PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 17, 1998)
$161,400,329
OCWEN MORTGAGE LOAN ASSET BACKED
OCWEN CERTIFICATES, SERIES 1998-OFS1
(LOGO)
$125,489,000 Class A Variable Pass-Through Rate
$ 13,719,000 Class M-1 Variable Pass-Through Rate
$ 11,701,000 Class M-2 Variable Pass-Through Rate
$ 10,491,329 Class B Variable Pass-Through Rate
Distributions payable on the 25th day of each month, commencing in April 1998
FINANCIAL ASSET SECURITIES CORP.
Depositor
_________________________
LMAC, INC.
Seller
_________________________
OCWEN FINANCIAL SERVICES, INC.
Master Servicer
_________________________
The Ocwen Mortgage Loan Asset Backed Certificates, Series 1998-OFS1
(collectively, the "Certificates") consist of (i) the Class A Certificates
(the "Senior Certificates"), (ii) the Class M-1 Certificates and the Class
M-2 Certificates (collectively, the "Mezzanine Certificates"), (iii) the
Class B Certificates (the "Subordinate Certificates" and, together with the
Senior Certificates and the Mezzanine Certificates, the "Offered
Certificates"), (iv) the Class OC Certificates and (v) the Class R
Certificates (the "Residual Certificates"). Only the Offered Certificates
are offered hereby.
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 next succeeding
business day, beginning in April 1998 (each, a "Distribution Date"). As
described more fully herein, interest payable with respect to each
Distribution Date will accrue on the Offered Certificates during the period
commencing on the immediately preceding Distribution Date (or, in the case of
the first period, commencing on the Closing Date) and ending on the day
preceding the current Distribution Date. Interest will be calculated on the
basis of a 360-day year and the actual number of days in the applicable
Accrual Period, will be based on the then outstanding Certificate Principle
Balance of the related Class and the then applicable Pass-Through Rate
thereon.
(cover continued on next page)
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
OFFERED CERTIFICATES, SEE THE INFORMATION UNDER "RISK FACTORS" BEGINNING ON
PAGE S-10 HEREIN AND IN THE PROSPECTUS BEGINNING ON PAGE 11.
___________________________
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON
THE OFFERED CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT INTERESTS IN OR
OBLIGATIONS OF THE DEPOSITOR, SELLER, MASTER SERVICER, TRUSTEE OR ANY
AFFILIATE THEREOF, EXCEPT TO THE EXTENT PROVIDED HEREIN. NEITHER THE
MORTGAGE LOANS NOR THE CERTIFICATES ARE INSURED OR GUARANTEED BY ANY GOVERN-
MENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Price to Public Underwriting Discount Proceeds to Depositor(1)
Class A Certificates . . . . . 100.0000% 0.1575% 99.8425%
Class M-1 Certificates . . . . 100.0000% 0.3500% 99.6500%
Class M-2 Certificates . . . . 100.0000% 0.4500% 99.5500%
Class B Certificates . . . . . 100.0000% 1.0000% 99.0000%
Total . . . . . . . . . . . . . $161,400,329 $403,229 $160,997,100
</TABLE>
(1) Before deducting expenses, estimated to be $400,000.
__________________________
The Offered Certificates are offered by Greenwich Capital Markets, Inc.
(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 through the facilities of The Depository Trust
Company, Cedel Bank, societe anonyme, and the Euroclear System on or about
March 18, 1998 (the "Closing Date").
__________________________
(GREENWICH LOGO)
March 17, 1998
THE YIELDS TO MATURITY OF THE OFFERED CERTIFICATES MAY VARY FROM THE
ANTICIPATED YIELDS TO THE EXTENT ANY SUCH CERTIFICATES ARE PURCHASED AT A
DISCOUNT OR PREMIUM AND TO THE EXTENT THE RATE AND TIMING OF PAYMENTS THEREON
ARE SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING
PREPAYMENTS) OF THE MORTGAGE LOANS. THE YIELD TO INVESTORS ON THE OFFERED
CERTIFICATES WILL ALSO BE SENSITIVE TO, 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 ANY
OFFERED CERTIFICATES PURCHASED AT A DISCOUNT, THE RISK THAT A LOWER THAN
ANTICIPATED RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT
IS LOWER THAN THE ANTICIPATED YIELD AND, IN THE CASE OF ANY OFFERED
CERTIFICATES PURCHASED AT A PREMIUM, THE RISK THAT A FASTER THAN ANTICIPATED
RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN
THE ANTICIPATED YIELD. SEE "RISK FACTORS--YIELD, PREPAYMENT AND MATURITY
CONSIDERATIONS" HEREIN.
The Certificates represent in the aggregate the entire beneficial
ownership interest in a Trust Fund (the "Trust Fund") consisting primarily of
a segregated pool (the "Mortgage Pool") of conventional, one- to four-family,
first lien mortgage loans having original terms to maturity ranging from 15
years to 30 years (the "Mortgage Loans"). The Mortgage Loans were originated
or acquired by Ocwen Financial Services, Inc. (the "Originator"), a
subsidiary of Ocwen Financial Corporation, in the ordinary course of its
business. LMAC, Inc. (the "Seller"), a wholly-owned finance subsidiary of
Ocwen Financial Services, Inc., will acquire the Mortgage Loans from the
Originator in a transaction contemporaneous with the transfer of the Mortgage
Loans from the Seller to the Depositor. The Depositor will acquire the
Mortgage Loans from the Seller pursuant to a Mortgage Loan Purchase
Agreement, dated as of March 1, 1998 (the "Purchase Agreement"), between the
Depositor and the Seller. The Trust Fund will be created pursuant to a
Pooling and Servicing Agreement, dated as of March 1, 1998 (the "Pooling and
Servicing Agreement"), among the Depositor, Ocwen Financial Services, Inc.,
as Master Servicer, LMAC, Inc., as Seller, and Norwest Bank Minnesota,
National Association, as Trustee. The Mortgage Pool consists of fixed-rate
Mortgage Loans ("Fixed Rate Mortgage Loans") having an aggregate principal
balance as of March 1, 1998 (the "Cut-off Date"), after application of
scheduled payments due on or prior to the Cut-off Date, whether or not
received, of approximately $19,968,089.03, and adjustable-rate Mortgage Loans
("Adjustable Rate Mortgage Loans") having an aggregate principal balance as
of the Cut-off Date, after application of scheduled payments due on or prior
to the Cut-off Date whether or not received, of approximately
$141,432,240.87, in each case subject to a permitted variance as described
herein under "The Mortgage Pool." Each Adjustable Rate Mortgage Loan provides
for semiannual adjustment to the Loan Rate thereon based on six-month London
interbank offered rates for United States dollar deposits (the "Index") and
for corresponding adjustments to the monthly payment amount due thereon, in
each case subject to the limitations described herein; provided that in the
case of 12.17% of the Adjustable Rate Mortgage Loans, the first adjustment
for such Mortgage Loan will occur after an initial period of one year
following origination, in the case of 71.50% of the Adjustable Rate Mortgage
Loans, two years following origination, in the case of 1.23% of the
Adjustable Rate Mortgage Loans, three years following origination, and in the
case of 0.81% of the Adjustable Rate Mortgage Loans, five years following
origination, each by aggregate principal balance of the Adjustable Rate
Mortgage Loans as of the Cut-off Date.
The interests of the owners of the Offered Certificates will initially
be represented by book-entries on the records of The Depository Trust Company
(the "Depository"), Cedel Bank, societe anonyme, and the Euroclear System and
participating members thereof. No person acquiring a beneficial interest in
such a Certificate will be entitled to receive a physical certificate
representing such Certificate, except in the limited circumstances described
herein. See "Description of the Certificates--Book-Entry Certificates"
herein.
For federal income tax purposes, the Trust Fund will include multiple
segregated asset pools, with respect to which elections will be made to treat
each as a "real estate mortgage investment conduit" (a "REMIC"). As
described more fully herein and in the Prospectus, the Offered Certificates
and the Class OC Certificates, which are not offered hereby, will constitute
beneficial ownership of the "regular interests" in the Master REMIC. The
Class R Certificates will constitute the beneficial ownership of the
"residual interests" in the Master REMIC and each Subsidiary REMIC. See
"Certain Material Federal Income Tax Consequences" herein and "Certain
Material Federal Income Tax Considerations" in the Prospectus.
Greenwich Capital Markets, Inc. (the "Underwriter") intends to make a
secondary market in the Offered Certificates but has no obligation to do so.
There is currently no secondary market for the Offered Certificates and there
can be no assurance that such a market will develop or, if it does develop,
that it will continue.
Certain persons participating in this offering may engage in
transactions that stabilize, maintain, or otherwise affect the price of the
Offered Certificates. Such transactions may include stabilizing and the
purchase of Offered Certificates to cover syndicate short positions. For a
description of these activities, see "Method of Distribution" herein.
This Prospectus Supplement does not contain complete information about
the offering of the Offered Certificates. Additional information is contained
in the Prospectus dated March 17, 1998 (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 yield of, the
Offered Certificates, which risks and uncertainties are discussed under "Risk
Factors" and "Yield, Prepayment and Maturity Considerations." As a
consequence, no assurance can be given as to the actual 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 to John P. Graham, Vice President, Financial Asset Securities Corp.,
in writing, at 600 Steamboat Road, Greenwich, Connecticut 06830.
SUMMARY OF TERMS
This Summary of Terms is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms used in this Summary
of Terms are defined elsewhere in this Prospectus Supplement or in the
Prospectus.
Trust Fund. . . . . . Ocwen Mortgage Loan Trust 1998-OFS1 (the "Trust
Fund") will be formed pursuant to a pooling and
servicing agreement (the "Pooling and Servicing
Agreement") to be dated as of March 1, 1998 (the
"Cut-off Date") among Financial Assets Securities
Corp., as depositor (the "Depositor"), Ocwen
Financial Services, Inc., as master servicer (the
"Master Servicer"), Ocwen Federal Bank FSB, as
special servicer (the "Special Servicer"), LMAC,
Inc., as seller (the "Seller"), and Norwest Bank
Minnesota, National Association, as trustee (the
"Trustee"). The property of the Trust Fund will
include: a pool of closed-end fixed and adjustable
rate mortgage loans (the "Mortgage Loans"), secured
by first deeds of trust or mortgages on residential
properties that are primarily one- to four-family
properties (the "Mortgaged Properties"); payments in
respect of the Mortgage Loans due after the Cut-off
Date; property that secured a Mortgage Loan which
has been acquired by foreclosure or deed in lieu of
foreclosure; an assignment of the Depositor's rights
under the Purchase Agreement; rights under certain
hazard insurance policies covering the Mortgaged
Properties; and certain other property, as described
more fully herein.
The Trust property initially will include the
scheduled principal balance of each Mortgage Loan as
of the Cut-off Date after the application of
scheduled payments due on or prior to the Cut-off
Date, whether or not received. With respect to any
date, the "Pool Principal Balance" will be equal to
the aggregate of the Principal Balances of all
Mortgage Loans as of such date. The "Cut-off Date
Principal Balance" with respect to each Mortgage
Loan is the unpaid principal balance thereof as of
the Cut-off Date after the application of scheduled
payments due on or prior to the Cut-off Date,
whether or not received. The "Principal Balance" of
a Mortgage Loan (other than a Liquidated Mortgage
Loan (as defined herein)) on any day is equal to its
Cut-off Date Principal Balance minus all collections
or advances in respect of delinquent scheduled
payments applied in reduction of the Cut-off Date
Principal Balance of such Mortgage Loan. The
Principal Balance of a Liquidated Mortgage Loan
after the Due Period in which such Mortgage Loan
becomes a Liquidated Mortgage Loan shall be zero.
Title of Certificates. Ocwen Mortgage Loan Asset Backed Certificates,
Series 1998-OFS1 (the "Certificates"), consisting of
(i) the Class A Certificates (the "Senior
Certificates"), (ii) the Class M-1 and Class M-2
Certificates (collectively, the "Mezzanine
Certificates"), (iii) the Class B Certificates (the
"Subordinate Certificates" and, together with the
Senior Certificates and the Mezzanine Certificates,
the "Offered Certificates"), (iv) the Class OC
Certificates and (v) the Class R Certificates (the
"Residual Certificates"). The Senior Certificates,
the Mezzanine Certificates and the Subordinate
Certificates are collectively referred to herein as
the "Offered Certificates." Only the Offered
Certificates are offered hereby.
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 on the
cover page hereof.
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 the
Underwriter. See "The Depositor" in the Prospectus
and "Method of Distribution" herein. None of the
Depositor, National Westminster Bank plc or any of
their respective affiliates or any other person or
entity will insure or guarantee or otherwise be
obligated with respect to the Certificates.
Seller. . . . . . . . LMAC, Inc. (the "Seller"), a wholly-owned, limited
purpose finance subsidiary of Ocwen Financial
Services, Inc. Ocwen Financial Services, Inc. is a
subsidiary of Ocwen Financial Corporation. The
Seller's corporate headquarters are located at 1675
Palm Beach Lakes Boulevard, West Palm Beach, Florida
33401 and its telephone number is (561) 681-8000.
Master Servicer. . . Ocwen Financial Services, Inc. (the "Master
Servicer"), a Florida corporation and a subsidiary
of Ocwen Financial Corporation. The Master
Servicer's corporate headquarters are located at
1675 Palm Beach Lakes Boulevard, West Palm Beach,
Florida 33401 and its telephone number is (561)
681-8000. See "The Master Servicer" herein.
Subservicer and
Special Servicer. . Ocwen Federal Bank FSB, a federally chartered
savings bank. The Subservicer and Special Servicer
is an affiliate of the Seller. See "Ocwen Federal
Bank FSB" herein.
Trustee. . . . . . . Norwest Bank Minnesota, National Association, a
national banking association, will act as trustee
(the "Trustee").
Cut-off Date. . . . . March 1, 1998.
Closing Date. . . . . On or about March 18, 1998.
The Mortgage Loans. . The Mortgage Loans have original terms to maturity
ranging from 15 years to 30 years. The Mortgage
Pool consists of fixed-rate Mortgage Loans (the
"Fixed Rate Mortgage Loans") and adjustable-rate
Mortgage Loans (the "Adjustable Rate Mortgage
Loans"). Approximately 244 of the Mortgage Loans
are Fixed Rate Mortgage Loans having an aggregate
principal balance as of the Cut-off Date, after
application of scheduled payments due on or prior to
the Cut-off Date whether or not received, of
approximately $19,968,089.03. Six of the Fixed Rate
Mortgage Loans, comprising approximately 4.37% of
the Fixed Rate Mortgage Loans by aggregate principal
balance of the Fixed Rate Mortgage Loans as of the
Cut-off Date, are Balloon Loans (as defined herein).
The Fixed Rate Mortgage Loans have annualized rates
at which such Mortgage Loans bear interest ("Loan
Rates") that are fixed and range from 7.50% per
annum to 15.99% per annum with a weighted average
Loan Rate as of the Cut-off Date of approximately
10.709% per annum. As of the Cut-off Date, the
Fixed Rate Mortgage Loans will have a weighted
average remaining term to maturity of approximately
329 months. Approximately 1,195 of the Mortgage
Loans are Adjustable Rate Mortgage Loans having an
aggregate principal balance as of the Cut-off Date,
after application of scheduled payments due on or
prior to the Cut-off Date whether or not received,
of approximately $141,432,240.87. Each Adjustable
Rate Mortgage Loan provides for semi-annual
adjustment to the Loan Rate thereon and for
corresponding adjustments to the monthly payment
amount due thereon, in each case on each adjustment
date applicable thereto (each such date, an
"Adjustment Date"); provided that in the case of
12.17% of the Adjustable Rate Mortgage Loans, the
first adjustment for such Mortgage Loan will occur
after an initial period of one year following
origination, in the case of 71.50% of the Adjustable
Rate Mortgage Loans, two years following
origination, in the case of 1.23% of the Adjustable
Rate Mortgage Loans, three years following
origination, and in the case of 0.81% of the
Adjustable Rate Mortgage Loans, five years following
origination, each by aggregate principal balance of
the Adjustable Rate Mortgage Loans as of the Cut-off
Date (each such Mortgage Loan described in the
preceding proviso, a "Delayed First Adjustment
Mortgage Loan"). On each Adjustment Date for each
Adjustable Rate Mortgage Loan, the Loan Rate thereon
will be adjusted to equal the sum, rounded to the
nearest multiple of 0.125%, of the Index (as
described below) and a fixed percentage amount (the
"Gross Margin"), subject to periodic and lifetime
limitations as described herein. See "The Mortgage
Pool" herein. None of the Adjustable Rate Mortgage
Loans permit the related mortgagor to convert the
adjustable Loan Rate thereon to a fixed Loan Rate.
As of the Cut-off Date, the Adjustable Rate Mortgage
Loans have Loan Rates ranging from 7.25% per annum
to 16.00% per annum, a weighted average Loan Rate of
approximately 10.173% per annum, a weighted average
next Adjustment Date in September 1999, Gross
Margins ranging from 3.000% to 8.750% and a weighted
average Gross Margin of approximately 5.525%. As of
the Cut-off Date, the Adjustable Rate Mortgage Loans
will have a weighted average remaining term to
maturity of approximately 357 months. For
additional information relating to the Mortgage
Loans, see "The Mortgage Pool" herein.
The Index. . . . . . As of any Adjustment Date, the Index applicable to
the determination of the Loan Rate on each Adjustable
Rate Mortgage Loan will be the average of the
interbank offered rates for six-month United States
dollar deposits in the London market as published in
The Wall Street Journal and as most recently avail-
able (i) as of the first business day 45 days prior
to such Adjustment Date, (ii) as of the first
business day of the month preceding the month of such
Adjustment Date or (iii) the last business day of the
second month preceding the month in which such
Adjustment Date occurs, as specified in the related
Mortgage Note. See "The Mortgage Pool--The Index"
herein.
Description of
Certificates
A. Form and
Registration of
Certificates. . The Certificates will initially be issued in book-
entry form. Persons acquiring beneficial ownership
interests in the Certificates ("Certificate Owners")
may elect to hold their Certificate interests through
The Depository Trust Company ("DTC") in the United
States, or Cedel Bank, societe anonyme, ("Cedel") or
the Euroclear System ("Euroclear") in Europe.
Transfers within DTC, Cedel or Euroclear, as the case
may be, will be in accordance with the usual rules
and operating procedures of the relevant system. So
long as the Certificates are Book-Entry Certificates
(as defined herein), such Certificates will be
evidenced by one or more Certificates registered in
the name of Cede & Co. ("Cede"), as the nominee of
DTC or one of the relevant depositaries (collectively,
the "European Depositaries"). Cross-market transfers
between persons holding directly or indirectly
through DTC, on the one hand, and counterparties
holding directly or indirectly through Cedel or
Euroclear, on the other, will be effected in DTC
through Citibank N.A. ("Citibank") or The Chase
Manhattan Bank ("Chase"), the relevant depositaries
of Cedel or Euroclear, respectively, and each a
participating member of DTC. The Certificates
initially will be registered in the name of Cede. The
interests of the Certificateholders will be repre-
sented by book entries on the records of DTC and
participating members thereof. No Certificate Owner
will be entitled to receive a definitive certificate
representing such person's interest, except in the
event that Definitive Certificates (as defined
herein) are issued under the limited circumstances
described under "Description of the Certificates--
Book-Entry Certificates" herein. All references in
this Prospectus Supplement to any Certificates
reflect the rights of the Certificate Owners only as
such rights may be exercised through DTC and its
participating organizations for so long as such
Certificates are held by DTC. See "Risk Factors--Book
Entry Certificates", herein and "Annex I" hereto and
"Description of the Securities--Book-Entry
Registration of Securities" in the Prospectus.
B. Priority of
Distributions. . Distributions on the Certificates on each
Distribution Date will be based on the Available
Funds and will be made in the following order of
priority (subject to the prior payment of certain
fees as described herein): (i) to interest on each
Class of Offered Certificates in the priority and
subject to the limitations described under
"Description of the Certificates--Allocation of
Available Funds" herein; (ii) to current principal
of the Classes of Certificates then entitled to
receive distributions of principal, in the order and
subject to the priorities set forth herein under
"Description of the Certificates--Allocation of
Available Funds," in each case in an aggregate
amount up to the maximum amount of principal to be
distributed on such Classes on such Distribution
Date; (iii) to principal of the Classes of
Certificates then entitled to receive distributions
of principal in order to maintain the
Overcollateralization Target Amount (as defined
herein); (iv) to unpaid interest and the Loss
Reimbursement Entitlements in the order and subject
to the priorities described herein under
"Description of the Certificates--Allocation of
Available Funds," (v) to the Class OC Certificates
for deposit into the Excess Reserve Fund Account
first to cover any Basis Risk Shortfall Amount and
then to cover any Required Reserve Amount, and then
to be released to the Class OC Certificates, in each
case, subject to the limitations set forth herein
under "Description of the Certificates--Allocation
of Available Funds" and (vi) any remaining amounts
to the Class R Certificates.
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 April 1998 (each, a
"Distribution Date"). Distributions on each
Distribution Date will be made to holders of the
Certificates of record as of the Business Day
immediately preceding the 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 corporate trust office of the
Trustee. Distributions on the Mortgage Loans will be
applied to the payment of principal and interest on
the Certificates in accordance with the priorities
described below.
1. Interest On each Distribution Date, to the
extent funds 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 of
such Class and (ii) any Unpaid
Interest Shortfall Amount (as defined
herein) payable to such Class, except
that payment of Unpaid Interest
Shortfall Amounts to the Mezzanine
and Subordinate Certificates will be
subordinated to payments of prin-
cipal due the related Offered
Certificates on such Distribution
Date. See "Description of the
Certificates--Allocation of Available
Funds" herein.
2. Principal Amounts distributable in respect of
principal of the Offered Certificates
will be allocated to those Classes of
Offered Certificates then entitled to
receive distributions of principal in
the order and priorities described in
"Description of the Certificates--
Allocation of Available Funds" herein.
On each Distribution Date, to the
extent of funds available therefor as
described herein, principal distri-
butions will be made to the holders
of the Offered Certificates then
entitled to distributions of principal
in an amount equal to the lesser of
(A) the aggregate Certificate
Principal Balances of the Offered
Certificates and (B) the Principal
Distribution Amount for such
Distribution Date.
Pass-Through Rates. . . The Pass-Through Rate for each Class of Offered
Certificates for a particular Distribution Date is a
per annum rate equal to the lesser of (a) the sum of
(i) One-Month LIBOR on the related LIBOR
Determination Date (as defined herein) and (ii) the
related Pass-Through Margin and (b) the Available
Funds Cap. The Pass-Through Margins for the Class
A, Class M-1, Class M-2 and Class B Certificates
will be equal to 0.195% (19.5 basis points), 0.45%
(45 basis points), 0.65% (65 basis points) and 1.25%
(125 basis points), respectively, until the first
Distribution Date following the Call Option Date,
and 0.39% (39 basis points), 0.90% (90 basis
points), 1.30% (130 basis points) and 2.50% (250
basis points), respectively, on and after such
Distribution Date. As to any Distribution Date, the
"Available Funds Cap" is a rate per annum equal to
the weighted average of the Loan Rates on the
Mortgage Loans outstanding as of the first day of
the related Due Period, net of the sum of (i) the
Servicing Fee Rate and (ii) the Trustee Fee Rate.
The sum of the Servicing Fee Rate and the Trustee
Fee Rate will be approximately 0.51375%. The "Call
Option Date" is the first Distribution Date on which
the Pool Principal Balance (as defined herein) is
less than or equal to 10% of the Maximum Collateral
Amount (as defined herein). The Pass-Through Rates
for the Class A, Class M-1, Class M-2 and Class B
Certificates for the Distribution Date in April 1998
will be 5.8825%, 6.1375%, 6.3375% and 6.9375%,
respectively, per annum. See "Description of the
Certificates--Calculation of One-Month LIBOR"
herein.
