Prospectus
Supplement will describe any such compensation paid by the Depositor.
Alternatively, the related Prospectus Supplement may specify that the
Securities will be distributed by GCM acting as agent or in some cases as
principal with respect to Securities that it has previously purchased or
agreed to purchase. If GCM acts as agent in the sale of Securities, GCM will
receive a selling commission with respect to each Series of Securities,
depending on market conditions, expressed as a percentage of the aggregate
principal balance of the related Trust Fund Assets as of the Cut-off Date.
The exact percentage for each Series of Securities will be disclosed in the
related Prospectus Supplement. To the extent that GCM elects to purchase
Securities as principal, GCM may realize losses or profits based upon the
difference between its purchase price and the sales price. The Prospectus
Supplement with respect to any Series offered other than through underwriters
will contain information regarding the nature of such offering and any
agreements to be entered into between the Depositor and purchasers of
Securities of such Series.
The Depositor will indemnify GCM and any underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933, or
will contribute to payments GCM and any underwriters may be required to make
in respect thereof.
In the ordinary course of business, GCM and the Depositor may engage in
various securities and financing transactions, including repurchase
agreements to provide interim financing of the Depositor's loans or private
asset backed securities, pending the sale of such loans or private asset
backed securities, or interests therein, including the Securities.
The Depositor anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Securities. Holders of Securities should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
LEGAL MATTERS
The legality of the Securities of each Series, including certain
material federal income tax consequences with respect thereto, will be passed
upon for the Depositor by Brown & Wood LLP, New York, New York 10048.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Securities and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related Series of
Securities. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of the Securities of each Series
offered hereby and by the Prospectus Supplement that they shall have been
rated in one of the four highest rating categories by the nationally
recognized statistical rating agency or agencies (each, a "Rating Agency")
specified in the related Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of
the value of the Trust Fund Assets and any credit enhancement with respect to
such class and will reflect such Rating Agency's assessment solely of the
likelihood that holders of a class of Securities of such class will receive
payments to which such Securityholders are entitled under the related
Agreement. Such rating will not constitute an assessment of the likelihood
that principal prepayments on the related Loans will be made, the degree to
which the rate of such prepayments might differ from that originally
anticipated or the likelihood of early optional termination of the Series of
Securities. Such rating should not be deemed a recommendation to purchase,
hold or sell Securities, inasmuch as it does not address market price or
suitability for a particular investor. Such rating will not address the
possibility that prepayment at higher or lower rates than anticipated by an
investor may cause such investor to experience a lower than anticipated yield
or that an investor purchasing a Security at a significant premium might fail
to recoup its initial investment under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect
for any given period of time or that it may not be lowered or withdrawn
entirely by the Rating Agency in the future if in its judgment circumstances
in the future so warrant. In addition to being lowered or withdrawn due to
any erosion in the adequacy of the value of the Trust Fund Assets or any
credit enhancement with respect to a Series, such rating might also be
lowered or withdrawn among other reasons, because of an adverse change in the
financial or other condition of a credit enhancement provider or a change in
the rating of such credit enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a Series of Securities will be determined on the basis of
criteria established by each Rating Agency rating classes of such Series.
Such criteria are sometimes based upon an actuarial analysis of the behavior
of mortgage loans in a larger group. Such analysis is often the basis upon
which each Rating Agency determines the amount of credit enhancement required
with respect to each such class. There can be no assurance that the
historical data supporting any such actuarial analysis will accurately
reflect future experience nor any assurance that the data derived from a
large pool of mortgage loans accurately predicts the delinquency, foreclosure
or loss experience of any particular pool of Loans. No assurance can be
given that values of any Properties have remained or will remain at their
levels on the respective dates of origination of the related Loans. If the
residential real estate markets should experience an overall decline in
property values such that the outstanding principal balances of the Loans in
a particular Trust Fund and any secondary financing on the related Properties
become equal to or greater than the value of the Properties, the rates of
delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. In additional,
adverse economic conditions (which may or may not affect real property
values) may affect the timely payment by mortgagors of scheduled payments of
principal and interest on the Loans and, accordingly, the rates of
delinquencies, foreclosures and losses with respect to any Trust Fund. To
the extent that such losses are not covered by credit enhancement, such
losses will be borne, at least in part, by the holders of one or more classes
of the Securities of the related Series.
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN NEW CENTURY HOME
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY EQUITY LOAN TRUST
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS SERIES 1997-NC6
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
DEPOSITOR OR THE UNDERWRITERS. THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN
OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH
THEY RELATE OR AN OFFER TO SELL, OR A SOLICITATION FINANCIAL ASSET SECURITIES CORP.
OF AN OFFER TO BUY, TO ANY PERSON IN ANY (DEPOSITOR)
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION
WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS ---------------------------
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY PROSPECTUS SUPPLEMENT
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY ---------------------------
TIME SUBSEQUENT TO THEIR RESPECTIVE DATES.
_________________ GREENWICH CAPITAL MARKETS, INC.
TABLE OF CONTENTS ---------------------------
PAGE
December 11, 1997
PROSPECTUS SUPPLEMENT
Incorporation of Certain Documents
by Reference . . . . . . . . . . . . . ii
Summary of Terms . . . . . . . . . . . S-1
Risk Factors . . . . . . . . . . . . . S-10
New Century's Portfolio of
Mortgage Loans. . . . . . . . . . . . S-17
The Trust Fund . . . . . . . . . . . . S-20
The Pooling and Servicing Agreement . . S-30
Description of the Certificates . . . . S-37
The Certificate Insurer . . . . . . . . S-66
Use of Proceeds . . . . . . . . . . . . S-66
Certain Material Federal Income
Tax Consequences. . . . . . . . . . . S-66
State Taxes . . . . . . . . . . . . . . S-69
ERISA Considerations . . . . . . . . . S-69
Legal Investment Considerations . . . . S-72
Method of Distribution . . . . . . . . S-73
Legal Matters . . . . . . . . . . . . . S-73
Ratings . . . . . . . . . . . . . . . . S-73
Index of Defined Terms . . . . . . . . S-75
PROSPECTUS
Prospectus Supplement or Current Report
on Form 8-K . . . . . . . . . . . . . . . . 2
Incorporation of Certain Documents
by Reference. . . . . . . . . . . . . . . . 2
Available Information . . . . . . . . . . . . 2
Reports to Securityholders. . . . . . . . . . 3
Summary of Terms. . . . . . . . . . . . . . . 4
Risk Factors . . . . . . . . . . . . . . . . 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 . . . . . 40
The Agreements. . . . . . . . . . . . . . . . 42
Certain Legal Aspects of the Loans. . . . . . 55
Certain Material Federal Income
Tax Considerations. . . . . . . . . . . . . 67
State Tax Considerations. . . . . . . . . . . 86
ERISA Considerations. . . . . . . . . . . . . 86
Legal Investment. . . . . . . . . . . . . . . 89
Method of Distribution. . . . . . . . . . . . 90
Legal Matters . . . . . . . . . . . . . . . . 90
Financial Information . . . . . . . . . . . . 91
Rating. . . . . . . . . . . . . . . . . . . . 91
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