If on any Distribution Date, the Pass-Through Rate
for a Class of Offered Certificates is based upon
the Available Funds Cap, the excess of (i) the
amount of interest such Class would have been
entitled to receive on such Distribution Date had
the applicable Pass-Through Rate not been subject to
the Available Funds Cap, up to the Maximum Cap, over
(ii) the amount of interest such Class of
Certificates received on such Distribution Date
based on the Available Funds Cap, together with the
unpaid portion of any such excess from prior
Distribution Dates (and interest accrued thereon at
the then applicable Pass-Through Rate, without
giving effect to the Available Funds Cap) is the
"Basis Risk Shortfall Amount" for such Class. Any
Basis Risk Shortfall Amount will be paid from and to
the extent of funds available therefor in the Excess
Reserve Fund Account (as described herein). The
ratings on the Offered Certificates do not address
the likelihood of the payment of any Basis Risk
Shortfall Amount.
The "Maximum Cap" for any Distribution Date is a per
annum rate equal to the weighted average of the Loan
Rates on the Fixed Rate Mortgage Loans and the
Maximum Loan Rates on the Adjustable Rate Mortgage
Loans, in each case outstanding as of the first day
of the related Due Period, net of the sum of (i) the
Servicing Fee Rate and (ii) the Trustee Fee Rate.
Excess Reserve Fund
Account. . . . . Certificateholders of each Class of Offered
Certificates will be entitled to receive payments
from the Excess Reserve Fund Account from and to the
extent of amounts available therefor in an amount
equal to any Basis Risk Shortfall Amount for such
Class of Certificates. In general, the "Excess
Reserve Fund Account" will be funded up to the
Required Reserve Amount (as defined herein) by
amounts deposited therein on the Closing Date or
otherwise payable to the Class OC Certificates. See
"Description of the Certificates--Excess Reserve
Fund Account" 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 allocation of the internal cash flows of the
Mortgage Loans, (b) the subordination provided to
the Offered Certificates by any Class or Classes of
Certificates that are subordinate thereto and (c)
the application of Allocable Loss Amounts as defined
herein.
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, thereby creating overcollateralization
to the extent the Pool Principal Balance exceeds the
aggregate Class 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 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.
Subordination. The Mezzanine and Subordinate
Certificates are subordinate in right of certain
payments to the Senior Certificates. The Class M-2
Certificates are subordinate in right of certain
payments to the Class M-1 Certificates. The
Subordinate Certificates are subordinate in right of
certain payments to the Mezzanine Certificates.
Generally, on any date on which no
overcollateralization exists, all Realized Losses on
the Mortgage Loans will be borne by the most
subordinate Class of Offered Certificates before
being borne by a Class senior thereto.
Allocation of Losses. If on any Distribution Date,
after giving effect to distributions to be made on
such date, the aggregate of the Certificate
Principal Balances of the Offered Certificates
exceeds the Pool Principal Balance as of the end of
the preceding Due Period the Certificate Principal
Balance of the Subordinate Certificates and the
Mezzanine Certificates will be reduced, in reverse
order of seniority (first, Class B Certificates,
second, Class M-2 Certificates and third, Class M-1
Certificates) by the amount of the excess; any such
excess is referred to as a "Allocable Loss Amount."
Thereafter, such Classes of Certificates are only
entitled to distributions of interest and principal
with respect to their Certificate Principal Balances
as so reduced, and the amount of any Loss
Reimbursement Entitlements will be payable to the
applicable Class of Subordinate Certificates or
Mezzanine Certificates only to the extent of future
excess cashflow as described herein. The Pooling
and Servicing Agreement will not provide for the
"write down" of the Certificate Principal Balance of
the Class A Certificates.
Advances;
Compensating
Interest. . . . . . The Master Servicer will be obligated to make
Advances only to the extent that such Advances, in
the Master Servicer's reasonable judgment, are
recoverable from the related Mortgage Loan.
Advances are recoverable from collections on the
Mortgage Loans. Advances will equal, on any
Distribution Date (a) scheduled interest on the
Mortgage Loans due and payable during the related
Due Period but uncollected as of the related
Determination Date (net of the Servicing Fee) and
(b) principal due and payable on the Mortgage Loans
during the related Due Period but uncollected as of
the related Determination Date, other than a Balloon
Payment. See "The Pooling and Servicing
Agreement--Advances" herein. With respect to any
Distribution Date, the related "Determination Date"
shall be the 15th day of the calendar month in which
such Distribution Date occurs or, if such 15th day
is not a business day, the business day immediately
following such 15th day.
In addition, the Master Servicer will also be
required to pay Compensating Interest with respect
to any prepayment received on a Mortgage Loan during
the related Prepayment Period as described herein
under "The Pooling and Servicing Agreement--
Servicing and Other Compensation and Payment of
Expenses." The Master Servicer will not be required
to pay Compensating Interest with respect to any
Distribution Date in an amount in excess of one-
half the Servicing Fee (as defined herein) received
by the Master Servicer for such Distribution Date.
Optional Termination. . On any Distribution Date on which the Pool Principal
Balance is less than or equal to 10% of the Maximum
Collateral Amount (as defined herein), the holder of
the majority interest in the Residual Certificates
(the "Majority Residual Interestholder") 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 the event the Majority Residual
Interestholder does not exercise such option, the
Master Servicer will be entitled to purchase the
Mortgage Loans and the REO Property. See
"Description of the Certificates--Optional
Termination" herein.
Certain Federal
Income Tax
Consequences. . . . For federal income tax purposes, the Trust Fund will
include multiple segregated asset pools. The
Trustee will make a REMIC election with respect to
each such segregated asset pool. The Mortgage Loans
and certain other property will be held by one REMIC
(the "Initial Subsidiary REMIC"), which will issue
various Classes of uncertificated interests that
will be designated as regular and residual
interests. The Initial Subsidiary REMIC will be
part of a tiered REMIC structure in which the
regular interests issued by one REMIC will
constitute the assets of a higher tier REMIC (the
Initial Subsidiary REMIC and such other REMICs are
collectively referred to herein as the "Subsidiary
REMICs"). The Offered Certificates and the Class OC
Certificates (collectively, the "Regular
Certificates"), will represent ownership of regular
interests in a REMIC (the "Master REMIC"). In
addition, each of the Offered Certificates will
represent beneficial interests in the right to
receive payments from the Excess Reserve Fund
Account (as defined herein). The Class R
Certificates will evidence ownership of the residual
interest in the Master REMIC and in each Subsidiary
REMIC. See "Certain Material Federal Income Tax
Consequences" herein and "Certain Material Federal
Income Tax Considerations" 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.
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 Class A Certificates and the Class M-1
Certificates will constitute "mortgage related
securities" within the meaning of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA") so
long as they are rated in one of the two highest
rating categories by at least one nationally
recognized statistical rating organization and, as
such, are legal investments for certain entities to
the extent provided for in SMMEA. The Class M-2
Certificates and the Class B 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 to the issuance of the Offered
Certificates that (i) the Class A Certificates be
rated "Aaa" by Moody's Investors Service ("Moody's")
and "AAA" by Duff & Phelps Credit Rating Company
("DCR" and, together with Moody's, the "Rating
Agencies"), (ii) the Class M-1 Certificates be rated
"Aa2" by Moody's and "AA" by DCR, (iii) the Class M-
2 Certificates be rated "A2" by Moody's and "A" by
DCR and (iv) the Class B Certificates be rated
"Baa2" by Moody's and "BBB" by DCR. If any other
rating agency were to rate the Offered Certificates,
such rating agency may assign a rating different
from the ratings described above. 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. A security rating does not address the
frequency of prepayments on the Mortgage Loans or
the corresponding effect on yield to investors. See
"Yield, Prepayment and Maturity Considerations" and
"Ratings" herein.
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Offered Certificates.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
Yield Generally. The yields to maturity of the Offered Certificates may
vary from the anticipated yields to the extent such Certificates are
purchased at a discount or premium and to the extent the rate and timing of
payments thereon are sensitive to the rate and timing of principal payments
(including prepayments) of the Mortgage Loans. Certificateholders should
consider, in the case of any Offered Certificates purchased at a discount,
the risk that a lower than anticipated rate of principal payments could
result in an actual yield that is lower than the anticipated yield and, in
the case of any Offered Certificates purchased at a premium, the risk that a
faster than anticipated rate of principal payments could result in an actual
yield that is lower than the anticipated yield. In addition, the timing of
changes in the rate of Principal Prepayments (as defined herein) on the
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 higher (or
lower) than the rate anticipated by the investor during the period
immediately following the issuance of the Offered Certificates may not be
offset by a subsequent like decrease (or increase) in the rate of Principal
Prepayments.
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, (iii) repurchases by the Seller or the Master Servicer or (iv)
optional purchase of the remaining Mortgage Loans in connection with the
termination of the Trust Fund). In addition, as described herein, Mortgage
Loans representing approximately 0.60% of the Pool Principal Balance as of
the Cut-off Date are Balloon 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. All of the
Mortgage Loans may be prepaid in whole or in part at any time. A majority of
the Mortgage Loans are subject to prepayment charges under certain
circumstances during a six-month, one, two, three, four or five year period
from origination, as specified in the related Mortgage Note. The Mortgage
Loans are subject to the "due-on-sale" provisions included therein (insofar
as such provisions are enforceable under applicable state law). Such
Principal Prepayments will, subject to certain conditions, result in
distributions to holders of the Offered Certificates then entitled to receive
principal distributions of principal that would otherwise be distributed over
the remaining terms of the 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. 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 (as with the Mortgage Pool)
is the average amount of time that will elapse from the date such pool is
formed until each dollar of principal is scheduled to be repaid to the
investors in such pool. Because it is expected that there will be 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 Mortgage Pool--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 borne by a Class of Certificates subordinate thereto, 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 yield on each
Class of Offered Certificates in order of payment priority will be
progressively more sensitive to the rate, timing and severity of Realized
Losses on the Mortgage Loans and other shortfalls in Available Funds. 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. Investors in the Offered Certificates, and particularly the
Subordinate Certificates, should carefully consider the related risks,
including the risk that such investors may suffer a loss on their investment.
BOOK-ENTRY CERTIFICATES
Issuance of the Offered Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary trading market since
investors may be unwilling to purchase Offered Certificates for which they
cannot obtain physical certificates. Since transactions in the Offered
Certificates can be effected only through DTC, Cedel, Euroclear,
participating organizations, indirect participants and certain banks, the
ability of a Certificate Owner to pledge an Offered Certificate to persons or
entities that do not participate in the DTC, Cedel, or Euroclear system or
otherwise to take actions in respect of such Certificates, may be limited due
to lack of a physical certificate representing the Offered Certificates.
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Offered Certificates since
such distributions will be forwarded by the Trustee to DTC and DTC will
credit such distributions to the accounts of its Financial Intermediary (as
defined herein) which will thereafter credit them to the accounts of
Certificate Owners either directly or indirectly through indirect
participants. See "Description of the Certificates--Book-Entry Certificates"
herein.
RISK OF EARLY DEFAULTS
Substantially all of the Mortgage Loans were originated within twelve
months prior to the Cut-off Date. The weighted average remaining term to
stated maturity of the Mortgage Loans is approximately 354 months. Although
little data is available, defaults on mortgage loans, including mortgage
loans similar to the Mortgage Loans, are generally expected to occur with
greater frequency in the early years of the terms of mortgage loans.
NATURE OF COLLATERAL
Even assuming that the Mortgaged Properties provide adequate security
for the Mortgage Loans, substantial delays could be encountered in connection
with the liquidation of Mortgage Loans that are delinquent and resulting
shortfalls in distributions to the Certificateholders could occur. Further,
liquidation expenses (such as legal fees, real estate taxes, and maintenance
and preservation expenses) will reduce the proceeds payable to
Certificateholders and thereby reduce the security for the Mortgage Loans.
In the event any of the Mortgaged Properties fail to provide adequate
security for the related Mortgage Loans, the Certificateholders could
experience a loss.
RISK OF LIMITATIONS TO ADJUSTMENTS OF THE LOAN RATES ON THE MORTGAGE LOANS
As described herein, the Pass-Through Rates for each Class of Offered
Certificates adjusts monthly to equal the lesser of (a) the sum of (i) One-
Month LIBOR plus (ii) the related Pass-Through Margin and (b) the Available
Funds Cap. Approximately 12.37% of the Mortgage Loans (by Pool Principal
Balance as of the Cut-off Date) have fixed Loan Rates and, in addition, each
of the Adjustable Rate Mortgage Loans is subject to a Periodic Rate Cap and a
Maximum Loan Rate; consequently, the amount of interest that accrues on a
Class of Offered 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 the related Pass-Through Margin, in which circumstance the value
of such Class or Classes of Offered Certificates may be temporarily or
permanently reduced.
EFFECT OF BASIS RISK ON CREDIT ENHANCEMENT
Credit enhancement is provided to the Offered Certificates in part by
means of the application of the General Excess Available Amount on each
Distribution Date to make required distributions on the applicable Classes of
Offered Certificates. See "Description of the Certificates--Allocation of
Available Funds" herein. The General Excess Available Amount on any
Distribution Date will be affected by the actual amount of interest received,
collected or recovered in respect of the Mortgage Loans during the related
Due Period and such amount will be influenced by changes in the weighted
average of the Loan Rates resulting from prepayments and liquidations of the
Mortgage Loans as well as from adjustments of the Loan Rates relating to the
Adjustable Rate Mortgage Loans. To the extent the weighted average of the
Pass-Through Rates on the Classes of Offered Certificates increases relative
to the weighted average of the Loan Rates for the Mortgage Loans, it may be
necessary to apply all or a portion of the General Excess Available Amount to
make required distributions of interest on the Classes of Offered
Certificates and, as a result, such General Excess Available Amount may be
unavailable for any other purpose. In addition, it is possible that, under
certain circumstances, the General Excess Available Amount may be
insufficient to cover the required distributions of interest on the Classes
of Offered Certificates.
BALLOON LOANS
Mortgage Loans representing approximately 0.60% of the Pool Principal
Balance as of the Cut-off Date are Balloon 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
Master Servicer, the Depositor or the Trustee is obligated to refinance any
Mortgage Loan.
UNDERWRITING STANDARDS, LIMITED OPERATING HISTORY AND POTENTIAL DELINQUENCIES
THE ORIGINATOR'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. THE ORIGINATOR PROVIDES LOANS
PRIMARILY TO BORROWERS WHO DO NOT QUALIFY FOR LOANS CONFORMING TO FANNIE MAE
AND FREDDIE MAC GUIDELINES BUT WHO HAVE EQUITY IN THEIR PROPERTY. WHILE THE
ORIGINATOR'S PRIMARY CONSIDERATION IN UNDERWRITING A MORTGAGE LOAN IS THE
VALUE OF THE MORTGAGED PROPERTY, THE ORIGINATOR 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 MORTGAGED
PROPERTY.
AS A RESULT OF THE ORIGINATOR'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 IN A MORE TRADITIONAL MANNER.
Furthermore, changes in the values of Mortgaged Properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss
experience of the Mortgage Loans than on mortgage 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 in effect on
the dates of origination of the related Mortgage Loans.
The Originator commenced operations in May 1997. Accordingly, the
Originator (whether as an originator or acquirer of mortgage loans) 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.
GEOGRAPHIC CONCENTRATION
Mortgage Loans representing approximately 29.02%, 12.83%, 6.40% and
5.95% of the Pool Principal Balance as of the Cut-off Date are secured by
Mortgaged Properties located in California, Illinois, Utah and Florida,
respectively. If these residential real estate markets should experience an
overall decline in property values after the dates of origination of the
Mortgage Loans, the rates of delinquencies, foreclosures, bankruptcies and
losses on the 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 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.
PREPAYMENT INTEREST SHORTFALL
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, instead
of for a full month which may result in a Prepayment Interest Shortfall. The
Master Servicer is obligated to pay, without any right of reimbursement,
those shortfalls in interest collections payable on the Offered Certificates
that are attributable to Prepayment Interest Shortfalls less the Servicing
Fee, but only to the extent of one-half of the Servicing Fee for the related
Due Period.
ADDITIONAL RISKS ASSOCIATED WITH THE MORTGAGE LOANS
Approximately 27.72% of the Mortgage Loans (by Pool Principal Balance as
of the Cut-off Date) had a Loan-to-Value Ratio at origination in excess of
80%. With respect to such Mortgage Loans, primary mortgage insurance is not
required. Mortgage Loans with higher Loan-to-Value Ratios may present a
greater risk of loss. See "The Mortgage Pool--Mortgage Loan Statistics"
herein.
LIMITED OBLIGATIONS
The Offered Certificates will not represent an interest in or obligation
of the Depositor, the Master Servicer, the Trustee or any of their respective
affiliates. The only obligations of the foregoing entities with respect to
the Certificates or any Mortgage Loan will be the obligations of the Seller
pursuant to certain limited representations and warranties made with respect
to the Mortgage Loans and of the Master Servicer with respect to its
servicing obligations under the Pooling and Servicing Agreement (including
the limited obligation to make certain Advances). Neither the Certificates
nor the underlying Mortgage Loans will be guaranteed or insured by any
governmental agency or instrumentality, or by the Depositor, the Seller, the
Master Servicer, the Trustee or any of their respective affiliates. Proceeds
of the assets included in the Trust Fund (including the Mortgage Loans) will
be the sole source of payments on the Offered Certificates, and there will be
no recourse to the Depositor, the Seller, the Master Servicer, the Trustee or
any other entity in the event that such proceeds are insufficient or
otherwise unavailable to make all payments provided for under the Offered
Certificates.
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 in connection with a borrowing by the Seller rather than a
true sale. Such an attempt, even if unsuccessful, could result in 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.
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 the
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.
RISK OF LOAN RATES REDUCING THE PASS-THROUGH RATES OF THE OFFERED
CERTIFICATES
The calculation of the Pass-Through Rates of the Offered Certificates is
based upon (i) the value of One-Month LIBOR, which may be different from the
value of the Index applicable to the Adjustable Rate Mortgage Loans (either
as a result of the use of a different index, a different rate determination
date or a different rate adjustment date) and (ii) the weighted average of
the Loan Rates (net of certain amounts described herein) of the Mortgage
Loans, which are either fixed, in the case of the Fixed Rate Mortgage Loans,
or subject to periodic adjustment caps, maximum rate caps and minimum rate
floors, in the case of the Adjustable Rate Mortgage Loans. In general, the
Adjustable Rate Mortgage Loans adjust based upon the Index whereas the Pass-
Through Rates on the Offered Certificates adjust monthly based upon One-Month
LIBOR, as described herein under "Description of Certificates--Calculation of
One-Month LIBOR," subject to the Available Funds Cap. Consequently, the
interest which becomes due on the Adjustable Rate Mortgage Loans (net of the
Servicing Fee and the Trustee Fee) during any Due Period may not equal the
amount of interest that would accrue on Adjustable Rate Mortgage Loans at
One-Month LIBOR plus the Pass-Through Rate Margin during the related Interest
Period. In particular, Pass-Through Rates adjust monthly, while the Loan
Rates of the Adjustable Rate Mortgage Loans adjust less frequently (and the
Loan Rates of the Fixed Rate Mortgage Loans do not adjust) with the result
that the Available Funds Cap may limit increases in the Pass-Through Rates
for extended periods in a rising interest rate environment. The Loan Rate on
85.71% (by Pool Principal Balance as of the Cut-off Date) of the Adjustable
Rate Mortgage Loans will not adjust for one year, two years, three years or
five years, respectively, following origination. In addition, the Loan Rates
on certain of the Mortgage Loans may respond to different economic and market
factors than the Pass-Through Rates and there is not necessarily a
correlation between them. Thus, it is possible, for example, that the Loan
Rates on certain of the Mortgage Loans may fall during the periods of which
One-Month LIBOR is stable or rising or that, even if both the Loan Rates on
the Mortgage Loans and One-Month LIBOR fall during the same period, the Loan
Rates on certain of the Mortgage Loans may fall more rapidly than One-Month
LIBOR. Furthermore, if the Available Funds Cap is used to determine the
Pass-Through Rates of one or more Classes of Offered Certificates for a
Distribution Date, the value of such Class of Certificates may be temporarily
reduced.
If, with respect to any Distribution Date, the amount of interest that
would accrue during the related Accrual Period on a Class of Offered
Certificates based on the applicable level of One-Month LIBOR plus the Pass-
Through Rate Margin is greater than the weighted average (calculated as
described herein) of the Loan Rates on the Mortgage Loans as of the first day
of the related Due Period, less the Servicing Fee Rate and the Trustee Fee
Rate, then the Pass-Through Rate on such Class of Offered Certificates will
be based on the Available Funds Cap, and Basis Risk Shortfall Amount will,
except as provided below, occur. However, no assurance can be given that
there will be sufficient General Excess Available Amount generated from the
Mortgage Loans to pay the Basis Risk Shortfall Amount on any given
Distribution Date.
YIELD CONSIDERATIONS WITH RESPECT TO THE ADJUSTABLE RATE MORTGAGE LOANS
The yield to maturity on the Offered Certificates may be affected by the
resetting of the Loan Rates on the Adjustable Rate Mortgage Loans on the
related Adjustment Dates. In addition, because the Loan Rate for each
Adjustable Rate Mortgage Loan is based on the Index plus the related Gross
Margin, such rate could be higher than prevailing market interest rates, and
this may result in an increase in the rate of prepayments on the Adjustable
Rate Mortgage Loans after such adjustment. Finally, because the Loan Rates
on the Adjustable Rate Mortgage Loans are based on the Index while the Pass-
Through Rate on the Offered Certificates is based in part on One-Month LIBOR,
and a substantial number of the Mortgage Loans are Delayed First Adjustment
Mortgage Loans, any resulting Basis Risk Shortfall Amount, to the extent not
covered by amounts in the Excess Reserve Fund Account, as described herein,
will adversely affect the yield to maturity on the Offered Certificates.
THE MORTGAGE POOL
GENERAL
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 Cut-off Date, unless indicated to the contrary herein.
All weighted averages specified herein are weighted based on the Cut-off Date
Principal Balances of the Mortgage Loans. References to percentages of the
Mortgage Loans mean percentages based on the Pool Principal Balance as of the
Cut-off Date, unless otherwise specified.
MORTGAGE LOAN STATISTICS
The Mortgage Pool will consist of approximately 1,439 conventional,
fixed-rate and adjustable rate Mortgage Loans secured by first liens on
residential real properties (the "Mortgaged Properties"). The Mortgage Loans
have original terms to maturity ranging from 15 years to 30 years. The
Mortgage Pool consists of fixed-rate Mortgage Loans (the "Fixed Rate Mortgage
Loans"), which will consist of approximately 244 Mortgage Loans having an
aggregate principal balance as of March 1, 1998 (the "Cut-off Date") of
approximately $19,968,089.03, and adjustable-rate Mortgage Loans (the
"Adjustable Rate Mortgage Loans"), which will consist of approximately 1,195
Mortgage Loans having an aggregate principal balance as of the Cut-off Date
of approximately $141,432,240.87, in each case after application of payments
of principal due on or before the Cut-off Date whether or not received, and
in each case subject to a permitted variance of plus or minus 5%. Each
Adjustable Rate Mortgage Loan provides for semi-annual adjustment to the
mortgage rate thereon based on six-month London interbank offered rates for
United States dollar deposits (the "Index") and for corresponding adjustments
to the monthly payment amount due thereon, in each case subject to the
limitations described under "--Adjustable Rate Mortgage Loans" herein;
provided that in the case of 12.17% of the Adjustable Rate Mortgage Loans,
the first adjustment for such Mortgage Loan will occur after an initial
period of one year, in the case of 71.50% of the Adjustable Rate Mortgage
Loans, two years, in the case of 1.23% of the Adjustable Rate Mortgage Loans,
three years, and in the case of 0.81% of the Adjustable Rate Mortgage Loans,
five years, each by aggregate principal balance of the Adjustable Rate
Mortgage Loans as of the Cut-off Date (each such Mortgage Loan described in
this proviso, a "Delayed First Adjustment Mortgage Loan").
All of the Mortgage Loans are secured by first mortgages or deeds of
trust or other similar security instruments creating first liens on one-to
four-family residential properties consisting of detached or semi-detached
one- to four-family dwelling units, individual condominium units, townhouses
and individual units in planned unit developments. Approximately 27.72% of
the Mortgage Loans had a Loan-to-Value Ratio at origination in excess of 80%.
No Mortgage Loan will have a Loan-to-Value Ratio at origination exceeding
90.00%. There can be no assurance that the Loan-to-Value Ratio of any
Mortgage Loan determined at any time after origination is less than or equal
to its original Loan-to-Value Ratio. All of the Mortgage Loans have
scheduled monthly payments due on the first day of the month (with respect to
each Mortgage Loan, a "Due Date"). Each Mortgage Loan will contain a
customary "due-on-sale" clause.
Approximately 72.05% of the Mortgage Loans provide for payment by the
mortgagor of a prepayment charge in limited circumstances on certain
prepayments. Generally, each such Mortgage Loan provides for payment of a
prepayment charge on certain partial prepayments and all prepayments in full
made within six months, one year, two years, three years, four years or five
years from the date of origination of such Mortgage Loan. The amount of the
prepayment charge is as provided in the related Mortgage Note but is
generally equal to six months' interest on any amounts prepaid in excess of
20% of the then outstanding principal balance of the related Mortgage Loan in
any 12 month period.
Six Fixed Rate Mortgage Loans and one Adjustable Rate Mortgage Loan
comprising approximately 0.54% and 0.06%, respectively, of the Pool Principal
Balance as of the Cut-off Date are balloon payment mortgage loans (each, a
"Balloon Loan"). Each Balloon Loan generally amortizes over 360 months, but
the final payment (the "Balloon Payment") on each Balloon Loan is due and
payable on the 180th month. The amount of the Balloon Payment on each Balloon
Loan is substantially in excess of the amount of the scheduled monthly
payment on the Mortgage Loan for the period prior to the Due Date of such
Balloon Payment.
Each Mortgage Loan had a Loan Rate of not less than 7.25% per annum and
not more than 16.00% per annum and as of the Cut-off Date the weighted
average Loan Rate was approximately 10.24% per annum.
The weighted average remaining term to maturity of the Mortgage Loans
will be approximately 354 months as of the Cut-off Date. None of the Mortgage
Loans will have a first Due Date prior to April 1, 1997 or after April 1,
1998, or will have a remaining term to maturity of less than 171 months or
greater than 30 years as of the Cut-off Date. The month of the latest
maturity date of any Mortgage Loan is March 2028.
The average principal balance of the Mortgage Loans at origination was
approximately $112,360. The average principal balance of the Mortgage Loans
as of the Cut-off Date was approximately $112,161.
No Mortgage Loan had a principal balance as of the Cut-off Date of
greater than approximately $960,000 or less than approximately $1,850. The
Mortgage Loans are expected to have the following characteristics as of the
Cut-off Date (the sum in any column may not equal the total indicated due to
rounding):
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance Principal Balance
Number of Outstanding as of Outstanding as of
Principal Balance ($) Loans the Cut-off Date the Cut-off Date
- --------------------------------- --------- ------------------ -----------------
<S> <C> <C> <C>
1,000.01 - 50,000.00 . . . . . 299 $10,819,228.51 6.70%
50,000.01 - 100,000.00 . . . . . 561 41,868,404.47 25.94
100,000.01 - 150,000.00 . . . . . 283 34,421,001.04 21.33
150,000.01 - 200,000.00 . . . . . 143 24,664,521.46 15.28
200,000.01 - 250,000.00 . . . . . 61 13,621,387.05 8.44
250,000.01 - 300,000.00 . . . . . 36 9,734,788.16 6.03
300,000.01 - 350,000.00 . . . . . 8 2,588,808.05 1.60
350,000.01 - 400,000.00 . . . . . 11 4,217,252.05 2.61
400,000.01 - 450,000.00 . . . . . 12 5,118,153.39 3.17
450,000.01 - 500,000.00 . . . . . 14 6,691,211.87 4.15
500,000.01 - 550,000.00 . . . . . 1 507,331.21 0.31
550,000.01 - 600,000.00 . . . . . 3 1,699,178.40 1.05
650,000.01 - 700,000.00 . . . . . 4 2,753,302.63 1.71
800,000.01 - 850,000.00 . . . . . 1 839,364.69 0.52
850,000.01 - 900,000.00 . . . . . 1 898,795.60 0.56
950,000.01 - 1,000,000.00 . . . . 1 957,601.32 0.59
----- --------------- -------
Total . . . . . . . . . . . 1,439 $161,400,329.90 100.00%
===== =============== =======
</TABLE>
ORIGINAL TERM TO MATURITY OF THE MORTGAGE LOANS
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Original Term (months) of Loans the Cut-off Date the Cut-off Date
- --------------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
180 . . . . . . . . . . . . . . . 50 $3,255,771.11 2.00%
240 . . . . . . . . . . . . . . . 6 448,076.81 0.28
360 . . . . . . . . . . . . . . . 1,383 157,726,481.98 97.72
----- --------------- -------
Total . . . . . . . . . . . 1,439 $161,400,329.90 100.00%
===== =============== =======
</TABLE>
PROPERTY TYPES OF THE MORTGAGE LOANS
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Property Type of Loans the Cut-off Date the Cut-off Date
- --------------------------------- ---------- ------------------ -----------------
<S> <C> <C> <C>
Single Family . . . . . . . . . . 1,192 $134,915,346.64 83.59%
2-Family . . . . . . . . . . . . 101 9,502,346.51 5.89
3-Family . . . . . . . . . . . . 26 2,754,122.14 1.71
4-Family . . . . . . . . . . . . 28 3,234,993.80 2.00
Condominium . . . . . . . . . . . 57 5,143,771.08 3.19
Planned Unit Development . . . . 32 5,689,523.49 3.53
Townhouse . . . . . . . . . . . . 3 160,226.24 0.10
----- --------------- -------
Total . . . . . . . . . . . 1,439 $161,400,329.90 100.00%
===== =============== =======
</TABLE>
OCCUPANCY STATUS OF THE MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Occupancy Status of Loans the Cut-off Date the Cut-off Date
- ----------------------------------- --------- ------------------ -----------------
<S> <C> <C> <C>
Owner-Occupied . . . . . . . . . . 1,241 $147,884,992.31 91.63%
Non Owner-Occupied . . . . . . . . 198 13,515,337.59 8.37
----- --------------- -------
Total . . . . . . . . . . . . 1,439 $161,400,329.90 100.00%
===== =============== =======
</TABLE>
- -------------------------
(1) The occupancy status of a Mortgaged Property is as represented by the
mortgagor in its loan application.
PURPOSE OF THE MORTGAGE LOANS
<TABLE>
<CAPTION>
% of Aggregate
PRINCIPAL BALANCE Principal Balance
NUMBER OF OUTSTANDING AS OF THE Outstanding as of
Purpose LOANS CUT-OFF DATE the Cut-off Date
- ------------------------------- ---------- ---------------------- -----------------
<S> <C> <C> <C>
Cash Out Refinance . . . . . . 727 $84,318,352.04 52.24%
Purchase . . . . . . . . . . . 441 46,948,173.15 29.09
Refinance . . . . . . . . . . . 271 30,133,804.71 18.67
----- --------------- -------
Total . . . . . . . . . . 1,439 $161,400,329.90 100.00%
===== =============== =======
</TABLE>
LOAN RATES OF THE MORTGAGE LOANS
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance Principal Balance
Number of Outstanding as of Outstanding as of
Loan Rate (%) Loans the Cut-off Date the Cut-off Date
- ------------------------------------- ----------- ------------------ -----------------
<S> <C> <C> <C>
7.250 - 8.000 . . . . . . . . . . 24 $3,466,312.90 2.15%
8.001 - 9.000 . . . . . . . . . . 151 20,469,158.26 12.68
9.001 - 10.000 . . . . . . . . . . 439 58,702,749.57 36.37
10.001 - 11.000 . . . . . . . . . . 500 49,622,772.11 30.75
11.001 - 12.000 . . . . . . . . . . 180 17,752,183.93 11.00
12.001 - 13.000 . . . . . . . . . . 77 5,762,699.00 3.57
13.001 - 14.000 . . . . . . . . . . 30 2,263,359.80 1.40
14.001 - 15.000 . . . . . . . . . . 33 2,919,594.22 1.81
15.001 - 16.000 . . . . . . . . . . 5 441,500.11 0.27
----- --------------- -------
Total . . . . . . . . . . . . . 1,439 $161,400,329.90 100.00%
===== =============== =======
</TABLE>
As of the Cut-off Date, the Loan Rates of the Mortgage Loans ranged from
7.25% to 16.00% per annum, with a weighted average of approximately 10.24%
per annum.
ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance Principal Balance
Outstanding Outstanding
Number as of the as of the
Original Loan-to-Value Ratio (%) of Loans Cut-off-Date Cut-off Date
- --------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
14.01 - 15.00 . . . . . . . . . . . . . 2 $59,800.57 0.04%
15.01 - 20.00 . . . . . . . . . . . . . 3 159,525.00 0.10
20.01 - 25.00 . . . . . . . . . . . . . 2 69,949.06 0.04
25.01 - 30.00 . . . . . . . . . . . . . 3 106,458.02 0.07
30.01 - 35.00 . . . . . . . . . . . . . 6 341,556.61 0.21
35.01 - 40.00 . . . . . . . . . . . . . 11 608,471.73 0.38
40.01 - 45.00 . . . . . . . . . . . . . 12 1,292,998.48 0.80
45.01 - 50.00 . . . . . . . . . . . . . 19 1,801,427.98 1.12
50.01 - 55.00 . . . . . . . . . . . . . 20 1,582,375.35 0.98
55.01 - 60.00 . . . . . . . . . . . . . 32 2,558,015.12 1.58
60.01 - 65.00 . . . . . . . . . . . . . 62 6,483,211.90 4.02
65.01 - 70.00 . . . . . . . . . . . . . 194 19,785,519.50 12.26
70.01 - 75.00 . . . . . . . . . . . . . 315 33,105,802.09 20.51
75.01 - 80.00 . . . . . . . . . . . . . 430 48,701,042.63 30.17
80.01 - 85.00 . . . . . . . . . . . . . 228 30,905,291.50 19.15
85.01 - 90.00 . . . . . . . . . . . . . 100 13,838,884.36 8.57
----- --------------- -------
Total . . . . . . . . . . . . . . 1,439 $161,400,329.90 100.00%
===== =============== =======
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans was approximately 76.91%. No Mortgage Loan had a Loan-to-Value Ratio at
origination greater than 90.00% or less than 14.63%.
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Location of Loans the Cut-off Date the Cut-off Date
- --------------------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
Arizona . . . . . . . . . . . . . . . . 11 $717,031.03 0.44%
Arkansas . . . . . . . . . . . . . . . 1 58,183.19 0.04
California . . . . . . . . . . . . . . 287 46,840,275.27 29.02
Colorado . . . . . . . . . . . . . . . 10 1,158,979.58 0.72
Connecticut . . . . . . . . . . . . . . 7 659,704.14 0.41
District of Columbia . . . . . . . . . 1 59,097.42 0.04
Florida . . . . . . . . . . . . . . . . 98 9,598,427.40 5.95
Georgia . . . . . . . . . . . . . . . . 3 559,907.66 0.35
Idaho . . . . . . . . . . . . . . . . . 24 2,641,252.16 1.64
Illinois . . . . . . . . . . . . . . . 221 20,713,349.13 12.83
Indiana . . . . . . . . . . . . . . . . 45 2,375,936.17 1.47
Iowa . . . . . . . . . . . . . . . . . 15 1,073,821.27 0.67
Kansas . . . . . . . . . . . . . . . . 14 818,101.74 0.51
Kentucky . . . . . . . . . . . . . . . 12 542,013.67 0.34
Louisiana . . . . . . . . . . . . . . . 4 145,289.22 0.09
Maine . . . . . . . . . . . . . . . . . 2 238,682.51 0.15
Maryland . . . . . . . . . . . . . . . 9 1,760,393.54 1.09
Massachusetts . . . . . . . . . . . . . 44 6,450,855.02 4.00
Michigan . . . . . . . . . . . . . . . 47 4,191,185.09 2.60
Minnesota . . . . . . . . . . . . . . . 26 2,725,139.07 1.69
Mississippi . . . . . . . . . . . . . . 3 216,006.11 0.13
Missouri . . . . . . . . . . . . . . . 58 3,662,233.89 2.27
Montana . . . . . . . . . . . . . . . . 3 205,921.08 0.13
Nebraska . . . . . . . . . . . . . . . 24 1,276,867.53 0.79
Nevada . . . . . . . . . . . . . . . . 6 963,379.48 0.60
New Jersey . . . . . . . . . . . . . . 27 4,094,829.93 2.54
New Mexico . . . . . . . . . . . . . . 1 424,881.73 0.26
New York . . . . . . . . . . . . . . . 30 4,936,693.54 3.06
North Carolina . . . . . . . . . . . . 26 1,943,507.49 1.20
North Dakota . . . . . . . . . . . . . 2 98,718.91 0.06
Ohio . . . . . . . . . . . . . . . . . 72 5,337,846.63 3.31
Oklahoma . . . . . . . . . . . . . . . 2 92,884.96 0.06
Oregon . . . . . . . . . . . . . . . . 52 6,599,525.51 4.09
Pennsylvania . . . . . . . . . . . . . 42 3,182,350.73 1.97
Rhode Island . . . . . . . . . . . . . 11 1,022,329.72 0.63
South Carolina . . . . . . . . . . . . 4 359,129.19 0.22
Tennessee . . . . . . . . . . . . . . . 12 1,286,839.27 0.80
Texas . . . . . . . . . . . . . . . . . 7 975,302.25 0.60
Utah . . . . . . . . . . . . . . . . . 81 10,331,355.33 6.40
Vermont . . . . . . . . . . . . . . . . 3 226,553.92 0.14
Virginia . . . . . . . . . . . . . . . 14 1,673,120.37 1.04
Washington . . . . . . . . . . . . . . 58 7,688,994.98 4.76
West Virginia . . . . . . . . . . . . . 2 152,271.24 0.09
Wisconsin . . . . . . . . . . . . . . . 18 1,321,161.83 0.82
----- --------------- -------
Total . . . . . . . . . . . . . 1,439 $161,400,329.90 100.00%
===== =============== =======
</TABLE>
The greatest geographic concentration of Mortgage Loans, by aggregate
principal balance as of the Cut-off Date, was approximately $957,622 in
California in the 91208 zip code.
DOCUMENTATION LEVEL OF THE MORTGAGE LOANS
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Documentation Level of Loans the Cut-off Date the Cut-off Date
- ----------------------------------- --------- -----------------
<S> <C> <C> <C>
Full Documentation . . . . . . . . 899 $90,508,234.84 56.08%
Stated/NIV Documentation . . . . . 454 61,175,170.21 37.90
Lite Documentation . . . . . . . . 86 9,716,924.85 6.02
----- --------------- -------
Total . . . . . . . . . . . . 1,439 $161,400,329.90 100.00%
===== =============== =======
</TABLE>
RISK CATEGORIES OF THE MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Risk Categories of Loans the Cut-off Date the Cut-off Date
- ----------------------------------- -------- -----------------
<S> <C> <C> <C>
A . . . . . . . . . . . . . . . . . 208 $27,144,223.63 16.82%
A- . . . . . . . . . . . . . . . . 529 63,231,074.86 39.18
B . . . . . . . . . . . . . . . . . 392 43,329,716.39 26.85
C . . . . . . . . . . . . . . . . . 143 12,658,108.05 7.84
D . . . . . . . . . . . . . . . . . 117 10,128,866.91 6.28
D- . . . . . . . . . . . . . . . . 50 4,908,340.06 3.04
----- --------------- -------
Total . . . . . . . . . . . . 1,439 $161,400,329.90 100.00%
===== =============== =======
</TABLE>
- ------------------------------
(1) See "Underwriting Standards" herein.
PREPAYMENT CHARGES(1)
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Years of Loans the Cut-off Date the Cut-off Date
- ----------------------------------- --------- ------------------ -----------------
<S> <C> <C> <C>
No Prepayment Charge . . . . . . . 435 $45,119,003.70 27.95%
0.5 . . . . . . . . . . . . . . . . 13 762,874.96 0.47
1 . . . . . . . . . . . . . . . . . 114 17,269,819.28 10.70
2 . . . . . . . . . . . . . . . . . 536 58,817,934.96 36.44
3 . . . . . . . . . . . . . . . . . 195 19,790,734.90 12.26
4 . . . . . . . . . . . . . . . . . 7 1,400,558.36 0.87
5 . . . . . . . . . . . . . . . . . 139 18,239,403.74 11.30
----- --------------- -------
Total . . . . . . . . . . . . 1,439 $161,400,329.90 100.00%
===== =============== =======
</TABLE>
- -----------------------------
(1) Prepayment charges are assessed on any Mortgage Loans prepaid in full or
in part within the specified number of years.
ADJUSTABLE RATE MORTGAGE LOANS
Each Adjustable Rate Mortgage Loan provides for semi-annual adjustment
to the Loan Rate thereon and for corresponding adjustments to the monthly
payment amount due thereon, in each case on each adjustment date applicable
thereto (each such date, an "Adjustment Date"); provided that the first
adjustment for such Mortgage Loan will occur after an initial period of one
year, in the case of 12.17% of the Adjustable Rate Mortgage Loans, two years
in the case of 71.50% of the Adjustable Rate Mortgage Loans, three years in
the case of 1.23% of the Adjustable Rate Mortgage Loans, and five years in
the case of 0.81% of the Adjustable Rate Mortgage Loans, each by aggregate
principal balance of the Adjustable Rate Mortgage Loans as of the Cut-off
Date. On each Adjustment Date for each Adjustable Rate Mortgage Loan, the
Loan Rate thereon will be adjusted to equal the sum, rounded to the nearest
multiple of 0.125%, of the Index (as described below) and a fixed percentage
amount (the "Gross Margin"); provided, however, that the Loan Rate on each
such Mortgage Loan generally will not increase or decrease by more than 1.50%
per annum on any related Adjustment Date (the "Periodic Rate Cap"), except
that each such Mortgage Loan may increase or decrease by a higher percentage
per annum on the initial Adjustment Date. Each Loan Rate on each such
Mortgage Loan will not exceed a specified maximum Loan Rate over the life of
such Mortgage Loan (the "Maximum Loan Rate") or be less than a specified
minimum Loan Rate over the life of such Mortgage Loan (the "Minimum Loan
Rate"). The Delayed First Adjustment Mortgage Loans have a weighted average
Periodic Rate Cap of approximately 1.00% per annum. Effective with the first
monthly payment due on each Adjustable Rate Mortgage Loan after each related
Adjustment Date, the monthly payment amount will be adjusted to an amount
that will amortize fully the outstanding principal balance of the related
Mortgage Loan over its remaining term, and pay interest at the Loan Rate as
so adjusted. Due to the application of the Periodic Rate Caps and the Maximum
Loan Rates, the Loan Rate on each such Mortgage Loan, as adjusted on any
related Adjustment Date, may be less than the sum of the Index and the
related Gross Margin, rounded as described herein. See "--The Index" herein.
None of the Adjustable Rate Mortgage Loans permits the related mortgagor to
convert the adjustable Loan Rate thereon to a fixed Loan Rate.
The Adjustable Rate Mortgage Loans had Loan Rates as of the Cut-off Date
of not less than 7.25% per annum and not more than 16.00% per annum and the
weighted average Loan Rate was approximately 10.173% per annum. As of the
Cut-off Date, the Adjustable Rate Mortgage Loans had Gross Margins ranging
from 3.000% to 8.750%, Minimum Loan Rates ranging from 0.000% per annum to
16.000% per annum and Maximum Loan Rates ranging from 13.750% per annum to
22.500% per annum. As of the Cut-off Date, the weighted average Gross Margin
was approximately 5.525%, the weighted average Minimum Loan Rate was
approximately 10.071% per annum and the weighted average Maximum Loan Rate
was approximately 16.657% per annum. The latest first Adjustment Date
following the Cut-off Date on any Adjustable Rate Mortgage Loan occurs in
February 2003 and the weighted average next Adjustment Date for all of the
Adjustable Rate Mortgage Loans following the Cut-off Date is September 1,
1999.
The Adjustable Rate Mortgage Loans are expected to have the following
characteristics as of the Cut-off Date (the sum in any column may not equal
the total indicated due to rounding):
MAXIMUM LOAN RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Maximum Loan Rate (%) of Loans the Cut-off Date the Cut-off Date
- ------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
13.750 - 14.000 . . . . . . . . . . . 5 $554,140.38 0.39%
14.001 - 15.000 . . . . . . . . . . . 63 9,758,874.97 6.90
15.001 - 16.000 . . . . . . . . . . . 261 35,041,353.61 24.78
16.001 - 17.000 . . . . . . . . . . . 434 52,075,653.27 36.82
17.001 - 18.000 . . . . . . . . . . . 281 30,532,347.55 21.59
18.001 - 19.000 . . . . . . . . . . . 72 6,812,129.60 4.82
19.001 - 20.000 . . . . . . . . . . . 35 2,639,249.43 1.87
20.001 - 21.000 . . . . . . . . . . . 35 2,879,293.50 2.04
21.001 - 22.000 . . . . . . . . . . . 8 1,071,214.19 0.76
22.001 - 22.500 . . . . . . . . . . . 1 67,984.37 0.05
----- --------------- -------
Total . . . . . . . . . . . . . 1,195 $141,432,240.87 100.00%
===== =============== =======
</TABLE>
The weighted average Maximum Loan Rate of the Adjustable Rate Mortgage
Loans as of the Cut-off Date was approximately 16.657% per annum.
MINIMUM LOAN RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Minimum Loan Rate (%) of Loans the Cut-off Date the Cut-off Date
- ------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
0.000 . . . . . . . . . . . . . . . . 11 $1,061,934.21 0.75%
4.001 - 5.000 . . . . . . . . . . . 2 73,502.94 0.05
5.001 - 6.000 . . . . . . . . . . . 3 340,581.92 0.24
7.001 - 8.000 . . . . . . . . . . . 20 2,876,812.74 2.03
8.001 - 9.000 . . . . . . . . . . . 137 19,000,724.04 13.43
9.001 - 10.000 . . . . . . . . . . . 390 53,471,725.95 37.81
10.001 - 11.000 . . . . . . . . . . . 412 42,792,582.23 30.26
11.001 - 12.000 . . . . . . . . . . . 121 13,198,229.46 9.33
12.001 - 13.000 . . . . . . . . . . . 49 3,908,015.97 2.76
13.001 - 14.000 . . . . . . . . . . . 23 1,981,544.84 1.40
14.001 - 15.000 . . . . . . . . . . . 24 2,517,669.26 1.78
15.001 - 16.000 . . . . . . . . . . . 3 208,917.31 0.15
----- --------------- -------
Total . . . . . . . . . . . . . 1,195 $141,432,240.87 100.00%
===== =============== =======
</TABLE>
The weighted average Minimum Loan Rate of the Mortgage Loans as of the
Cut-off Date was approximately 10.071% per annum.
GROSS MARGINS OF THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Gross Margin (%) of Loans the Cut-off Date the Cut-off Date
- ------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
3.000 - 3.000 . . . . . . . . . . . . 1 $68,500.00 0.05%
3.501 - 3.750 . . . . . . . . . . . . 1 118,348.95 0.08
3.751 - 4.000 . . . . . . . . . . . . 5 371,142.89 0.26
4.001 - 4.250 . . . . . . . . . . . . 15 2,672,106.26 1.89
4.251 - 4.500 . . . . . . . . . . . . 59 6,673,826.72 4.72
4.501 - 4.750 . . . . . . . . . . . . 58 8,844,492.84 6.25
4.751 - 5.000 . . . . . . . . . . . . 165 19,978,514.51 14.13
5.001 - 5.250 . . . . . . . . . . . . 163 19,489,024.98 13.78
5.251 - 5.500 . . . . . . . . . . . . 178 21,893,665.65 15.48
5.501 - 5.750 . . . . . . . . . . . . 177 22,243,511.68 15.73
5.751 - 6.000 . . . . . . . . . . . . 107 12,648,085.59 8.94
6.001 - 6.250 . . . . . . . . . . . . 68 7,755,208.77 5.48
6.251 - 6.500 . . . . . . . . . . . . 115 10,408,028.70 7.36
6.501 - 6.750 . . . . . . . . . . . . 21 2,113,013.56 1.49
6.751 - 7.000 . . . . . . . . . . . . 47 4,676,845.58 3.31
7.001 - 7.250 . . . . . . . . . . . . 1 91,873.73 0.06
7.251 - 7.500 . . . . . . . . . . . . 7 544,451.34 0.38
7.501 - 7.750 . . . . . . . . . . . . 4 626,660.26 0.44
7.751 - 8.000 . . . . . . . . . . . . 2 182,970.51 0.13
8.501 - 8.750 . . . . . . . . . . . . 1 31,968.35 0.02
----- --------------- -------
Total . . . . . . . . . . . . . 1,195 $141,432,240.87 100.00%
===== =============== =======
</TABLE>
The weighted average Gross Margin of the Adjustable Rate Mortgage Loans
as of the Cut-off Date was approximately 5.525%.
NEXT ADJUSTMENT DATE FOR THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Next Adjustment Date of Loans the Cut-off Date the Cut-off Date
- ------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
04/01/1998 . . . . . . . . . . . . . 14 $1,640,656.52 1.16%
05/01/1998 . . . . . . . . . . . . . 9 1,726,392.02 1.22
06/01/1998 . . . . . . . . . . . . . 40 4,246,044.73 3.00
07/01/1998 . . . . . . . . . . . . . 48 5,493,529.52 3.88
08/01/1998 . . . . . . . . . . . . . 39 4,874,237.30 3.45
09/01/1998 . . . . . . . . . . . . . 34 3,995,846.90 2.83
10/01/1998 . . . . . . . . . . . . . 10 1,885,198.52 1.33
11/01/1998 . . . . . . . . . . . . . 2 230,198.36 0.16
12/01/1998 . . . . . . . . . . . . . 30 4,885,265.30 3.45
01/01/1999 . . . . . . . . . . . . . 25 3,991,579.11 2.82
02/01/1999 . . . . . . . . . . . . . 23 3,518,892.02 2.49
03/01/1999 . . . . . . . . . . . . . 5 988,800.00 0.70
07/01/1999 . . . . . . . . . . . . . 3 323,500.96 0.23
08/01/1999 . . . . . . . . . . . . . 12 1,368,702.15 0.97
09/01/1999 . . . . . . . . . . . . . 57 5,853,692.63 4.14
10/01/1999 . . . . . . . . . . . . . 40 3,300,180.16 2.33
11/01/1999 . . . . . . . . . . . . . 23 2,551,827.66 1.80
12/01/1999 . . . . . . . . . . . . . 193 21,031,770.43 14.87
01/01/2000 . . . . . . . . . . . . . 293 32,630,189.86 23.07
02/01/2000 . . . . . . . . . . . . . 190 23,685,259.36 16.75
03/01/2000 . . . . . . . . . . . . . 84 10,330,950.00 7.30
09/01/2000 . . . . . . . . . . . . . 2 307,873.91 0.22
11/01/2000 . . . . . . . . . . . . . 6 758,826.45 0.54
12/01/2000 . . . . . . . . . . . . . 5 598,487.38 0.42
01/01/2001 . . . . . . . . . . . . . 2 72,248.76 0.05
12/01/2002 . . . . . . . . . . . . . 1 103,827.82 0.07
01/01/2003 . . . . . . . . . . . . . 2 187,352.71 0.13
02/01/2003 . . . . . . . . . . . . . 3 850,910.33 0.60
----- --------------- -------
Total . . . . . . . . . . . . . 1,195 $141,432,240.87 100.00%
===== =============== =======
</TABLE>
INITIAL FIXED TERM/SUBSEQUENT ADJUSTABLE RATE TERM OF THE
ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance Principal Balance
Initial Fixed Term/Subsequent Number Outstanding as of Outstanding as of
Adjustable Rate Term of Loans the Cut-off Date the Cut-off Date
- --------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
One Year/Twenty-Nine Years . . . . . . 106 $17,206,380.94 12.17%
Two Years/Twenty-Eight Years . . . . . 892 100,995,371.13 71.41
Two Years/Thirteen Years . . . . . . . 4 133,355.26 0.09
Three Years/Twenty-Seven Years . . . . 15 1,737,436.50 1.23
Five Years/Twenty-Five Years . . . . . 6 1,142,090.86 0.81
Six Months/Various . . . . . . . . . . 172 20,217,606.18 14.29
------- ---------------- ----------------
Total . . . . . . . . . . . . . . 1,195 $141,432,240.87 100.00%
======= ================ ================
</TABLE>
PERIODIC RATE CAPS OF THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Periodic Rate Cap (%) of Loans the Cut-off Date the Cut-off Date
- --------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
1.00 . . . . . . . . . . . . . . . . . 1,189 $140,698,091.01 99.48%
1.50 . . . . . . . . . . . . . . . . . 6 734,149.86 0.52
-------- ----------------- -----------------
Total . . . . . . . . . . . . . . 1,195 $141,432,240.87 100.00%
======== ================= =================
</TABLE>
INITIAL PERIODIC RATE CAPS OF THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Initial Periodic Rate Cap (%) of Loans the Cut-off Date the Cut-off Date
- --------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
1.00 . . . . . . . . . . . . . . . . 278 $37,049,362.95 26.20%
1.50 . . . . . . . . . . . . . . . . 1 138,922.81 0.10
2.00 . . . . . . . . . . . . . . . . 690 74,018,411.72 52.33
3.00 . . . . . . . . . . . . . . . . 226 30,225,543.39 21.37
-------- ----------------- -----------------
Total . . . . . . . . . . . . . 1,195 $141,432,240.87 100.00%
======== ================= =================
</TABLE>
THE INDEX
As of any Adjustment Date, the Index applicable to the determination of
the Loan Rate on each Adjustable Rate Mortgage Loan will be the average of
the interbank offered rates for six-month United States dollar deposits in
the London market as published in The Wall Street Journal and as most
recently available either (i) as of the first business day 45 days prior to
such Adjustment Date, (ii) as of the first business day of the month
preceding the month of such Adjustment Date or (iii) the last business day of
the second month preceding the month in which such Adjustment Date occurs, as
specified in the related Mortgage Note.
In the event that the Index becomes unavailable or otherwise
unpublished, the Master Servicer will select a comparable alternative index
over which it has no direct control and which is readily verifiable.
UNDERWRITING STANDARDS
The Mortgage Loans will be acquired by the Depositor from the Seller on
the Closing Date pursuant to a Mortgage Loan Purchase Agreement by and
between Financial Asset Securities Corp. (the "Purchaser") and LMAC, Inc.
(the "Seller"), dated as of March 1, 1998. All of the Mortgage Loans were
originated or acquired by Ocwen Financial Services, Inc. (the "Originator"),
a subsidiary of Ocwen Financial Corporation, in the ordinary course of its
business. The Seller, a wholly-owned finance subsidiary of Ocwen Financial
Services, Inc., will acquire the Mortgage Loans from Ocwen Financial
Services, Inc. in a transaction contemporaneous with the transfer of the
Mortgage Loans from the Seller to the Depositor.
The Originator'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 Originator's primary consideration in underwriting
a mortgage loan is the value of the mortgaged property, the Originator also
considers, among other things, a mortgagor's credit history, repayment
ability and debt service-to-income ratio ("Debt Ratio"), as well as the type
and use of the mortgaged property. Second lien financing of the mortgaged
properties may be provided by lenders at any time (including at origination).
The Originator, however, will not itself provide second lien financing on a
mortgaged property.
The Mortgage Loans generally bear higher rates of interest than mortgage
loans that are originated in accordance with Fannie Mae and Freddie Mac
standards which is 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. A majority of the Mortgage Loans provide for the payment
by the mortgagor of a prepayment charge in limited circumstances on certain
full or partial prepayments made within six months, one year, two years,
three years, four years or five years from the date of origination of the
related Mortgage Loan as described under "The Mortgage Pool--Mortgage Loan
Statistics" above. Such charges may be waived or may be prohibited by State
law. The amount of the prepayment charge is as provided in the related
Mortgage Note but is generally equal to six months' interest on any amounts
prepaid in excess of 20% of the then outstanding principal balance of the
related Mortgage Loan in any 12 month period.
As a result of the Originator's underwriting criteria, changes in the
values of Mortgaged Properties may have a greater effect on the Originator's
delinquency, foreclosure and loss experience than on those of lenders whose
mortgage loans are 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 in effect on the dates of origination of the related
Mortgage Loans. Approximately 29.02%, 12.83%, 6.40% and 5.95%, respectively,
of the Mortgage Loans, each by aggregate principal balance of the Mortgage
Loans as of the Cut-off Date, are secured by Mortgaged Properties located in
the States of California, Illinois, Utah and Florida. If the California,
Illinois, Utah or Florida residential real estate markets should experience
an overall decline in property values after the dates of origination of the
Mortgage Loans, the rates of delinquencies, foreclosures and losses on the
Mortgage Loans may increase over historical levels of comparable type loans,
and may increase substantially.
All originations by the Originator of one- to four-family residential
mortgage loans are based on loan application packages submitted through
approved correspondents and brokers. Such loan application packages, which
generally contain relevant credit, property and underwriting information on
the loan request, are compiled by the applicable correspondent or broker and
submitted to the Originator for approval and purchase. The correspondents and
brokers receive all or a portion of the loan origination fee charged to the
borrower at the time the loan is made. As part of their quality control
procedures, the Originator maintains a file with respect to each
correspondent and broker including a copy of such correspondent's or broker's
license and reports of any complaints received with respect to such
correspondent or their brokers.
Each prospective mortgagor completes an application which includes
information with respect to the applicant's liabilities, income, credit
history, employment history and personal information. The Originator requires
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. Properties
that are to secure single-family mortgage loans are appraised or reviewed by
qualified independent appraisers who are approved by the Originator's
internal appraisal department. Such appraisers inspect the interior and/or
exterior and appraise the subject property and report the property condition.
Following each inspection, 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 must be on forms
acceptable to Fannie Mae and Freddie Mac. Every independent appraisal is
reviewed by either the Originator or by another independent appraiser
approved by the Originator before the mortgage loan is made and to the extent
that such review appraisal determines a market value more than five percent
less than the market value determined by the initial appraisal, such review
appraisal is used in place of the initial appraisal.
The Mortgage Loans were underwritten by the Originator's regular lending
divisions pursuant to the Originator's "Full Documentation," "Lite
Documentation," and "Stated Income Documentation" residential loan programs.
Under each of the programs, the Originator's regular lending divisions review
the loan applicant's source of income, calculate the amount of income from
sources indicated on the loan application or similar documentation, review
the credit history of the applicant, calculate the Debt Ratio to determine
the applicant's ability to repay the loan, review the type and use of the
property being financed and review the property for compliance with the
Originator's standards. In determining the ability of the applicant to repay
the loan, the Originator uses the interest rate of the loan being applied for
(the "Qualifying Rate"). The Originator's underwriting standards are applied
in a standardized procedure which complies with applicable federal and state
laws and regulations and requires their underwriters and/or the in-house
appraiser to be satisfied that the value of the property being financed, as
indicated by an appraisal and a review appraisal, currently supports the
outstanding loan balance.
In general, the maximum loan amount for mortgage loans originated under
the regular lending program is $750,000; however, mortgage loans on a case by
case basis may be originated for a higher loan amount. None of the Mortgage
Loans has a principal balance at origination higher than $960,000. The
Originator underwrites one to four-family loans with Loan-to-Value Ratios at
origination of generally up to 90%, depending on, among other things, the
purpose of the mortgage loan, a mortgagor's credit history, repayment ability
and Debt Ratio, as well as the type and use of the property. Under each class
of underwriting criteria, the maximum combined loan-to-value ratio at
origination, including any then existing second deeds of trust subordinate to
the Originator's first deed of trust, is 100%. The Originator, however, will
not itself provide second lien financing on a mortgaged property. Generally,
none of the mortgage loans originated or acquired by the Originator will be
covered by a primary mortgage insurance policy.
The Originator verifies the income of each borrower and the source of
funds under their various programs as follows: under the Full Documentation
program, borrowers are generally required to submit verification of stable
income for a two year period. Under the Lite Documentation program, borrowers
are generally required to submit verification of stable employment for the
past six months. Under the Stated Income program, the borrowers may be
qualified based upon the monthly income stated on the mortgage application,
without verification. The income stated must be reasonable and customary for
the borrower's line of work and a copy of the business license is required or
other generally acceptable evidence of business conduct. Under all of the
programs, the correspondent, or an Originator if originated by the
Originator, generally performs a telephone verification of the borrower's
employment. For self-employed borrowers the business location and telephone
number must be confirmed through an independent source, such as directory
assistance or a published telephone directory.
The Originator uses the following categories and characteristics as
guidelines to grade the mortgage loans:
"A" RISK. Under the "A" risk category, account ratings
cannot be greater than 30-days past due. A maximum of 0x30-day late
payment in the last 12 months, and 1x30 day late payment in the
last 24 months is acceptable (or 0x30 for mortgage loans originated
under the Lite Documentation and Stated Income Documentation
programs). No 60-day late payments within the last 24 months is
acceptable on an existing mortgage loan. For purposes of
determining whether a prospective mortgagor has been 30-days late,
the Originator uses a "rolling 30-day period," i.e., the
Originator generally will consider a continuous sequence of
30-day late payments as a single 30-day late payment. All
judgments, garnishments and liens of record must be paid in full at
funding. No bankruptcies may have occurred during the preceding
24 months and no notice of default may have occurred in the
preceding 36 months. All bankruptcies must have been discharged or
dismissed. Two years re-established excellent credit since
discharge or dismissal is required. A maximum Loan-to-Value Ratio
of 90% (or 85% for mortgage loans originated under the Lite
Documentation and Stated Income Documentation programs) is
permitted for a mortgage loan on a single family owner occupied
property. A maximum of 85% Loan-to-Value Ratio is permitted for
a mortgage loan on an owner occupied condominium or two-to-four
family residential property originated under the Full
Documentation program. All nonowner occupied loans have a maximum
Loan-to-Value Ratio of 80% (or 75% and 70% for mortgage loans
originated under the Lite Documentation or Stated Income
Documentation programs, respectively). The required Debt Ratio
is 45% or less.
"A-" RISK. Under the "A-" risk category, account ratings
cannot be greater than 30-days past due. A maximum of 2x30-day late
payments in the last 12 months is acceptable on a mortgage loan. No
60-day late payments within the last 24 months is acceptable on an
existing mortgage loan. For purposes of determining whether a
prospective mortgagor has been 30-days late, the Originator uses a
"rolling 30-day period," i.e., the Originator generally will
consider a continuous sequence of 30-day late payments as a single
30-day late payment. An existing mortgage loan is not required to
be current at the time the application is submitted. All judgments,
garnishments and liens of record must be paid in full at funding.
When the Loan-to-Value Ratio is equal to 80% or less, judgments and
collections that do not appear in the public records need not be
paid on rate/term refinances (no cash to borrowers) and purchases
only. No bankruptcies may have occurred in the preceding 12 months.
All bankruptcies must have been discharged or dismissed. No notice
of default may have occurred in the preceding 24 months. One year
of reestablished credit since discharge or dismissal is required. A
maximum Loan-to-Value Ratio of 90% (or 85% for mortgage loans
originated under the Lite Documentation or Stated Income
Documentation programs) is permitted for a mortgage loan on a
single family owner occupied property. A maximum of 85%
Loan-to-Value Ratio is permitted for a mortgage loan on an owner
occupied condominium or two-to-four family residential property
under the Full Documentation program only. Non-owner occupied loans
have a maximum Loan-to-Value Ratio of 80% under the Full
Documentation program or 75% under the Lite Documentation program
(or 70% for mortgage loans originated under the Stated Income
program). The maximum Debt Ratio is 50%.
"B" RISK. Under the "B" risk category, account ratings
cannot be greater than 60-days past due. A maximum of 4x30 or 2x30
and 1x60 day late payments in the last 12 months is acceptable on a
mortgage loan. For purposes of determining whether a prospective
mortgagor has been 30-days late, the Originator uses a "rolling
30-day period," i.e., the Originator generally will consider a
continuous sequence of 30-day late payments as a single 30-day late
payment. An existing mortgage loan is not required to be current at
the time the application is submitted. All judgments, garnishments
and liens of record must be paid in full at funding. When the
Loan-to-Value Ratio is equal to 80% or less, judgments and
collections that do not appear in the public records need not be
paid on rate/term refinances (no cash to borrowers) and purchases
only. No bankruptcies may have occurred in the preceding 12 months.
All bankruptcies must have been discharged or dismissed. One year's
re-established credit since discharge of dismissal is required. No
notice of default may have occurred in the preceding 24 months. A
maximum Loan-to-Value Ratio of 85% (or 80% for mortgage loans
originated under the Lite Documentation program or 80% under the
Stated Income Documentation program) is permitted for an owner
occupied mortgage loan regardless of the property type. Non-owner
occupied loans have a maximum Loan-to-Value Ratio of 75% under the
Full Documentation, 70% under the Lite Documentation and 65% under
the Stated Income Documents programs. The maximum Debt Ratio is 55%
for Loan-to-Value Ratios equal to or less than 70% and 50% for
Loan-to-Value Ratios greater than 70%.
"C" RISK. Under the "C" risk category, account ratings
cannot be greater than 90-days past due. The majority of the credit
must not be currently delinquent. A maximum of 6x30 or 3x30 and
1x60 or 2x30 and 1x90 day late payments in the last 12 months is
acceptable. For purposes of determination whether a prospective
mortgagor has been 30-days late, the Originator uses a "rolling
30-day period," i.e., the Originator generally will consider a
continuous sequence of 30-day late payments as a single 30-day late
payment. An existing mortgage loan is not required to be current at
the time the application is submitted. When the Loan-to-Value Ratio
is equal to 80% or less, judgments and collections that do not
appear in the public records need not be paid on rate/term
refinances (no cash to borrowers) and purchases only. A mortgagor
may be in Chapter 11 or Chapter 13 bankruptcy proceedings
immediately prior to the mortgage loan by the Originator or have
been in bankruptcy proceedings within the preceding one year if the
mortgagor has remained current on existing mortgage loan payments
for the preceding twelve months, has emerged from such bankruptcy
proceedings prior to or contemporaneously with the making of such
mortgage loan by the Originator and the Loan-to-Value Ratio of the
mortgage loan extended by the Originator does not exceed 70%. No
notice of default may have occurred in the preceding 12 months. A
maximum Loan-to-Value Ratio of 75% is permitted for an owner
occupied mortgage loan regardless of the property type. Non-owner
occupied loans have a maximum Loan-to-Value Ratio of 70% under the
Full Documentation, 65% under the Lite Documentation and 60% under
the Stated Income Documentation programs. The maximum Debt Ratio is
60%.
"D" RISK. Under the "D" risk category, account ratings
cannot be greater than 180-days past due in the last 12 months. A
maximum 120 days past due (or over 120 days with a Loan-to-Value
ratio of 70% or less) in the last 12 months is acceptable. No
notice of sale can be filed on any notice of default. For purposes
of determining whether a prospective mortgagor has been 30-days
late, the Originator uses a "rolling 30-day period," i.e., the
Originator generally will consider a continuous sequence of 30-day
late payments as a single 30-day late payment. An existing mortgage
loan is not required to be current at the time the application is
submitted. Judgments and collections that do not appear in the
public records need not be paid on rate/term refinances (no cash to
borrowers) and purchases only. The mortgagor cannot be currently in
bankruptcy on a purchase but a recent discharge or dismissal is
allowed. On refinances the mortgagor can be currently in a Chapter
11 or 13 bankruptcy. The proceeds can be used to obtain the
bankruptcy discharge. A maximum Loan-to-Value Ratio of 75% is
permitted for an owner occupied mortgage loan regardless of the
property type. Non-owner occupied loans have a maximum
Loan-to-Value Ratio of 60% under the Full Documentation, 55% under
the Lite Documentation and 50% under the Stated Income
Documentation programs. The maximum Debt Ratio is 60%.
"D-" RISK. Under the "D-" risk category, account
ratings are not taken into consideration. Notice of sale can be
filed on any notice of default. For purposes of determining whether
a prospective mortgagor has been 30-days late, the Originator uses
a "rolling 30-day period," i.e., the Originator generally will
consider a continuous sequence of 30-day late payments as a single
30-day late payment. An existing mortgage loan is not required to
be current at the time the application is submitted. Judgments and
collections that do not appear in the public records need not be
paid on rate/term refinances (no cash to borrowers) and purchases
only. The mortgagor can be currently in bankruptcy and proceeds can
be used to obtain the bankruptcy discharge. A maximum Loan-to-Value
Ratio of 70% is permitted for an owner occupied mortgage loan
regardless of the property type. Non-owner occupied loans have a
maximum Loan-to-Value Ratio of 60% under the Full Documentation,
55% under the Lite Documentation and 50% under the Stated Income
Documentation programs. The maximum Debt Ratio is 60%.
EXCEPTIONS. As described above the Originator uses the foregoing
categories and characteristics as guidelines only. On a case by case basis
only, the Originator may determine that the prospective mortgagor warrants a
risk upgrade or an exception from certain requirements of a particular risk
category. A one level credit upgrade in "B" and "C" risk grade loans only may
be allowed if the application reflects certain compensating factors, among
others: low Loan-to-Value Ratio, stable employment, ownership of current
residence of 5 or more years and condition of the property. An exception may
also be granted if the applicant has tendered a minimum down payment of 20%
or more, the new loan reduces the applicant's housing expense by more than
25% and if the mortgage credit history is rated 0x30 or 1x30 in the last 12
months.
THE MASTER SERVICER
Pursuant to the terms of the Pooling and Servicing Agreement, Ocwen
Financial Services, Inc. will act as master servicer. Ocwen Financial
Services, Inc. has recently commenced servicing loans such as the Mortgage
Loans. In connection with its duties under the Pooling and Servicing
Agreement, Ocwen Financial Services, Inc. will appoint Ocwen Federal Bank FSB
as subservicer. See "Ocwen Federal Bank FSB" below.
OCWEN FEDERAL BANK FSB
The information set forth in the following paragraphs has been provided
by Ocwen Federal Bank FSB. None of the Depositor, the Trustee, the
Underwriter or any of their respective affiliates have made or will make any
representation as to the accuracy or completeness of such information.
Ocwen Federal Bank FSB ("Ocwen"), a federally-chartered savings bank,
with its home office in Fort Lee, New Jersey and its servicing operations and
corporate offices in West Palm Beach, Florida, will serve as the Special
Servicer and the Subservicer for the Mortgage Loans (in such capacities, the
"Special Servicer" and the "Subservicer," respectively). Ocwen is a
wholly-owned subsidiary of Ocwen Financial Corporation, a public financial
services holding company. At December 31, 1997, Ocwen had approximately
$2.592 billion in assets, approximately $2.316 billion in liabilities and
approximately $276 million in equity. At December 31, 1997, Ocwen's tangible
and leveraged capital ratio was approximately 10.66% and its risk-based
capital ratio was approximately 14.83%. For the year ended December 31, 1997,
Ocwen's income from continuing operations was approximately $89 million.
In its capacity as subservicer, Ocwen will perform the day-to-day
servicing duties on behalf of the Master Servicer. Compensation to the
subservicer will be paid by the Master Servicer from the Servicing Fee.
Pursuant to the terms of the Pooling and Servicing Agreement, when a
Mortgage Loan becomes 60 days or more delinquent, the responsibility for
servicing such Mortgage Loan will be transferred to the Special Servicer. The
Special Servicer shall maintain responsibility for the servicing of such
Mortgage Loan until it is either brought current or is liquidated. As
compensation for its services under the Pooling and Servicing Agreement, the
Special Servicer will be entitled to receive the Servicing Fee in connection
with the Mortgage Loans serviced by it (each, a "Specially Serviced Mortgage
Loan"). In addition, the Special Servicer is entitled to a fee in connection
with the liquidation of Specially Serviced Mortgage Loans (the "Special
Servicer Incentive Fee") and to additional compensation (the "Special
Servicer Fee") with respect to each Specially Serviced Mortgage Loan.
The Special Servicer Fee will equal the sum of (a) $332 per Specially
Serviced Mortgage Loan payable immediately upon such Mortgage Loan becoming a
Specially Serviced Mortgage Loan, and (b) $166 per month per Specially
Serviced Mortgage Loan that has not been cured prior to the date on which
such Mortgage Loan becomes 90 or more days delinquent; provided that the
aggregate amounts paid to the Special Servicer with respect to any Specially
Serviced Mortgage Loan pursuant to (a) and (b) shall not exceed $2,000 and
provided further that in the event such Mortgage Loan becomes a Liquidated
Mortgage Loan the Special Servicer shall be entitled to the amount by which
$2,000 exceeds the sum of the amounts described in clauses (a) and (b)
previously paid to the Special Servicer with respect to such Specially
Serviced Mortgage Loan. The payment of the Special Servicer Fee will reduce
Available Funds prior to distributions to Certificateholders on any
Distribution Date on which an Overcollateralization Stepdown Trigger Event
has not occurred; provided, however, the payment of the Special Servicer Fee
will not reduce Available Funds prior to distributions to Certificateholders
by an amount in excess of the amount of interest due on the Mortgage Loans
during the related Due Period over the amount of interest due on the Offered
Certificates in connection with such Distribution Date. With respect to any
Distribution Date on which an Overcollateralization Stepdown Trigger Event is
occurring or, to the extent the Special Servicer Fee for such Distribution
Date exceeds the amount calculated in the proviso in the previous sentence,
the Special Servicer Fee will be paid to the extent of Available Funds, if
any, remaining after distribution to Certificateholders of all amounts
required to be distributed on the Offered Certificates on a Distribution Date
and the payment of other amounts due.
The Special Servicer Incentive Fee will be paid with respect to each
Liquidated Mortgage Loan liquidated by the Special Servicer and will equal
50% of the excess, if any, of (x) the principal portion of liquidation
proceeds with respect to such Mortgage Loan over (y) the percentage specified
in the Pooling and Servicing Agreement of the Principal Balance of such
Mortgage Loan immediately prior to the receipt of such liquidation proceeds.
The payment of the Special Servicer Incentive Fee will reduce the amount of
Net Liquidation Proceeds available to the Trust Fund.
The major business of the Special Servicer has been the resolution of
nonperforming single-family, multi-family and commercial mortgage loan
portfolios acquired from the Resolution Trust Corporation, from private
investors, and most recently, from the United States Department of Housing
and Urban Development ("HUD") through HUD's auction of defaulted FHA Loans.
The following table sets forth, for the non-conforming credit mortgage
loan ("BCD Mortgage Loan") servicing portfolio serviced by the Special
Servicer as of December 31, 1996, and as of December 31, 1997, certain
information relating to the delinquency experience (including loans in
foreclosure included in the Special Servicer's servicing portfolio (which
portfolio does not include mortgage loans that are subserviced by others)) at
the end of the indicated periods. The indicated periods of delinquency are
based on the number of days past due on a contractual basis. No mortgage loan
is considered delinquent for these purposes until it is one month past due on
a contractual basis. The information contained in the monthly remittance
reports which will be sent to investors will be compiled using the same
methodology as that used to compile the information contained in the table
below.
The following tables set forth, for the BCD Mortgage Loan servicing
portfolio derived from the Special Servicer as of December 31, 1996, and as
of December 31, 1997, certain information relating to the foreclosure, REO
and loan loss experience of BCD Mortgage Loans included in the Special
Servicer's servicing portfolio (which portfolio does not include mortgage
loans that are subserviced by others) at the end of the indicated periods.
<TABLE>
<CAPTION>
Delinquencies and Foreclosures
(Dollars in Thousands)
---------------------------------------------------------- Percent
As of
December 31, 1996
----------------------------------------------------------
Percent
By Percent By
By No. Dollar By No. Dollar
of Loans Amount of Loans Amount
-------- ------- --------- --------
<S> <C> <C> <C> <C>
Total Portfolio . . . . . . . 2,834 $305,085 100.00% 100.00%
Period of Delinquency:
30-59 Days . . . . . . . 107 10,554 3.78% 3.46%
60-89 Days . . . . . . . 38 4,321 1.34% 1.42%
90 Days or more . . . . . 138 17,969 4.87% 5.89%
Total Delinquent
Loans . . . . . . . . . . . 283 32,844 9.99% 10.77%
Loans in
Foreclosure(1) . . . . . . 136 17,805 4.80% 5.84%
(table continued)
As of
December 31, 1997
---------------------------------------------------------------
Percent
By Percent By
By No. Dollar By No. Dollar
of Loans Amount of Loans Amount
-------- ---------- --------- --------
Total Portfolio . . . . . . . . 21,827 $2,318,261 100.00% 100.00%
Period of Delinquency:
30-59 Days . . . . . . . . 437 41,429 2.00% 1.79%
60-89 Days . . . . . . . . 171 17,803 0.78% 0.77%
90 Days or more . . . . . . 302 36,878 1.38% 1.59%
Total Delinquent
Loans . . . . . . . . . . . . 910 96,110 4.17% 4.15%
Loans in
Foreclosure(1) . . . . . . . 281 34,663 1.29% 1.50%
</TABLE>
- -----------------------------
(1) Loans in foreclosure are also included under the heading "Total
Delinquent Loans."
<TABLE>
<CAPTION>
Real Estate Owned
(Dollars in Thousands)
-----------------------------------------------------------
As of As of
December 31, 1996 December 31, 1997
----------------------- --------------------------
By No. By By No. By
of Dollar of Dollar
Loans Amount Loans Amount
-------- -------- ------- ---------
<S> <C> <C> <C> <C>
Total Portfolio . . . . . . . . . . 2,834 $305,085 21,827 $2,318,261
Foreclosed Loans(1) . . . . . . . . 34 3,329 66 7,387
Foreclosed Ratio(2) . . . . . . . . 1.20% 1.09% 0.30% 0.32%
</TABLE>
- -----------------
(1) For the purposes of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title
to which has been acquired by the Special Servicer.
(2) The Foreclosure Ratio is equal to the aggregate principal balance or
number of Foreclosed Loans divided by the aggregate principal balance,
or number, as applicable, or mortgage loans in the total portfolio at
the end of the indicated period.
LOAN GAIN/(LOSS) EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION> AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Total Portfolio (1) . . . . . . . . . . . . . . . . . . . $305,085 $2,318,261
Net Gains/(Losses) (2) . . . . . . . . . . . . . . . . . 24 (1,209)
Net Gains/(Losses) as a Percentage of Total Portfolio . . 0.01% (0.05)%
</TABLE>
- -----------------
(1) "Total Portfolio" on the date stated above is the principal balance of
the mortgage loans outstanding on the last day of the period.
(2) "Net Gains/(Losses)" are actual gains or losses incurred on liquidated
properties and shortfall payoffs for each respective period. Gains or
losses on liquidated properties are calculated as net sales proceeds
less book value (exclusive of loan purchase premium or discount).
Shortfall payoffs are calculated as the difference between principal
payoff amount and unpaid principal at the time of payoff.
It is unlikely that the delinquency experience of the Mortgage Loans
comprising the Mortgage Pool will correspond to the delinquency experience of
the Special Servicer's mortgage portfolio set forth in the foregoing tables.
The statistics shown above represent the delinquency experience for the
Special Servicer's mortgage servicing portfolio only for the periods
presented, whereas the aggregate delinquency experience on the Mortgage Loans
comprising the Mortgage Pool will depend on the results obtained over the
life of the Mortgage Pool. The Special Servicer commenced receiving
applications for mortgage loans under its BCD Mortgage Loan program in
December 1994. Accordingly, the Special Servicer (whether as an originator or
acquirer of mortgage loans or as a servicer of such mortgage loans) does not
have significant historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of estimating the future
delinquency and loss experience of Mortgage Loans. There can be no assurance
that the Mortgage Loans comprising the Mortgage Pool will perform consistent
with the delinquency or foreclosure experience described herein. It should be
noted that if the residential real estate market should experience an overall
decline in property values, the actual rates of delinquencies and
foreclosures could be higher than those previously experienced by the Special
Servicer. In addition, adverse economic conditions 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 and
foreclosures with respect to the Mortgage Pool.
CERTAIN RIGHTS RELATED TO FORECLOSURE AND THE SPECIAL SERVICER
Certain rights in connection with foreclosure of defaulted Mortgage
Loans will be granted to the holder of the Class OC Certificates (the
"Directing Holder"), which is initially expected to be an affiliate of the
Special Servicer. Such rights will include the right to recommend
foreclosure or alternatives to foreclosure, and, if such recommendation is
not accepted by the Special Servicer, to purchase such Mortgage Loans from
the Trust Fund. Any such purchase may affect the yields to maturity of the
Offered Certificates.
The Directing Holder will also have the right to terminate the rights
and obligations of the Special Servicer under a special servicing agreement
at any time, without cause, and to appoint a successor special servicer,
provided that (i) such successor is reasonably acceptable to the Master
Servicer and (ii) a letter is provided to the Trustee from each Rating Agency
to the effect that such termination and appointment will not result in the
qualification, reduction or withdrawal of the ratings then applicable to the
Certificates.
The rights of the Directing Holder may be transferred to any future
holder of the Class OC Certificates if, prior to such transfer, (i) the
Special Servicer consents thereto and (ii) a letter is provided to the
Trustee from each Rating Agency to the effect that the transfer of such
rights to the proposed transferee will not result in the qualification,
reduction or withdrawal of the ratings then applicable to the Certificates.
THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement. The Trust Fund created under the Pooling and Servicing Agreement
will consist of (i) all of the Depositor's right, title and interest in the
Mortgage Loans, the related Mortgage Notes, Mortgages and other related
documents, (ii) all payments on or collections in respect of the Mortgage
Loans due after the Cut-off Date, together with any proceeds thereof, (iii)
any Mortgaged Properties acquired on behalf of Certificateholders by
foreclosure or by deed in lieu of foreclosure, and any revenues received
thereon, (iv) the rights of the Trustee under all insurance policies required
to be maintained pursuant to the Pooling and Servicing Agreement and (v) the
rights of the Depositor under the Mortgage Loan Purchase Agreement between
the Depositor and the Seller. The Offered Certificates will be transferable
and exchangeable at the corporate trust offices of the Trustee.
ASSIGNMENT OF THE MORTGAGE LOANS
On the Closing Date the Depositor will transfer to the Trust Fund all of
its right, title and interest in and to each Mortgage Loan, the related
Mortgage Notes, Mortgages and other related documents (collectively, the
"Related Documents"), including all scheduled payments with respect to each
such Mortgage Loan due after the applicable Cut-off Date. The Trustee,
concurrently with such transfer, will deliver the Certificates to the
Depositor. Each Mortgage Loan transferred to the Trust Fund will be
identified on a schedule (the "Mortgage Loan Schedule") delivered to the
Trustee pursuant to the Pooling and Servicing Agreement. Such schedule will
include information such as the Principal Balance of each Mortgage Loan as of
the Cut-off Date, its Loan Rate as well as other information.
The Pooling and Servicing Agreement will require that, within the time
period specified therein, the Seller will deliver or cause to be delivered to
the Trustee (or a custodian, as the Trustee's agent for such purpose) the
Mortgage Loans endorsed to the Trustee on behalf of the Certificateholders
and the Related Documents. In lieu of delivery of original mortgages, if such
original is not available, the Seller may deliver or cause to be delivered
true and correct copies thereof, together with a lost note affidavit executed
by the Seller.
Within 90 days of the Closing Date, the Trustee will review the Mortgage
Loans and the Related Documents pursuant to the Pooling and Servicing
Agreement and if any Mortgage Loan or Related Document is found to be
defective in any material respect and such defect is not cured within 60 days
following notification thereof to the Seller by the Trustee, the Seller will
be obligated to either (i) substitute for such Mortgage Loan an Eligible
Substitute Mortgage Loan; however, such substitution is permitted only within
two years of the Closing Date and may not be made unless an opinion of
counsel is provided to the effect that such substitution will not disqualify
the Trust Fund as a REMIC or result in a prohibited transaction tax under the
Code or (ii) purchase such Mortgage Loan at a price (the "Purchase Price")
equal to the outstanding Principal Balance of such Mortgage Loan as of the
date of purchase, plus all accrued and unpaid interest thereon, computed at
the Loan Rate (net of the Servicing Fee Rate) through the end of the calendar
month in which the purchase is effected, plus the amount of any unreimbursed
Advances and Servicing Advances made by the Master Servicer or the Special
Servicer. The Purchase Price will be deposited in the Collection Account on
or prior to the next succeeding Determination Date after such obligation
arises. The obligation of the Seller to repurchase or substitute for a
Defective Mortgage Loan is the sole remedy regarding any defects in the
Mortgage Loans and Related Documents available to the Trustee or the
Certificateholders.
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the Seller will be required to deposit in the Collection Account on or
prior to the next succeeding Determination Date after such obligation arises
an amount (the "Substitution Adjustment") equal to the excess of the
Principal Balance of the related Defective Mortgage Loan over the Principal
Balance of such Eligible Substitute Mortgage Loan.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted by
the Seller for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance), not in excess of, and not more than 5% less
than, the Principal Balance of the Defective Mortgage Loan; (ii) have a Loan
Rate, with respect to a Fixed Rate Mortgage Loan, not less than the Loan Rate
of the Defective Mortgage Loan and not more than 1% in excess of the Loan
Rate of such Defective Mortgage Loan or, with respect to an Adjustable Rate
Mortgage Loan, have a Maximum Loan Rate and Minimum Loan Rate not less than
the respective rate for the Defective Mortgage Loan and have a Gross Margin
equal to or greater than the Defective Mortgage Loan; (iii) have the same Due
Date as the Defective Mortgage Loan; (iv) have a remaining term to maturity
not more than one year earlier and not later than the remaining term to
maturity of the Defective Mortgage Loan; (v) comply with each representation
and warranty as to the Mortgage Loans set forth in the Pooling and Servicing
Agreement (deemed to be made as of the date of substitution); and (vi)
satisfy certain other conditions specified in the Pooling and Servicing
Agreement.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., Cut-off Date Principal
Balance and the Loan Rate). In addition, the Seller will represent and
warrant, on the Closing Date, that, among other things: (i) at the time of
transfer to the Depositor, the Seller has transferred or assigned all of its
right, title and interest in each Mortgage Loan and the Related Documents,
free of any lien; and (ii) each Mortgage Loan complied, at the time of
origination, in all material respects with applicable state and federal laws.
Upon discovery of a breach of any such representation and warranty which
materially and adversely affects the interests of the Certificateholders in
the related Mortgage Loan and Related Documents, the Seller will have a
period of 60 days after discovery or notice of the breach to effect a cure.
If the breach cannot be cured within the 60-day period, the Seller will be
obligated to (i) substitute for such Defective Mortgage Loan an Eligible
Substitute Mortgage Loan or (ii) purchase such Defective Mortgage Loan from
the Trust Fund. The same procedure and limitations that are set forth above
for the substitution or purchase of Defective Mortgage Loans as a result of
deficient documentation relating thereto will apply to the substitution or
purchase of a Defective Mortgage Loan as a result of a breach of a
representation or warranty in the Pooling and Servicing Agreement that
materially and adversely affects the interests of the Certificateholders.
Mortgage Loans required to be transferred to the Seller as described in
the preceding paragraphs are referred to as "Defective Mortgage Loans."
Pursuant to the Pooling and Servicing Agreement, the Master Servicer and
Special Servicer will service and administer the Mortgage Loans as more fully
set forth herein.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Master Servicer shall establish and maintain or cause to be
maintained a separate trust account (the "Collection Account") for the
benefit of the holders of the Certificates. The Collection Account will be an
Eligible Account (as defined herein). Upon receipt by the Master Servicer of
amounts in respect of the Mortgage Loans (excluding amounts representing the
Servicing Fee, reimbursement for Advances and Servicing Advances and
insurance proceeds to be applied to the restoration or repair of a Mortgaged
Property or similar items), the Master Servicer will deposit such amounts in
the Collection Account. Amounts so deposited may be invested in Eligible
Investments (as described in the Pooling and Servicing Agreement) maturing no
later than one Business Day prior to the date on which the amount on deposit
therein is required to be deposited in the Distribution Account or on such
Distribution Date if approved by the Rating Agencies. The Trustee will
establish an account (the "Distribution Account") into which will be
deposited amounts withdrawn from the Collection Account for distribution to
Certificateholders on a Distribution Date. The Distribution Account will be
an Eligible Account. Amounts on deposit therein may be invested in Eligible
Investments maturing on or before the Business Day prior to the related
Distribution Date unless such Eligible Investments are invested in
investments managed or advised by the Trustee or an affiliate thereof, in
which case such Eligible Investments may mature on the related Distribution
Date.
An "Eligible Account" is a segregated account that is (i) an account or
accounts maintained with a federal or state chartered depository institution
or trust company the short-term unsecured debt obligations of which (or, in
the case of a depository institution or trust company that is the principal
subsidiary of a holding company, the short-term unsecured debt obligations of
such holding company) are rated P-1 by Moody's and A-1 by Standard & Poor's
(or comparable ratings if Moody's and Standard & Poor's are not the Rating
Agencies) at the time any amounts are held on deposit therein, (ii) an
account or accounts the deposits in which are fully insured by the Federal
Deposit Insurance Corporation (to the limits established by such
corporation), the uninsured deposits in which account are otherwise secured
such that, as evidenced by an opinion of counsel delivered to the Trustee and
to each Rating Agency, the Certificateholders will have a claim with respect
to the funds in such account or a perfected first priority security interest
against such collateral (which shall be limited to Eligible Investments)
securing such funds that is superior to claims of any other depositors or
creditors of the depository institution with which such account is
maintained, (iii) a trust account or accounts maintained with the trust
department of a federal or state chartered depository institution, national
banking association or trust company acting in its fiduciary capacity or (iv)
otherwise acceptable to each Rating Agency without reduction or withdrawal of
their then current ratings of the Certificates as evidenced by a letter from
each Rating Agency to the Trustee. Eligible Investments are specified in the
Pooling and Servicing Agreement and are limited to investments which meet the
criteria of the Rating Agencies from time to time as being consistent with
their then current ratings of the Certificates.
ADVANCES
Subject to the following limitations, the Master Servicer will be
obligated to advance or cause to be advanced on or before each Distribution
Date its own funds, or funds in the Collection Account that are not included
in the Available Funds for such Distribution Date, in an amount equal to the
aggregate of all payments of principal and interest, net of the Servicing Fee
Rate, that were due during the related Due Period on the Mortgage Loans,
other than Balloon Payments, 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 by
foreclosure or deed in lieu of foreclosure, and, with respect to Balloon
Loans, with respect to which the Balloon Payment is not made when due, an
assumed monthly payment that would have been due on the related Due Date
based on the original principal amortization schedule for such Balloon Loan
(any such advance, an "Advance").
Advances are required to be made only to the extent they are deemed by
the Master Servicer to be recoverable from related late collections,
insurance proceeds or liquidation proceeds. The purpose of making such
Advances is to maintain a regular cash flow to the Certificateholders, rather
than to guarantee or insure against losses. The Master Servicer will not be
required to make any 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 Relief Act.
All Advances will be reimbursable to the Master Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage
Loan as to which such unreimbursed Advance was made. In addition, any
Advances previously made in respect of any Mortgage Loan that are deemed by
the Master Servicer to be nonrecoverable from related late collections,
insurance proceeds or liquidation proceeds may be reimbursed to the Master
Servicer out of any funds in the Collection Account prior to the
distributions on the Certificates. In the event the Master Servicer fails in
its obligation to make any such advance, the Trustee, in its capacity as
successor Master Servicer, will be obligated to make any such advance, to the
extent required in the Pooling and Servicing Agreement.
In the course of performing its servicing obligations, the Master
Servicer will pay all reasonable and customary "out-of-pocket" costs and
expenses incurred in the performance of its servicing obligations, including,
but not limited to, the cost of (i) the preservation, restoration and
protection of the Mortgaged Properties, (ii) any enforcement or judicial
proceedings, including foreclosures, and (iii) the management and liquidation
of Mortgaged Properties acquired in satisfaction of the related mortgage.
Each such expenditure will constitute a "Servicing Advance."
The Master Servicer's right to reimbursement for Servicing Advances is
limited to late collections on the related Mortgage Loan, including
liquidation proceeds, released mortgaged property proceeds, insurance
proceeds and such other amounts as may be collected by the Master Servicer
from the related Mortgagor or otherwise relating to the Mortgage Loan in
respect of which such unreimbursed amounts are owed, unless such amounts are
deemed to be nonrecoverable by the Master Servicer, in which event
reimbursement will be made to the Master Servicer from general funds in the
Collection Account.
THE TRUSTEE
Norwest Bank Minnesota, National Association, a national banking
association organized and existing under the laws of the United States, will
be named Trustee pursuant to the Pooling and Servicing Agreement. The Trustee
will initially serve as custodian of the Mortgage Loans.
The principal compensation (the "Trustee Fee") 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 0.01375% per annum
on the Principal Balance of each Mortgage Loan. The Pooling and Servicing
Agreement will provide that the Trustee and any director, officer, employee
or agent of the Trustee will be indemnified by the Trust Fund and will be
held harmless against any loss, liability or expense (not including expenses,
disbursements and advances incurred or made by the Trustee, including the
compensation and the expenses and disbursements of its agents and counsel, in
the ordinary course of the Trustee's performance in accordance with the
provisions of the Pooling and Servicing Agreement) incurred by the Trustee
arising out of or in connection with the acceptance or administration of its
obligations and duties under the Pooling and Servicing Agreement, other than
any loss, liability or expense (i) that constitutes a specific liability of
Trustee under the Pooling and Servicing Agreement or (ii) incurred by reason
of willful misfeasance, bad faith or negligence in the performance of the
Trustee's duties under the Pooling and Servicing Agreement or as a result of
a breach, or by reason of reckless disregard, of the Trustee's obligations
and duties under the Pooling and Servicing Agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation (the "Servicing Fee") to be paid to the
Master Servicer in respect of its servicing activities for the Certificates
will be equal to accrued interest at the "Servicing Fee Rate" of 0.50% per
annum on the Principal Balance of each Mortgage Loan. As additional servicing
compensation, the Master Servicer is entitled to retain all service-related
fees (other than prepayment penalties), including assumption fees,
modification fees, extension fees and late payment charges, to the extent
collected from mortgagors, together with any interest or other income earned
on funds held in the Collection Account and any escrow accounts. The Master
Servicer is obligated to offset any Prepayment Interest Shortfall on any
Distribution Date (payments made by the Master Servicer in satisfaction of
such obligation, "Compensating Interest") by an amount not in excess of
one-half of its Servicing Fee for such Distribution Date described in the
preceding two sentences. The Master Servicer is obligated to pay certain
insurance premiums and certain ongoing expenses associated with the Mortgage
Pool and incurred by the Master Servicer in connection with its
responsibilities under the Pooling and Servicing Agreement and is entitled to
reimbursement therefor as provided in the Pooling and Servicing Agreement.
With respect to any Determination Date and each Mortgage Loan as to
which a principal prepayment in full or in part was applied during the
related Due Period, the "Prepayment Interest Shortfall" is an amount equal to
the interest at the applicable Loan Rate (net of the Servicing Fee) on the
amount of such principal prepayment for the number of days commencing on the
date on which the principal prepayment is applied and ending on the last day
of the related Due Period.
VOTING RIGHTS
With respect to any date of determination, the percentage of all the
Voting Rights allocated among holders of the Offered Certificates shall be
the fraction, expressed as a percentage, the numerator of which is the
aggregate Certificate Principal Balance of all the Certificates of such Class
then outstanding and the denominator of which is the aggregate Principal
Balance of the Mortgage Loans then outstanding. The Voting Rights allocated
to each Class of Offered Certificates shall be allocated among all holders of
each such Class in proportion to the outstanding Certificate Principal
Balance of such Certificates.
AMENDMENT
The Pooling and Servicing Agreement may be amended by the Seller, the
Depositor, the Master Servicer and the Trustee, without the consent of the
holders of the Certificates, for any of the purposes set forth under "The
Agreements--Amendment" in the Prospectus. In addition, the Pooling and
Servicing Agreement may be amended by the Seller, the Depositor, the Master
Servicer, the Special Servicer and the Trustee 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.
TERMINATION
The Majority Residual Interestholder (or if such holder does not
exercise such option, the Master Servicer) will have the right to repurchase
all remaining Mortgage Loans and REO Properties and thereby effect the early
retirement of the Certificates, on any Distribution Date following the Due
Period during which the aggregate principal balance of the Mortgage Loans is
less than or equal to 10% of the Maximum Collateral Amount. In the event
that the option is exercised, the repurchase will be made at a price
generally equal to par plus accrued interest for each Mortgage Loan at the
related Loan Rate to but not including the first day of the month in which
such repurchase price is distributed plus the amount of any unreimbursed
Advances and Servicing Advances made by the Master Servicer or Special
Servicer. 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 repurchase of the Mortgage
Loans and REO Properties will result in the early retirement of the
Certificates.
OPTIONAL PURCHASE OF DEFAULTED LOANS
As to any Mortgage Loan which is delinquent in payment by 90 days or
more, the Master Servicer or the Special Servicer may, at its option,
purchase such Mortgage Loan from the Trust Fund at the Purchase Price for
such Mortgage Loan.
EVENTS OF DEFAULT
Events of Default will consist, among other things, of: (i) (a) any
failure by the Master Servicer to make an Advance and (b) any other failure
by the Master Servicer to deposit in the Collection Account or Distribution
Account the required amounts or remit to the Trustee any payment which
continues unremedied for one Business Day following written notice to the
Master Servicer; (ii) any failure of the Master Servicer to make any Advance
or to cover any Prepayment Interest Shortfalls, as described herein, which
failure continues unremedied for one Business Day; (iii) any failure by the
Master Servicer to observe or perform in any material respect any other of
its covenants or agreements in the Pooling and Servicing Agreement, which
continues unremedied for 30 days after the first date on which (x) the Master
Servicer has knowledge of such failure or (y) written notice of such failure
is given to the Master Servicer; or (iv) insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings, and certain
actions by or on behalf of the Master Servicer indicating its insolvency or
inability to pay its obligations.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default under the Pooling and Servicing Agreement
remains unremedied, the Trustee at the direction of the holders of Offered
Certificates evidencing not less than 51% of the Voting Rights may terminate
all of the rights and obligations of the Master Servicer in its capacity as
servicer with respect to the Mortgage Loans, as provided in the Pooling and
Servicing Agreement, whereupon the Trustee will succeed to all of the
responsibilities and duties of the Master Servicer under the Pooling and
Servicing Agreement, including the obligation to make Advances. No assurance
can be given that termination of the rights and obligations of the Master
Servicer under the Pooling and Servicing Agreement would not adversely affect
the servicing of the related Mortgage Loans, including the delinquency
experience of such 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.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Offered Certificates will be issued pursuant to a Pooling and
Servicing Agreement, dated as of March 1, 1998 (the "Pooling and Servicing
Agreement"), among the Depositor, the Seller, the Master 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.
Ocwen Mortgage Loan Trust 1998-OFS1 will issue the Class A Certificates
(the "Senior Certificates"), (ii) the Class M-1 Certificates and the Class
M-2 Certificates (the "Mezzanine Certificates"), (iii) the Class B
Certificates (the "Subordinate Certificates"), (iv) The Class OC Certificates
and (v) the Class R Certificates (the "Residual Certificates"). The Senior
Certificates, the Mezzanine Certificates and the Subordinate Certificates
(collectively, the "Offered Certificates"), the Class OC Certificates and the
Residual Certificates are collectively referred to herein as the
"Certificates." Only the Offered Certificates are offered hereby.
The Class A, Class M-1, Class M-2 and Class B Certificates will have the
respective Original Certificate Principal Balances specified on the cover
hereof. The aggregate of the Original Certificate Principal Balances of the
Offered Certificates is $161,400,329.
The Offered Certificates will be issued in book-entry form as described
below. The Offered Certificates will be issued in minimum dollar
denominations 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:
CLASS ASSUMED FINAL MATURITY DATES
- ---------------------------------- ----------------------------
Class A . . . . . . . . . . . . . April 25, 2029
Class M-1 . . . . . . . . . . . . April 25, 2029
Class M-2 . . . . . . . . . . . . April 25, 2029
Class B . . . . . . . . . . . . . April 25, 2029
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 on April 27, 1998 (each, a
"Distribution Date"), to the persons in whose names such Certificates are
registered at the close of business on the Business Day immediately preceding
the related Distribution Date (each, a "Record Date").
BOOK-ENTRY CERTIFICATES
The Offered Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests
in the Offered Certificates ("Certificate Owners") will hold their Offered
Certificates through DTC in the United States, or Cedel or Euroclear (in
Europe) if they are participants of such systems, or indirectly through
organizations which are participants in such systems. The Book-Entry
Certificates will be issued in one or more certificates which equal the
aggregate principal balance of the Offered Certificates and will initially be
registered in the name of Cede & Co., the nominee of DTC. Cedel and Euroclear
will hold omnibus positions on behalf of their participants through
customers' securities accounts in Cedel's and Euroclear's names on the books
of their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of
DTC. Citibank will act as depositary for Cedel and The Chase Manhattan Bank
will act as depositary for Euroclear (in such capacities, individually the
"Relevant Depositary" and collectively the "European Depositaries").
Investors may hold such beneficial interests in the Book-Entry Certificates
in minimum denominations of $50,000. Except as described below, no person
acquiring a Book-Entry Certificate (each, a "beneficial owner") will be
entitled to receive a physical certificate representing such Certificate (a
"Definitive Certificate"). Unless and until Definitive Certificates are
issued, it is anticipated that the only "Certificateholder" of the Offered
Certificates will be Cede & Co., as nominee of DTC. Certificate Owners will
not be Certificateholders as that term is used in the Agreement. Certificate
Owners are only permitted to exercise their rights indirectly through
Participants and DTC.
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 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 beneficial owner's Financial Intermediary is not a
DTC participant and on the records of Cedel or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Offered Certificates from the Trustee through DTC and DTC
participants. While the Offered Certificates 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 Offered Certificates and is required to receive
and transmit distributions of principal of, and interest on, the Offered
Certificates. Participants and indirect participants with whom Certificate
Owners have accounts with respect to Offered Certificates are similarly
required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Certificate Owners. Accordingly,
although Certificate Owners will not possess certificates representing their
respective interests in the Offered Certificates, the Rules provide a
mechanism by which Certificate Owners will receive distributions and will be
able to transfer their interest.
Certificateholders will not receive or be entitled to receive
certificates representing their respective interests in the Offered
Certificates, except under the limited circumstances described below. Unless
and until Definitive Certificates are issued, Certificateholders who are not
Participants may transfer ownership of Offered Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer Offered Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Offered
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Offered Certificates 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 Certificateholders.
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 below) or Euroclear Participant
(as defined below) 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. For
information with respect to tax documentation procedures relating to the
Certificates, see "Certain Material Federal Income Tax Considerations--Tax
Treatment of Foreign Investors" and "--Backup Withholding" in the Prospectus
and "Global Clearance, Settlement and Tax Documentation Procedures--Certain
U.S. Federal Income Tax Documentation Requirements" in Annex I hereto.
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.
DTC which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the
Book-Entry Certificates, whether held for its own account or as a nominee for
another person. In general, beneficial ownership of Book-Entry Certificates
will be subject to the Rules, as in effect from time to time.
Cedel Bank, societe anonyme, 67 Bd Grande-Duchesse Charlotte, L-1331
Luxembourg, was incorporated in 1970 as a limited company under Luxembourg
law. Cedel is owned by banks, securities dealers and financial institutions,
and currently has about 100 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than five
percent of Cedel's stock.
Cedel is registered as a bank in Luxembourg, and as such is subject to
regulation by the Institute Monetaire Luxembourgeois, "IML", the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Cedel holds securities for its customers ("Cedel Participants") and
facilitates the clearance and settlement of securities transactions by
electronic book-entry transfers between their accounts. Cedel provides
various services, including safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. Cedel also deals with domestic securities markets in several
countries through established depository and custodial relationships. Cedel
has established an electronic bridge with Morgan Guaranty Trust as the
Euroclear Operator in Brussels to facilitate settlement of trades between
systems. Cedel currently accepts over 70,000 securities issues on its books.
Cedel's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Cedel's United States customers are limited to
securities brokers and dealers and banks. Currently, Cedel has approximately
3,000 customers located in over 60 countries, including all major European
countries, Canada, and the United States. Indirect access to Cedel is
available to other institutions which clear through or maintain a custodial
relationship with an account holder of Cedel.
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 29 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 Guaranty Trust Company of New York (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by
the Euroclear Operator, 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.
The Euroclear Operator 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 the Euroclear
Operator 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.
Distributions on the Book-Entry Certificates will be made on each
Remittance Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC
participants in accordance with DTC's normal procedures. Each DTC 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. Distributions with
respect to Certificates 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 Considerations--Tax
Treatment of Foreign Investors" and "--Miscellaneous Tax Aspects--Backup
Withholding" in the Prospectus. Because DTC can only act on behalf of Finan-
cial 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 such Book-Entry Certificates,
may be limited due to the lack of physical certificates for such 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.
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 Certificates of such beneficial owners are
credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by
the holders of the Book-Entry Certificates under the Agreement only at the
direction of one or more Financial Intermediaries to whose DTC 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. Cedel or the Euroclear Operator, as the case may be,
will take any other action permitted to be taken by a Certificateholder 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 Offered Certificates which conflict with
actions taken with respect to other Offered Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a)
DTC or the Company advises the Trustee in writing that DTC 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
Company or the Trustee is unable to locate a qualified successor, (b) the
Company, at its sole option, with the consent of the Trustee, elects to
terminate a book-entry system through DTC or (c) after the occurrence of an
Event of Default, beneficial owners having Percentage Interests aggregating
not less than 51% of the Book-Entry Certificates advise the Trustee and DTC
through the Financial Intermediaries and the DTC participants in writing that
the continuation of a book-entry system through DTC (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 occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and
thereafter the Trustee will recognize the holders of such Definitive
Certificates as Certificateholders under the Agreement.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Offered Certificates 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.
Neither the Company, the Servicer nor 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 Certificates held
by Cede & Co., as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
PRIORITY OF DISTRIBUTIONS AMONG CERTIFICATES
As more fully described herein, distributions on the Certificates will
be made on each Distribution Date from Available Funds and will be made to
the Classes of Certificates (subject to the prior payment of certain fees as
described herein) in the following order of priority: (i) to interest on
each Class of Offered Certificates in the priority and subject to the
limitations described under "--Allocation of Available Funds" herein; (ii) to
current principal of the Classes of Certificates then entitled to receive
distributions of principal, in the order and subject to the priorities set
forth herein under "--Allocation of Available Funds"; (iii) to principal of
the Classes of Certificates then entitled to receive distributions of
principal in order to maintain the Overcollateralization Target Amount; (iv)
to unpaid interest and the Loss Reimbursement Entitlement in the order and
subject to the priorities described herein under "--Allocation of Available
Funds", (v) to the Class OC Certificates for deposit into the Excess Reserve
Fund Account first to cover any Basis Risk Shortfall Amount and then to cover
any Required Reserve Amount, and then to be released to the Class OC
Certificates, in each case subject to certain limitations set forth herein
under "--Allocation of Available Funds" and (vi) any remaining amounts to the
holders of the Class R Certificates.
ALLOCATION OF AVAILABLE FUNDS
Distributions to holders of each Class of Offered Certificates will be
made on each Distribution Date from Available Funds. "Available Funds" for
any Distribution Date is equal to the sum, net of amounts reimbursable
therefrom to the Master Servicer and the Special Servicer, of (i) the
aggregate amount of monthly payments on the related Mortgage Loans due on the
related Due Date and received by the Trustee on or prior to the related
Determination Date, after deduction of the Servicing Fee, the Special
Servicer Fee (provided that an Overcollateralization Stepdown Trigger Event
is not occurring and subject to certain other limitations specified above
under "Ocwen Federal Bank FSB") and the Trustee Fee, (ii) certain unscheduled
payments in respect of the Mortgage Loans, including prepayments, insurance
proceeds, Net Liquidation Proceeds and proceeds from repurchases of and
substitutions for such Mortgage Loans occurring during the related Prepayment
Period, including prepayment penalties and (iii) all Advances with respect to
the related Mortgage Loans received by the Trustee for such Distribution
Date.
The "Prepayment Period" with respect to any Distribution Date is the
period commencing on the Determination Date in the month preceding the month
in which such Distribution Date occurs (or, in the case of the first
Distribution Date, the day following the Cut-off Date) and ending on the
Determination Date relating to such Distribution Date.
On each Distribution Date, the Trustee will withdraw from the
Distribution Account all Available Funds then on deposit therein and will
distribute the same in the following order of priority:
(i) to the holders of each Class of Offered Certificates in the
following order or priority:
(a) concurrently, to the Senior Certificates, the Interest
Distributable Amount for such Class for such Distribution Date; and
(b) sequentially, to the Class M-1, Class M-2 and Class B
Certificates, in that order, the related Monthly Interest Distributable
Amount for such Distribution Date;
(ii) from the Principal Distribution Amount (giving effect first to the
component of the Principal Distribution Amount equal to the Basic Principal
Distribution Amount and then to the component of the Principal Distribution
Amount equal to the Extra Principal Distribution Amount pursuant to clause
(iii)(a) below):
(a) on each Distribution Date (1) before the Stepdown Date or (2)
with respect to which a Trigger Event is in effect,
sequentially to the holders of the Class A, Class M-1, Class
M-2 and Class B Certificates, in that order, the respective
Class Principal Distribution Amount;
(b) on each Distribution Date (1) on or after the Stepdown Date
and (2) as long as a Trigger Event is not in effect, to the
holders of the Class or Classes of Offered Certificates then
entitled to distribution of principal, in an amount equal to
in the aggregate the Principal Distribution Amount in the
following amounts and order of priority:
(1) the lesser of (x) the Principal Distribution Amount
and (y) the Class A Principal Distribution Amount to the Class
A Certificateholders, until the Certificate Principal Balance
thereof is reduced to zero;
(2) the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the amount distributed to the
Class A Certificateholders in clause (ii)(b)(1) above and (y)
the Class M-1 Principal Distribution Amount, to the Class M-1
Certificateholders, until the Certificate Principal Balance
thereof is reduced to zero;
(3) the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the sum of the amounts
distributed to the Class A Certificateholders in clause
(ii)(b)(1) above and to the Class M-1 Certificateholders in
clause (ii)(B)(2) above and (y) the Class M-2 Principal
Distribution Amount, to the Class M-2 Certificateholders,
until the Certificate Principal Balance thereof is reduced to
zero;
(4) the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the sum of the amounts
distributed to the Class A Certificateholders in clause
(ii)(b)(1), the amount distributed to the Class M-1
Certificateholders in clause (ii)(b)(2) and the amount
distributed to the Class M-2 Certificateholders in clause
(ii)(b)(3) above and (y) the Class B Principal Distribution
Amount, to the Class B Certificateholders, until the
Certificate Principal Balance thereof is reduced to zero;
(iii) any amounts remaining after the distributions in clauses (i)
through (ii) above shall be distributed in the following order of priority:
(a) to fund the Extra Principal Distribution Amount for such
Distribution Date to be paid as a component of the Principal
Distribution Amount in the same order of priority described in
clause (ii) above;
(b) to the Class M-1 Certificateholders, the related Unpaid
Interest Shortfall Amount for such Distribution Date and then the
related Loss Reimbursement Entitlement, if any, for such
Distribution Date;
(c) to the Class M-2 Certificateholders, the related Unpaid
Interest Shortfall Amount for such Distribution Date and then the
related Loss Reimbursement Entitlement, if any, for such
Distribution Date;
(d) to the Class B Certificateholders, the related Unpaid
Interest Shortfall Amount for such Distribution Date and then the
related Loss Reimbursement Entitlement, if any, for such
Distribution Date;
(e) to the Special Servicer, such amounts, if any, owed
thereto as described in the Pooling and Servicing Agreement;
(f) to the holders of the Class OC Certificates for deposit
into the Excess Reserve Fund Account first to cover any Basis Risk
Shortfall Amount and then to cover any Required Reserve Amount, and
then to be released to the holders of the Class OC Certificates,
such amounts, if any, as described in the Pooling and Servicing
Agreement;
(g) to the Master Servicer, the Extra Master Servicing Fee, as
defined in the Pooling and Servicing Agreement; and
(iv) to the holders of the Class R Certificates, the remaining amount.
As more fully described in the Pooling and Servicing Agreement, any
remaining Available Funds for such Distribution Date then on deposit in the
Distribution Account will be distributed to the Master Servicer, in payment
of unpaid servicing fees and reimbursement of certain outstanding Advances,
and then to holders of the Residual Certificates.
DEFINITIONS
The "Accrual Period" for the Offered 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 Offered
Certificates will be the actual number of days included in the period
commencing on the Closing Date and ending on and including April 26, 1998.
The "Allocable Loss Amount" with respect to each Distribution Date means
the excess, if any, of (a) the aggregate of the Certificate Principal
Balances of all Classes of Offered Certificates (after giving effect to all
distributions on such Distribution Date) over (b) the Pool Principal Balance
as of the end of the preceding Due Period.
The "Basic Principal Distribution Amount" means with respect to any
Distribution Date the excess of (i) the Principal Remittance Amount for such
Distribution Date over (ii) the Overcollateralization Release Amount, if any,
for such Distribution Date.
The "Call Option Date" is the first Distribution Date on which the Pool
Principal Balance is less than or equal to 10% of the Maximum Collateral
Amount.
The "Certificate Principal Balance" of any Class of Offered
Certificates, as of any Distribution Date, will be equal to the Certificate
Principal Balance thereof on the Closing Date (the "Original Certificate
Principal Balance") reduced by the sum of (i) all amounts actually
distributed in respect of principal of such Class on all prior Distribution
Dates and (ii) with respect to any Mezzanine Certificates and the Class B
Certificates, all related Allocable Loss Amounts applied in reduction of
principal of such Certificates on all prior Distribution Dates.
"Class A Principal Distribution Amount" means as of any Distribution
Date (a) prior to the Stepdown Date or with respect to which a Trigger Event
is in effect, the lesser of (i) 100% of the Principal Distribution Amount and
(ii) the aggregate Certificate Principal Balance of the Class A Certificates
and (b) on or after the Stepdown Date and as long as a Trigger Event is not
in effect, the positive difference, if any, of the excess of (x) the
aggregate Certificate Principal Balance of the Class A Certificates
immediately prior to such Distribution Date over (y) the lesser of (A) the
product of (i) approximately 51.70% and (ii) the aggregate Principal Balance
of the Mortgage Loans as of the last day of the related Due Period and (B)
the aggregate Principal Balance of the Mortgage Loans as of the last day of
the related Due Period minus the greater of $807,002 and two times the
current Principal Balance of the largest Mortgage Loan then outstanding.
"Class M-1 Principal Distribution Amount" means as of any Distribution
Date (a) with respect to which a Trigger Event is in effect, the lesser of
(i) 100% of the Principal Distribution Amount and (ii) the aggregate
Certificate Principal Balance of the Class M-1 Certificates and (b) on or
after the Stepdown Date and as long as a Trigger Event is not in effect, the
positive difference, if any, of the excess of (x) the sum of (i) the
aggregate Certificate Principal Balance of the Class A Certificates (after
taking into account the payment of the Class A Principal Distribution Amount
on such Distribution Date) and (ii) the Certificate Principal Balance of the
Class M-1 Certificates immediately prior to such Distribution Date over (y)
the lesser of (A) the product of (i) approximately 68.70% and (ii) the
aggregate Principal Balance of the Mortgage Loans as of the last day of the
related Due Period and (B) the aggregate Principal Balance of the Mortgage
Loans as of the last day of the related Due Period minus the greater of
$807,002 and two times the current Principal Balance of the largest Mortgage
Loan then outstanding.
"Class M-2 Principal Distribution Amount" means as of any Distribution
Date (a) with respect to which a Trigger Event is in effect, the lesser of
(i) 100% of the Principal Distribution Amount and (ii) the aggregate
Certificate Principal Balance of the Class M-2 Certificates and (b) on or
after the Stepdown Date and as long as a Trigger Event is not in effect, the
positive difference, if any, of the excess of (x) the sum of (i) the
aggregate Certificate Principal Balance of the Class A Certificates (after
taking into account the payment of the Class A Principal Distribution Amount
on such Distribution Date), (ii) the Certificate Principal Balance of the
Class M-1 Certificates (after taking into account the payment of the Class
M-1 Principal Distribution Amount on such Distribution Date) and (iii) the
Certificate Principal Balance of the Class M-2 Certificates immediately prior
to such Distribution Date over (y) the lesser of (A) the product of (i)
approximately 83.20% and (ii) the aggregate Principal Balance of the Mortgage
Loans as of the last day of the related Due Period and (B) the aggregate
Principal Balance of the Mortgage Loans as of the last day of the related Due
Period minus the greater of $807,002 and two times the current Principal
Balance of the largest Mortgage Loan then outstanding.
"Class B Principal Distribution Amount" means as of any Distribution
Date (a) with respect to which a Trigger Event is in effect, the lesser of
(i) 100% of the Principal Distribution Amount and (ii) the aggregate
Certificate Principal Balance of the Class B Certificates and (b) on or after
the Stepdown Date and as long as a Trigger Event is not in effect, the
positive difference, if any, of the excess of (x) the sum of (i) the
aggregate Certificate Principal Balance of the Class A Certificates (after
taking into account the payment of the Class A Principal Distribution Amount
on such Distribution Date), (ii) the Certificate Principal Balance of the
Class M-1 Certificates (after taking into account the payment of the Class
M-1 Principal Distribution Amount on such Distribution Date), (iii) the
Certificate Principal Balance of the Class M-2 Certificates (after taking
into account the payment of the Class M-2 Principal Distribution Amount on
such Distribution Date), and (iv) the Certificate Principal Balance of the
Class B Certificates immediately prior to such Distribution Date over (y) the
lesser of (A) the product of (i) approximately 96.20% and (ii) the aggregate
Principal Balance of the Mortgage Loans as of the last day of the related Due
Period and (B) the aggregate Principal Balance of the Mortgage Loans as of
the last day of the related Due Period minus the greater of $807,002 and two
times the current Principal Balance of the largest Mortgage Loan then
outstanding.
The "Delinquency Percentage," with respect to any Distribution Date and
the related Due Period, is the fraction, expressed as a percentage, the
numerator of which is the aggregate of the Principal Balances of all Mortgage
Loans that are 60 or more days Delinquent, in foreclosure or relating to REO
Properties as of the close of business on the last day of the related Due
Period and the denominator of which is the Pool Principal Balance as of the
close of business on the last day of such Due Period.
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 the any Distribution Date is the period
commencing on the second day of the month preceding the month in which such
Distribution Date occurs and ending on the first day of the month in which
such Distribution Date occurs.
The "Extra Principal Distribution Amount" for any Distribution Date, is
the lesser of (x) the General Excess Available Amount for such Distribution
Date and (y) Overcollateralization Deficiency Amount for such Distribution
Date.
The "General Excess Available Amount" means with respect to each
Distribution Date is the amount, if any, by which the Available Funds for
such Distribution Date exceeds the aggregate amount distributed on such
Distribution Date pursuant to clauses (i) and (ii) under "--Allocation of
Available Funds" above.
The "Interest Distributable Amount" for any Distribution Date and each
Class of Offered Certificates equals the sum of (i) the Monthly Interest
Distributable Amount for such Class for such Distribution Date and (ii) the
Unpaid Interest Shortfall Amount for such Class for such Distribution Date.
"Loss Reimbursement Entitlement" means, with respect to any Distribution
Date and the Class M-1 Certificates, Class M-2 Certificates or Class B
Certificates, the amount of Allocable Loss Amounts applied to the reduction
of the Certificate Principal Balance of such Class and not reimbursed
pursuant to "--Allocation of Available Funds" above as of such Distribution
Date.
The "Maximum Collateral Amount" means the Pool Principal Balance as of
the Cut-off Date.
The "Monthly Interest Distributable Amount" for any Distribution Date
and each Class of Offered Certificates equals the amount of interest accrued
during the related Accrual Period at the related Pass-Through Rate on the
Certificate Principal Balance of such Class immediately prior to such
Distribution Date (or, in the case of the first Distribution Date, on the
Closing Date).
An "Overcollateralization Deficiency Amount" with respect to any
Distribution Date equals the amount, if any, by which the
Overcollateralization Target Amount exceeds the related Overcollateralized
Amount on such Distribution Date (after giving effect to distributions in
respect of the Basic Principal Distribution Amount but without giving effect
to any Allocable Loss Amounts on such Distribution Date.
"Overcollateralization Release Amount" means, with respect to any
Distribution Date after the Stepdown Date on which an Overcollateralization
Stepdown Trigger Event is not in effect, the lesser of (x) the Principal
Remittance Amount for such Distribution Date and (y) the excess, if any, of
(i) the Overcollateralization Amount for such Distribution Date, assuming
that 100% of the Principal Remittance Amount is applied to as a principal
payment on the Offered Certificates on such Distribution Date over (ii) the
Overcollateralization Target Amount for such Distribution Date.
The "Overcollateralization Target Amount" means with respect to (a) any
Distribution Date occurring prior to the Stepdown Date, an amount equal to
1.90% of the Maximum Collateral Amount; and (b) with respect to any
Distribution Date on or after such Stepdown Date, an amount equal to the
greater of (x) the lesser of (i) 1.90% of the Maximum Collateral Amount and
(ii) 3.80% of the Pool Principal Balance as of the end of the related Due
Period and (y) the greater of $807,002 and two times the current Principal
Balance of the largest Mortgage Loan then outstanding.
The "Overcollateralized Amount" for any Distribution Date is the amount,
if any, by which (i) the Pool Principal Balance on the last day of the
immediately preceding 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.
The "Principal Distribution Amount" for any Distribution Date will equal
the sum of (i) the Basic Principal Distribution Amount and (ii) the Extra
Principal Distribution Amount for such Distribution Date.
A "Principal Prepayment" with respect to any Distribution Date is any
mortgagor payment or other recovery of principal on a Mortgage Loan that is
received in advance of its scheduled Due Date and is not accompanied
by an amount representing scheduled interest due on any date or dates in any
month or months subsequent to the month of prepayment.
The "Principal Remittance Amount" means with respect to any Distribution
Date, the sum of (i) each scheduled payment of principal collected on the
Mortgage Loans by the Master Servicer in the related Due Period, (ii) the
principal portion of all partial and full principal prepayments of such
Mortgage Loans applied by the Master Servicer during such Due Period,
(iii) the principal portion of all Net Liquidation Proceeds and Insurance
Proceeds received during such Due Period, (iv) that portion of the Purchase
Price, representing principal of any repurchased Mortgage Loan, required to
be deposited to the Collection Account during such Due Period, (v) the
principal portion of any Substitution Adjustments required to be deposited in
the Collection Account during such Due Period, and (vi) 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, in
respect of principal.
A "Realized Loss" with respect to any defaulted Mortgage Loan that is
finally liquidated (a "Liquidated Mortgage Loan") is (i) the amount of loss
realized equal to the portion of the Principal Balance remaining unpaid after
application of all liquidation proceeds net of amounts reimbursable to the
Master Servicer or Special Servicer for related Advances, Servicing Advances,
Servicing Fees and the Special Servicer Incentive Fee (such amount, the "Net
Liquidation Proceeds") in respect of such Mortgage Loan and (ii) with respect
to certain Mortgage Loans the principal balances or the scheduled payments of
principal and interest of which have been reduced in connection with
bankruptcy proceedings, (a) in the case of a reduction of the principal
balance of a Mortgage Loan, the amount of such principal reduction, and (b)
in the case of a reduction in the scheduled payments of principal and
interest of a Mortgage Loan, the net present value (using as the discount
rate the higher of the Loan Rate on such Mortgage Loan or the rate of
interest, if any, specified by the court in such order) of the scheduled
payments as so modified or restructured.
The "Rolling Delinquency Percentage" means, with respect to any
Distribution Date, the average of the Delinquency Percentages with respect to
the last day of each of the three immediately preceding Due Periods.
The "Senior Credit Enhancement Percentage," with respect to any
Distribution Date, is the percentage obtained by dividing (i) the sum of
(a) the aggregate of the Certificate Principal Balances of the Mezzanine
Certificates and the Class B Certificates and (b) the Overcollateralized
Amount, in each case after giving effect to the distributions of principal on
such Distribution Date, by (ii) the Pool Principal Balance as of the end of
the related Due Period.
The "Senior Specified Enhancement Percentage" on any date of
determination thereof means 48.30%.
The "Stepdown Date" means the earlier of (A) the Distribution Date on
which the Certificate Principal Balance of the Senior Certificates equals
zero and (B) the later to occur of (x) the Distribution Date in March 2001
and (y) the first Distribution Date on which the Senior Credit Enhancement
Percentage is greater than or equal to the Senior Specified Enhancement
Percentage.
A "Trigger Event" has occurred on any Distribution Date, if the Rolling
Delinquency Percentage exceeds 42% of the Senior Credit Enhancement
Percentage for such Distribution Date.
An "Overcollateralization Stepdown Trigger Event" means the occurrence
on any Distribution Date of both of the following: (i) the Cumulative Loss
Trigger has occurred and (ii) the Trigger Event has occurred.
The "Cumulative Loss Trigger" has occurred on a Distribution Date if
cumulative Realized Losses as of such Distribution Date exceed the
percentages of the Maximum Collateral Amount set forth below with respect to
such Distribution Date.
PERCENTAGE OF
THE MAXIMUM
DISTRIBUTION DATE COLLATERAL AMOUNT
- ----------------- -----------------
April 1998 to March 2001 . . . . . . . . . . . . . . . . . . . 1.20%
April 2001 to March 2002 . . . . . . . . . . . . . . . . . . . 2.10%
April 2002 to March 2003 . . . . . . . . . . . . . . . . . . . 2.60%
April 2003 to March 2004 . . . . . . . . . . . . . . . . . . . 2.90%
April 2004 to March 2005 . . . . . . . . . . . . . . . . . . . 3.20%
April 2005 and thereafter . . . . . . . . . . . . . . . . . . . 3.30%
The "Unpaid Interest Shortfall Amount" means (i) for each Class of
Offered Certificates and the first Distribution Date, zero, and (ii) with
respect to each Class and any Distribution Date after the first Distribution
Date, the amount, if any, by which (a) the sum of (1) the Monthly Interest
Distributable Amount for such Class for the immediately preceding
Distribution Date and (2) the outstanding Unpaid Interest Shortfall Amount,
if any, for such Class for such preceding Distribution Date exceeds (b) the
aggregate amount distributed on such Class in respect of interest pursuant to
clause (a) of this definition on such preceding Distribution Date, plus
interest on the amount of interest due but not paid on the Certificates of
such Class on such preceding Distribution Date, to the extent permitted by
law, at the Pass-Through Rate for such Class for the related Accrual Period.
PASS-THROUGH RATES
The Pass-Through Rate for each Class of Offered Certificates for a
particular Distribution Date is a per annum rate equal to the lesser of (a)
the sum of (i) One-Month LIBOR on the related LIBOR Determination Date (as
defined herein) and (ii) the related Pass-Through Margin and (b) the
Available Funds Cap. The Pass-Through Margins for the Class A, Class M-1,
Class M-2 and Class B Certificates will be equal to 0.195% (19.5 basis
points), 0.45% (45 basis points), 0.65% (65 basis points), and 1.25% (125
basis points), respectively, until the first Distribution Date following the
Call Option Date, and 0.39% (39 basis points), 0.90% (90 basis points), 1.30%
(130 basis points) and 2.50% (250 basis points), respectively, on and after
such Distribution Date. As to any Distribution Date, the "Available Funds
Cap" is a rate per annum equal to the weighted average of the Loan Rates on
the Mortgage Loans outstanding as of the first day of the related Due Period,
net of the sum of (i) the Servicing Fee Rate and (ii) the Trustee Fee Rate.
The sum of the Servicing Fee Rate and the Trustee Fee Rate will be
approximately 0.51375%. The "Call Option Date" is the first Distribution
Date on which the Pool Principal Balance (as defined herein) is less than or
equal to 10% of the Maximum Collateral Amount (as defined herein). The Pass-
Through Rates for the Class A, Class M-1, Class M-2 and Class B Certificates
for the Distribution Date in April 1998 will be 5.8825%, 6.1375%, 6.3375% and
6.9375%, respectively, per annum. See "Calculation of One-Month LIBOR"
herein.
If on any Distribution Date, the Pass-Through Rate for any Class of
Offered Certificates is based upon the Available Funds Cap, the excess of (i)
the amount of interest such Class of Certificates would have been entitled to
receive on such Distribution Date had such Pass-Through Rate not been subject
to the Available Funds Cap, up to the Maximum Cap, over (ii) the amount of
interest such Class of Offered Certificates received on such Distribution
Date based on the Available Funds Cap, together with the unpaid portion of
any such excess from prior Distribution Dates (and interest accrued thereon
at the then applicable Pass-Through Rate on such Class of Offered
Certificates, without giving effect to the Available Funds Cap) is the "Basis
Risk Shortfall Amount" for such Class of Offered Certificates. Any Basis
Risk Shortfall Amount on any Class of Offered Certificates will be paid on
future Distribution Dates from and to the extent of funds available therefor
in the Excess Reserve Fund Account (as described herein). The ratings on the
Offered Certificates do not address the likelihood of the payment of any
Basis Risk Shortfall Amount.
The "Maximum Cap" for any Distribution Date is a per annum rate equal to
the weighted average of the Loan Rate on the Fixed Rate Mortgage Loans and
the Maximum Loan Rate on the Adjustable Rate Mortgage Loans, in each case
outstanding as of the first day of the related Due Period, net of the sum of
(i) the Servicing Fee Rate and (ii) the Trustee Fee Rate.
CALCULATION OF ONE-MONTH LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Accrual Period 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 for the Offered Certificates 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
Master Servicer or any successor Master Servicer. The One-Month LIBOR value
for the initial Accrual Period will be 5.6875% per annum.
On each LIBOR Determination Date, One-Month LIBOR for the related
Accrual Period for the Offered 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 Offered Certificates for the related Accrual Period will (in the
absence of manifest error) be final and binding.
APPLICATION OF ALLOCABLE LOSS AMOUNTS
Following any reduction of the Overcollateralization Amount to zero, any
Allocable Loss Amounts will be applied, sequentially, in reduction of the
Certificate Principal Balances of the Class B Certificates, the Class M-2
Certificates and the Class M-1 Certificates, in that order, until their
respective Certificate Principal Balances have been reduced to zero. The
Certificate Principal Balance of the Senior Certificates will not be reduced
by any application of Allocable Loss Amounts. The reduction of the
Certificate Principal Balance of any applicable Class of Offered Certificates
by the application of Allocable Loss Amounts entitles such Class to
reimbursement in an amount equal to the Loss Reimbursement Entitlement. Each
such Class of Offered Certificates will be entitled to receive its Loss
Reimbursement Entitlement, or any portion thereof, in accordance with the
payment priorities specified herein. Payment in respect of Loss
Reimbursement Entitlements will not reduce the Certificate Principal Balance
of the related Class or Classes.
EXCESS RESERVE FUND ACCOUNT
The Pooling and Servicing Agreement establishes an account (the "Excess
Reserve Fund Account"), which is held in trust, as part of the Trust Fund, by
the Trustee on behalf of the Offered Certificateholders. The Excess Reserve
Fund Account will not be an asset of any REMIC. Certificateholders of each
Class of Offered Certificates in the order of their priority of payment will
be entitled to receive payments from the Excess Reserve Fund Account to the
extent of amounts on deposit therein pursuant to the Pooling and Servicing
Agreement in an amount equal to any Basis Risk Shortfall Amount for such
Class of Certificates. On the Closing Date, $1,000 will be deposited into
the Excess Reserve Fund Account. Thereafter, if the Available Funds Cap
exceeds One-Month LIBOR by less than 0.25%, the amount to be held in the
Excess Reserve Fund Account (the "Required Reserve Amount") on any
Distribution Date thereafter shall equal the greater of (i) 0.50% of the
outstanding Class Certificate Balance of the Offered Certificates as of such
Distribution Date and (ii) $5,000 and shall be funded from amounts otherwise
to be paid to the Class OC Certificates. Any distribution by the Trustee
from amounts in the Excess Reserve Fund Account shall be made on the
applicable Distribution Date.
Amounts on deposit in the Excess Reserve Fund Account in excess of
$5,000 will be released therefrom and distributed to the holders of the Class
OC Certificates on any Distribution Date on which the Available Funds Cap
exceeds One-Month LIBOR by 0.25% or more.
REPORTS TO CERTIFICATEHOLDERS OF THE CERTIFICATES
On each Distribution Date, the Trustee will forward to each holder of a
Certificate and the Rating Agency a statement generally setting forth:
(i) the amount of the distributions, separately identified,
with respect to each Class of the Offered Certificates;
(ii) the amount of such distributions set forth in clause (i)
allocable to principal, separately identifying the aggregate amount of
any Principal Prepayments or other unscheduled recoveries of principal
included therein;
(iii) the amount of such distributions set forth in clause (i)
allocable to interest and the calculation thereof;
(iv) the amount of any Unpaid Interest Shortfall Amount with
respect to each Class of Offered Certificates, separately identified;
(v) the Overcollateralization Target Amount and
Overcollateralized 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 Pool Principal Balance at the end of the related Due
Period;
(viii) the amount of the Servicing Fee paid to or retained by
the Master Servicer and the amount of compensation paid to the Special
Servicer;
(ix) the amount of the Trustee Fee paid to the Trustee;
(x) the amount of Advances for the related Due Period;
(xi) the number and aggregate Principal 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
Principal Balance of such Mortgage Loan as of the close of business on
the last day of the related Due Period and the date of acquisition
thereof;
(xiii) the total number and principal balance of any REO
Properties as of the close of business on the last day of the preceding
Due Period;
(xiv) the aggregate amount of Realized Losses incurred during
the preceding calendar month;
(xv) the cumulative amount of Realized Losses;
(xvi) any Overcollateralization Deficiency Amount after giving
effect to the distribution of principal on such Distribution Date;
(xvii) the Allocable Loss Amounts, if any, allocated to each
Class of the Mezzanine and Subordinate Certificates and the Loss
Reimbursement Entitlement owing to each Class of Mezzanine and
Subordinate Certificates outstanding after giving effect to
distributions thereof on such Distribution Date;
(xviii) whether a Trigger Event or Overcollateralization Stepdown
Trigger Event has occurred and is continuing;
(xix) the amount of the Extra Principal Distribution Amount;
(xx) the Pass-Through Rate for each Class of Offered Certificates
for such Distribution Date; and
(xxi) the amount on deposit in the Excess Reserve Fund Account
on such Distribution Date and the Basis Risk Shortfall Amount owing to
each Class of Offered Certificates after giving effect to distributions
thereof on such Distribution Date.
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.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity of the Offered Certificates, and particularly the
Subordinate Certificates, will be sensitive to defaults 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, its actual
yield to maturity will be lower than that so calculated. Certificateholders
of the Offered Certificates may not receive reimbursement for Realized Losses
in the month following the occurrence of such losses. 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. Because the Mortgage
Loans were underwritten in accordance with standards less stringent than
those generally acceptable to FNMA and FHLMC with regard to a borrower's
credit standing and repayment ability, the risk of delinquencies with respect
to, and losses on, the Mortgage Loans will be greater than that of mortgage
loans underwritten in accordance with FNMA and FHLMC standards.
The rate of principal payments on the Offered Certificates, the
aggregate amount of distributions on the Offered Certificates and the yields
to maturity of the Offered Certificates will be related to the rate and
timing of payments of principal on the Mortgage Loans. The rate of principal
payments on the Mortgage Loans will in turn be affected by the amortization
schedules of the Mortgage Loans and by the rate of principal prepayments
(including for this purpose prepayments resulting from refinancing,
liquidations of the Mortgage Loans due to defaults, casualties or
condemnations and repurchases by the Seller or Master Servicer). Because
certain of the Mortgage Loans contain prepayment penalties, the rate of
principal payments may be less than the rate of principal payments for
mortgage loans which did not have prepayment penalties. The Mortgage Loans
are subject to the "due-on-sale" provisions included therein. See "The
Mortgage Pool" herein.
Prepayments, liquidations and purchases of the Mortgage Loans (including
any optional purchase) will result in distributions on the Offered
Certificates of principal amounts which would otherwise be distributed over
the remaining terms of the Mortgage Loans. Since the rate of payment of
principal on the Mortgage Loans will depend on future events and a variety of
other factors, no assurance can be given as to such rate or the rate of
principal prepayments. The extent to which the yield to maturity of a Class
of Offered Certificates may vary from the anticipated yield will depend upon
the degree to which such Offered Certificate is purchased at a discount or
premium, and the degree to which the timing of payments thereon is sensitive
to prepayments, liquidations and purchases of the Mortgage Loans. Further,
an investor should consider the risk that, in the case of any Offered
Certificate purchased at a discount, a slower than anticipated rate of
principal payments (including prepayments) on the Mortgage Loans could result
in an actual yield to such investor that is lower than the anticipated yield
and, in the case of any Offered Certificate purchased at a premium, a faster
than anticipated rate of principal payments on the Mortgage Loans could
result in an actual yield to such investor that is lower than the anticipated
yield.
The rate of principal payments (including prepayments) on pools of
mortgage loans may vary significantly over time and may be influenced by a
variety of economic, geographic, social and other factors, including changes
in mortgagors' housing needs, job transfers, unemployment, mortgagors' net
equity in the mortgaged properties and servicing decisions. In general, if
prevailing interest rates were to fall significantly below the Loan Rates on
the Fixed Rate Mortgage Loans, such Mortgage Loans could be subject to higher
prepayment rates than if prevailing interest rates were to remain at or above
the Loan Rates on such Mortgage Loans. Conversely, if prevailing interest
rates were to rise significantly, the rate of prepayments on such Mortgage
Loans would generally be expected to decrease. As is the case with fixed
rate Mortgage Loans, the Adjustable Rate Mortgage Loans may be subject to a
greater rate of principal prepayments in a low interest rate environment.
For example, if prevailing interest rates were to fall, Mortgagors with
Adjustable Rate Mortgage Loans may be inclined to refinance their Adjustable
Rate Mortgage Loans with a fixed rate loan to "lock in" a lower interest
rate. The existence of the applicable Periodic Rate Cap and Maximum Rate
also may affect the likelihood of prepayments resulting from refinancings.
No assurances can be given as to the rate of prepayments on the Mortgage
Loans in stable or changing interest rate environments. In addition, the
delinquency and loss experience of the Adjustable Rate Mortgage Loans may
differ from that on the fixed rate Mortgage Loans because the amount of the
monthly payments on the Adjustable Rate Mortgage Loans are subject to
adjustment on each Adjustment Date. In addition, a substantial majority of
the Adjustable Rate Mortgage Loans will not have their initial Adjustment
Date for one to five years after the origination thereof. The prepayment
experience of the Delayed First Adjustment Mortgage Loans may differ from
that of the other Adjustable Rate Mortgage Loans. The Delayed First
Adjustment Mortgage Loans may be subject to greater rates of prepayments as
they approach their initial Adjustment Dates even if market interest rates
are only slightly higher or lower than the Loan Rates on the Delayed First
Adjustment Mortgage Loans as borrowers seek to avoid changes in their monthly
payments.
OVERCOLLATERALIZATION PROVISIONS
The operation of the overcollateralization provisions of the Pooling and
Servicing Agreement will affect the weighted average lives of the Offered
Certificates and consequently the yields to maturity of such Certificates.
Unless and until the Overcollateralized Amount equals the
Overcollateralization Target Amount, the General Excess Available Spread will
be applied as distributions of principal of the Class or Classes of
Certificates then entitled to distributions of principal, thereby reducing
the weighted average lives thereof. The actual Overcollateralized Amount may
change from Distribution Date to Distribution Date producing uneven
distributions of the General Excess Available Spread. There can be no
assurance as to when or whether the Overcollateralized Amount will equal the
Overcollateralization Target Amount.
The General Excess Available Spread generally is a function of the
excess of interest collected or advanced on the Mortgage Loans over the
interest required to pay interest on the Offered Certificates, the Trustee
Fee, the Servicing Fee and, under certain conditions described herein, the
Special Servicer Fee. Mortgage Loans with higher Loan Rates will contribute
more interest to the General Excess Available Spread. Mortgage Loans with
higher Loan Rates may prepay faster than Mortgage Loans with relatively lower
Loan Rates in response to a given change in market interest rates. Any such
disproportionate prepayments of Mortgage Loans with higher Loan Rates may
adversely affect the amount of the General Excess Available Spread available
to make accelerated payments of principal of the Offered Certificates.
As a result of the interaction of the foregoing factors, the effect of
the overcollateralization provisions on the weighted average lives of the
Offered Certificates may vary significantly over time and from Class to
Class.
ADDITIONAL INFORMATION
The Depositor has filed certain yield tables and other computational
materials with respect to certain Classes of the Offered Certificates with
the Commission in a report on Form 8-K and may file certain additional yield
tables and other computational materials with respect to one or more Classes
of Offered Certificates with the Commission in a report on Form 8-K. Such
tables and materials were prepared by the Underwriter at the request of
certain prospective investors, based on assumptions provided by, and
satisfying the special requirements of, such prospective investors. Such
tables and assumptions may be based on assumptions that differ from the
Structuring Assumptions. Accordingly, such tables and other materials may
not be relevant to or appropriate for investors other than those specifically
requesting them.
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 higher (or
lower) than the rate anticipated by the investor during the period
immediately following the issuance of the Offered Certificates may not be
offset by a subsequent like decrease (or increase) in the rate of Principal
Prepayments.
The projected weighted average life of any Class of Offered Certificates
is the average amount of time that will elapse from March 18, 1998 (the
"Closing 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 Mortgage Loans-
- -Mortgage Loan Statistics."
The "Assumed Final Maturity Date" for each Class of Offered Certificates
is as set forth herein under "Description of the Certificates--General". The
Assumed Final Maturity Date for each Class of Offered Certificates is the
13th Distribution Date following the Due Period in which the Principal
Balances of all the Mortgage Loans 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 Overcollateralization Target
Amount is as defined herein and (iv) the Majority Residual Interestholder or
the Master Servicer may cause a termination of the Trust Fund as provided
herein.
The model used in this Prospectus Supplement (the "Prepayment
Assumption") 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. The Prepayment Assumption does not purport to be
a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans. With respect to the Mortgage Loans, a 100% Prepayment
Assumption assumes conditional prepayment rates of 4% per annum of the then
outstanding principal balance of the Mortgage Loans in the first month of the
life of the related Mortgage Loans and an additional 1.647059% per annum (or
more precisely 28/17%) in each month thereafter until the eighteenth month.
Beginning in the eighteenth month and in each month thereafter during the
life of the Mortgage Loans, a 100% Prepayment Assumption assumes a constant
prepayment rate of 32% per annum each month. As used in the table, below, 0%
Prepayment Assumption assumes prepayment rates equal to 0% of the Prepayment
Assumption i.e., no prepayments. Correspondingly, 100% Prepayment Assumption
assumes prepayment rates equal to 100% of the Prepayment Assumption, and so
forth.
Each of the Prepayment Scenarios in the table on page S-55 assumes the
respective percentages of Prepayment Assumption described thereunder.
The tables on pages S-57 through S-60 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-57 through S-60. 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-57
through S-60 were determined assuming that (the "Structuring Assumptions"):
(i) the Mortgage Loans consist of sixteen sub-pools of loans with the
characteristics set forth in the table below, (ii) the Closing Date for the
Offered Certificates occurs on March 18, 1998 and the Offered Certificates
were sold to investors by the Underwriter on the Closing Date,
(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 April 1998, in accordance with the allocation of
Available Funds set forth above under "Description of the Certificates--
Allocation of Available Funds"; (iv) the Accrual Period 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 April
1998 Distribution Date) to and including the day immediately preceding such
Distribution Date, (v) the prepayment rates are the percentages of the
Prepayment Assumption set forth in the "Prepayment Scenarios" table below,
(vi) prepayments include thirty days' interest thereon, (vii) 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 Optional Termination" in the tables
below, (viii) the Overcollateralization Target 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, (ix)
scheduled payments for all Mortgage Loans are received on the first day of
each month (or in the case of the month of the Closing Date, the day
following the Cut-off Date), 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, (x)
all 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, (xi) such prepayments are received on the last day of
each month commencing in the month of the Closing Date, (xii) One-Month LIBOR
is at all times 5.6875%, (xiii) the Pass-Through Rates for the Class A, Class
M-1, Class M-2 and Class B Certificates are 5.8825%, 6.1375% , 6.3375% and
6.9375%, respectively, until the Distribution Date following the Call Option
Date, at which time such Pass-Through Rates are assumed to be 6.0775%,
6.5875%, 6.9875% and 8.1875%, respectively, (xiv) the Loan Rate for each
Adjustable Mortgage Loan is adjusted on its next Adjustment Date (and on
subsequent Adjustment Dates, if necessary) to equal the sum of (a) the
assumed level of the Index and (b) the respective Gross Margin (such sum
being subject to the applicable Periodic Rate Caps, Minimum Loan Rates and
Maximum Loan Rates), (xv) with respect to the Adjustable Mortgage Loans, the
Index is equal to 5.71875%. 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> <C> <C> <C> <C> <C> <C>
Prepayment Assumption 0% 50% 75% 100% 150% 200%
</TABLE>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
Months to
Next Initial Original Remaining
Principal Current Loan Adjustment Gross Lifetime Periodic Periodic Months to Months to
Description Balance ($) Rate (%) Date Margin (%) Cap (%) Rate Cap (%) Cap (%) Maturity Maturity
- ------------ ----------- ------------- ----------- ---------- -------- ------------ -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
6mo ARM 227,806.35 9.7522 2 6.2789 16.0368 1.0000 1.0000 180 176
6mo ARM 1,542,506.86 9.6342 1 5.1574 16.1239 1.0000 1.0000 360 355
6mo ARM 1,726,392.02 9.9201 2 6.1474 15.9839 1.3610 1.0402 360 355
6mo ARM 4,116,388.04 9.7873 3 5.2307 16.2096 1.0000 1.0000 360 357
6mo ARM 5,493,529.52 9.8833 4 5.4479 16.3739 1.0000 1.0000 360 358
6mo ARM 4,615,514.74 9.5666 5 5.4035 16.0110 1.0268 1.0000 360 358
6mo ARM 2,495,468.65 10.0938 6 5.6601 16.3983 1.0000 1.0000 360 355
Adjustable 17,206,380.94 9.8060 9 5.1792 16.3018 1.0183 1.0000 360 357
Adjustable 100,995,371.13 10.2931 22 5.5896 16.7870 2.2773 1.0000 360 358
Adjustable 1,737,436.50 10.5353 32 5.7778 17.2066 2.3426 1.1713 360 356
Adjustable 1,142,090.86 11.0945 59 5.6408 17.5945 2.7572 1.0000 360 359
Adjustable 133,355.26 10.5703 19 5.7563 17.0703 2.0000 1.0000 180 175
Fixed 15yr 1,992,442.46 10.8142 N/A N/A N/A N/A N/A 180 177
Fixed 20yr 448,076.81 10.7873 N/A N/A N/A N/A N/A 240 238
Fixed 30yr 16,655,402.72 10.6754 N/A N/A N/A N/A N/A 360 357
Fixed Balloon 872,167.04 11.0650 N/A N/A N/A N/A N/A 180 177
</TABLE>
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.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCES OUTSTANDING*
<TABLE>
<CAPTION> CLASS A
PREPAYMENT SCENARIO
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI
- ----------------- ---------- ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage . . . . . 100% 100% 100% 100% 100% 100%
---------- ----------- ------------ ----------- ---------- -----------
March, 1999 . . . . . . . . . 97 86 80 75 64 52
March, 2000 . . . . . . . . . 96 67 54 41 19 0
March, 2001 . . . . . . . . . 95 51 33 18 0 0
March, 2002 . . . . . . . . . 94 37 25 17 0 0
March, 2003 . . . . . . . . . 93 29 19 12 0 0
March, 2004 . . . . . . . . . 92 25 14 8 0 0
March, 2005 . . . . . . . . . 91 20 11 5 0 0
March, 2006 . . . . . . . . . 90 17 8 4 0 0
March, 2007 . . . . . . . . . 88 14 6 2 0 0
March, 2008 . . . . . . . . . 87 12 5 2 0 0
March, 2009 . . . . . . . . . 85 10 3 1 0 0
March, 2010 . . . . . . . . . 83 8 3 1 0 0
March, 2011 . . . . . . . . . 80 7 2 0 0 0
March, 2012 . . . . . . . . . 78 5 1 0 0 0
March, 2013 . . . . . . . . . 74 4 1 0 0 0
March, 2014 . . . . . . . . . 71 4 1 0 0 0
March, 2015 . . . . . . . . . 68 3 0 0 0 0
March, 2016 . . . . . . . . . 64 2 0 0 0 0
March, 2017 . . . . . . . . . 60 2 0 0 0 0
March, 2018 . . . . . . . . . 55 1 0 0 0 0
March, 2019 . . . . . . . . . 50 1 0 0 0 0
March, 2020 . . . . . . . . . 45 1 0 0 0 0
March, 2021 . . . . . . . . . 38 1 0 0 0 0
March, 2022 . . . . . . . . . 32 0 0 0 0 0
March, 2023 . . . . . . . . . 28 0 0 0 0 0
March, 2024 . . . . . . . . . 23 0 0 0 0 0
March, 2025 . . . . . . . . . 18 0 0 0 0 0
March, 2026 . . . . . . . . . 12 0 0 0 0 0
March, 2027 . . . . . . . . . 6 0 0 0 0 0
March, 2028 . . . . . . . . . 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity(1) . . . . . . 19.51 4.62 3.22 2.41 1.36 1.08
Weighted Average Life (years)
to Optional Termination(1) 19.48 4.33 3.00 2.25 1.36 1.08
</TABLE>
- --------------------------------------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the principal
amount on each Distribution Date on such Class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing
the sum by the aggregate amount of the assumed net reductions in
principal amount on such Class of Certificates.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCES OUTSTANDING*
<TABLE>
<CAPTION> CLASS M-1
PREPAYMENT SCENARIO
-----------------------------------------------------------------------------------
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI
- ----------------- ---------- ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage . . . . . 100% 100% 100% 100% 100% 100%
March, 1999 . . . . . . . . . 100 100 100 100 100 100
March, 2000 . . . . . . . . . 100 100 100 100 100 100
March, 2001 . . . . . . . . . 100 100 100 100 100 69
March, 2002 . . . . . . . . . 100 100 75 51 84 25
March, 2003 . . . . . . . . . 100 89 57 35 43 7
March, 2004 . . . . . . . . . 100 74 43 23 22 0
March, 2005 . . . . . . . . . 100 61 32 16 11 0
March, 2006 . . . . . . . . . 100 51 24 11 3 0
March, 2007 . . . . . . . . . 100 42 18 7 0 0
March, 2008 . . . . . . . . . 100 35 14 5 0 0
March, 2009 . . . . . . . . . 100 29 10 3 0 0
March, 2010 . . . . . . . . . 100 24 8 0 0 0
March, 2011 . . . . . . . . . 100 20 6 0 0 0
March, 2012 . . . . . . . . . 100 16 4 0 0 0
March, 2013 . . . . . . . . . 100 13 3 0 0 0
March, 2014 . . . . . . . . . 100 11 1 0 0 0
March, 2015 . . . . . . . . . 100 9 0 0 0 0
March, 2016 . . . . . . . . . 100 7 0 0 0 0
March, 2017 . . . . . . . . . 100 6 0 0 0 0
March, 2018 . . . . . . . . . 100 4 0 0 0 0
March, 2019 . . . . . . . . . 100 4 0 0 0 0
March, 2020 . . . . . . . . . 100 2 0 0 0 0
March, 2021 . . . . . . . . . 100 0 0 0 0 0
March, 2022 . . . . . . . . . 96 0 0 0 0 0
March, 2023 . . . . . . . . . 84 0 0 0 0 0
March, 2024 . . . . . . . . . 70 0 0 0 0 0
March, 2025 . . . . . . . . . 54 0 0 0 0 0
March, 2026 . . . . . . . . . 37 0 0 0 0 0
March, 2027 . . . . . . . . . 17 0 0 0 0 0
March, 2028 . . . . . . . . . 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity(1) . . . . . . 27.15 9.52 6.47 5.12 5.20 3.61
Weighted Average Life (years)
to Optional Termination(1) 27.06 8.69 5.87 4.68 4.07 2.91
- --------------------------------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the principal
amount on each Distribution Date on such Class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing
the sum by the aggregate amount of the assumed net reductions in
principal amount on such Class of Certificates.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCES OUTSTANDING*
</TABLE>
<TABLE>
<CAPTION> CLASS M-2
PREPAYMENT SCENARIO
-----------------------------------------------------------------------------------
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI
- ----------------- ---------- ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage . . . . . 100% 100% 100% 100% 100% 100%
March, 1999 . . . . . . . . . 100 100 100 100 100 100
March, 2000 . . . . . . . . . 100 100 100 100 100 100
March, 2001 . . . . . . . . . 100 100 100 100 100 17
March, 2002 . . . . . . . . . 100 100 75 51 21 6
March, 2003 . . . . . . . . . 100 89 57 35 11 0
March, 2004 . . . . . . . . . 100 74 43 23 5 0
March, 2005 . . . . . . . . . 100 61 32 16 0 0
March, 2006 . . . . . . . . . 100 51 24 11 0 0
March, 2007 . . . . . . . . . 100 42 18 7 0 0
March, 2008 . . . . . . . . . 100 35 14 3 0 0
March, 2009 . . . . . . . . . 100 29 10 0 0 0
March, 2010 . . . . . . . . . 100 24 8 0 0 0
March, 2011 . . . . . . . . . 100 20 5 0 0 0
March, 2012 . . . . . . . . . 100 16 2 0 0 0
March, 2013 . . . . . . . . . 100 13 0 0 0 0
March, 2014 . . . . . . . . . 100 11 0 0 0 0
March, 2015 . . . . . . . . . 100 9 0 0 0 0
March, 2016 . . . . . . . . . 100 7 0 0 0 0
March, 2017 . . . . . . . . . 100 5 0 0 0 0
March, 2018 . . . . . . . . . 100 3 0 0 0 0
March, 2019 . . . . . . . . . 100 1 0 0 0 0
March, 2020 . . . . . . . . . 100 0 0 0 0 0
March, 2021 . . . . . . . . . 100 0 0 0 0 0
March, 2022 . . . . . . . . . 96 0 0 0 0 0
March, 2023 . . . . . . . . . 84 0 0 0 0 0
March, 2024 . . . . . . . . . 70 0 0 0 0 0
March, 2025 . . . . . . . . . 54 0 0 0 0 0
March, 2026 . . . . . . . . . 37 0 0 0 0 0
March, 2027 . . . . . . . . . 17 0 0 0 0 0
March, 2028 . . . . . . . . . 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity(1) . . . . . 27.15 9.45 6.41 4.96 3.84 2.74
Weighted Average Life (years)
to Optional Termination(1) 27.06 8.69 5.87 4.56 3.60 2.59
- ---------------------------------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the principal
amount on each Distribution Date on such Class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing
the sum by the aggregate amount of the assumed net reductions in
principal amount on such Class of Certificates.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCES OUTSTANDING*
</TABLE>
<TABLE>
<CAPTION> CLASS B
PREPAYMENT SCENARIO
-----------------------------------------------------------------------------------
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI
- ----------------- ---------- ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage . . . . . 100% 100% 100% 100% 100% 100%
March, 1999 . . . . . . . . . 100 100 100 100 100 100
March, 2000 . . . . . . . . . 100 100 100 100 100 100
March, 2001 . . . . . . . . . 100 100 100 100 54 14
March, 2002 . . . . . . . . . 100 100 75 51 19 0
March, 2003 . . . . . . . . . 100 89 57 35 6 0
March, 2004 . . . . . . . . . 100 74 43 22 0 0
March, 2005 . . . . . . . . . 100 61 32 13 0 0
March, 2006 . . . . . . . . . 100 51 24 6 0 0
March, 2007 . . . . . . . . . 100 42 16 1 0 0
March, 2008 . . . . . . . . . 100 35 10 0 0 0
March, 2009 . . . . . . . . . 100 29 5 0 0 0
March, 2010 . . . . . . . . . 100 23 2 0 0 0
March, 2011 . . . . . . . . . 100 18 0 0 0 0
March, 2012 . . . . . . . . . 100 13 0 0 0 0
March, 2013 . . . . . . . . . 100 9 0 0 0 0
March, 2014 . . . . . . . . . 100 6 0 0 0 0
March, 2015 . . . . . . . . . 100 4 0 0 0 0
March, 2016 . . . . . . . . . 100 1 0 0 0 0
March, 2017 . . . . . . . . . 100 0 0 0 0 0
March, 2018 . . . . . . . . . 100 0 0 0 0 0
March, 2019 . . . . . . . . . 100 0 0 0 0 0
March, 2020 . . . . . . . . . 100 0 0 0 0 0
March, 2021 . . . . . . . . . 100 0 0 0 0 0
March, 2022 . . . . . . . . . 96 0 0 0 0 0
March, 2023 . . . . . . . . . 84 0 0 0 0 0
March, 2024 . . . . . . . . . 70 0 0 0 0 0
March, 2025 . . . . . . . . . 54 0 0 0 0 0
March, 2026 . . . . . . . . . 37 0 0 0 0 0
March, 2027 . . . . . . . . . 15 0 0 0 0 0
March, 2028 . . . . . . . . . 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity(1) . . . . . . 27.11 9.12 6.17 4.72 3.45 2.48
Weighted Average Life (years)
to Optional Termination(1) 27.05 8.68 5.86 4.50 3.31 2.40
- --------------------------------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the principal
amount on each Distribution Date on such Class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing
the sum by the aggregate amount of the assumed net reductions in
principal amount on such Class of Certificates.
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
The Pooling and Servicing Agreement provides that the Trust Fund,
exclusive of the assets held in the Excess Reserve Fund Account, will
comprise several Subsidiary REMICs and a Master REMIC organized in a tiered
REMIC structure. Each Subsidiary REMIC will issue uncertificated regular
interests and those interests will be held entirely by the REMIC immediately
above it in the tiered structure. Each of the Subsidiary REMICs and the
Master REMIC will designate a single class of interests as the residual
interest in that REMIC. The Class R Certificates will represent ownership of
the residual interests in each of the REMICs. Elections will be made to
treat each Subsidiary REMIC and the Master REMIC as a REMIC for federal
income tax purposes.
Each Class of Offered Certificates and the Class OC Certificates will
represent beneficial ownership of regular interests issued by the Master
REMIC. In addition, each of the Offered Certificates will represent a
beneficial interest in the right to receive payments from the Excess Reserve
Fund Account.
Upon the issuance of the Offered Certificates, Brown & Wood LLP ("Tax
Counsel"), will deliver its opinion concluding, assuming compliance with the
Pooling and Servicing Agreement, for federal income tax purposes, each
Subsidiary REMIC and the Master REMIC will qualify as a REMIC within the
meaning of Section 860D of the Internal Revenue Code of 1986, as amended (the
"Code"). In addition, Tax Counsel will deliver an opinion concluding that
the Excess Reserve Fund Account is an "outside reserve fund" that is
beneficially owned by the Certificateholders of the Class OC Certificates.
Moreover, Tax Counsel will deliver an opinion concluding that the rights of
the Certificateholders of the Offered Certificates to receive payments from
the Excess Reserve Fund Account represent, for federal income tax purposes,
interests in an interest rate cap contract.
TAXATION OF REGULAR INTERESTS
A Certificateholder of a Class of Offered Certificates will be treated
for federal income tax purposes as owning an interest in regular interests in
the Master REMIC. The Offered Certificates will also represent beneficial
ownership of an interest in a limited recourse interest rate cap contract
(the "Cap Contract"). A Certificateholder of an Offered Certificate must
allocate its purchase price for the Offered Certificate between its two
components -- the REMIC regular interest component and the Cap Contract
component (the value of which should be nominal). For information reporting
purposes, the Trustee will assume that, with respect to any Offered
Certificate, the Cap Contract component will have only nominal value relative
to the value of the regular interest component. The IRS could, however,
argue that the Cap Contract component has a greater than de minimis value,
and if that argument were to be sustained, the regular interest component
could be viewed as having been issued with original issue discount ("OID")
(which could cause the total amount of discount to exceed a statutorily
defined de minimis amount). See "Certain Material Federal Income Tax
Considerations" in the Prospectus.
Upon the sale, exchange, or other disposition of an Offered Certificate,
the Certificateholder must allocate the amount realized between the two
components of the Offered Certificate based on the relative fair market
values of those components at the time of sale. Assuming that an Offered
Certificate is held as a "capital asset" within the meaning of section 1221
of the Code, gain or loss on the disposition of an interest in the Cap
Contract component should be capital gain or loss, and, gain or loss on the
disposition of the regular interest component should, subject to the
limitation described below, be capital gain or loss. Gain attributable to
the regular interest component of an Offered Certificate will be treated as
ordinary income, however, to the extent such gain does not exceed the
excess, if any, of (i) the amount that would have been includible in the
Certificateholder's gross income with respect to the regular interest
component had income thereon accrued at a rate equal to 110% of the
applicable federal rate as defined in section 1274(d) of the Code determined
as of the date of purchase of the Offered Certificate over (ii) the amount
actually included in such Certificateholder's income.
The maximum tax rate on noncorporate taxpayer's on capital gain realized
upon the disposition of Offered Certificates is 20 percent if the Offered
Certificates are held for at least 18 months, and 28 percent if the Offered
Certificates are held for more than one year but not more than 18 months.
Interest on a regular interest must be included in income by a
Certificateholder under the accrual method of accounting, regardless of the
Certificateholder's regular method of accounting. In addition, a Regular
interest could be considered to have been issued with OID. See "Certain
Material Federal Income Tax Considerations" in the Prospectus. The
prepayment assumption that will be used to in determining the accrual of any
OID, market discount, or bond premium, if any, will be a rate equal to 100%
of the Prepayment Assumption. No representation is made that the Mortgage
Loans will prepay at such a rate or at any other rate. OID must be included
in income as it accrues on a constant yield method, regardless of whether the
Certificateholder receives currently the cash attributable to such OID.
STATUS OF THE OFFERED CERTIFICATES
The regular interest component of the Offered Certificates will be
treated as assets described in Section 7701(a)(19)(C) of the Code, and as
"real estate assets" under Section 856(c)(5)(B) of the Code, generally, in
the same proportion that the assets of the Trust Fund, exclusive of the
Excess Reserve Fund Account, would be so treated. In addition, to the extent
a regular interest represents real estate assets under section 856(c)(5)(B)
of the Code, the interest derived from that component would be interest on
obligations secured by interests in real property for purposes of section
856(c)(3) of the Code. The Cap Contract component of an Offered Certificate
will not, however, qualify as an asset described in Section 7701(a)(19)(C) of
the Code or as a real estate asset under Section 856(c)(5)(B) of the Code.
THE EXCESS RESERVE FUND ACCOUNT
As indicated above, a portion of the purchase price paid by a
Certificateholder to acquire an Offered Certificate will be attributable to
the Cap Contract component of the Offered Certificate. The portion of the
overall purchase price attributable to the Cap Component must be amortized
over the life of the Offered Certificate, taking into account the declining
balance of the related regular interest component. Treasury regulations
concerning notional principal contracts provide alternative methods for
amortizing the purchase price of an interest rate cap contract. Under one
method -- the level yield constant interest method -- the price paid for an
interest rate cap is amortized over the life of the cap as though it were the
principal amount of a loan bearing interest at a reasonable rate.
Certificateholders are urged to consult their tax advisors concerning the
methods that can be employed to amortize the portion of the purchase price
paid for the Cap Contract component of an Offered Certificate.
Any payments made to a Certificateholder from the Excess Reserve Fund
Account will be treated as periodic payments on an interest rate cap
contract. To the extent the sum of such periodic payments for any year
exceed that year's amortized cost of the Cap Contract component, such excess
is ordinary income. If for any year the amount of that year's amortized cost
exceeds the sum of the periodic payments, such excess is allowable as an
ordinary deduction.
NON-U.S. PERSONS
Interest paid to or accrued by a Certificateholder who is a non-U.S.
Person will be considered "portfolio interest", and will not be subject to
U.S. 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 non-U.S. Person and the non-U.S. Person (i) is not
actually or constructively a "10 percent shareholder" of the Trust Fund or a
"controlled foreign corporation" with respect to which the Trust Fund is a
"related person" within the meaning of the Code and (ii) provides the Trust
Fund or other person who is otherwise required to withhold U.S. tax with
respect to the Offered Certificates with an appropriate statement (on Form
W-8 or a similar form), signed under penalties of perjury, certifying that
the beneficial owner of the Offered Certificate is a non-U.S. Person and
providing the non-U.S. Person's name and address. If an Offered Certificate
is held through a securities clearing organization or certain other financial
institutions, the organization or institution may provide the relevant signed
statement to the withholding agent; in that case, however, the signed
statement must be accompanied by a Form W-8 or substitute form provided by
the non-U.S. Person that owns the Certificate.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of an Offered Certificate by a non-U.S. 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 non-U.S. Person and (ii) in the case of
an individual, the individual is not present in the United States for 183
days or more in the taxable year.
For purposes of the foregoing discussion, the term "non-U.S. Person"
means any person other than (i) a citizen or resident of the United States;
(ii) a corporation (or entity treated as a corporation for tax purposes)
created or organized in the United States or under the laws of the United
States or of any state thereof, including, for this purpose, the District of
Columbia; (iii) a partnership (or entity treated as a partnership for tax
purposes) organized in the United States or under the laws of the United
States or of any state thereof, including, for this purpose, the District of
Columbia (unless provided otherwise by future Treasury regulations); (iv) an
estate whose income is includible in gross income for United States income
tax purposes regardless of its source; or (v) a trust, if a court within the
United States is able to exercise primary supervision over the administration
of the trust and one or more U.S. Persons have authority to control all
substantial decisions of the trust. Notwithstanding the last clause of the
preceding sentence, to the extent provided in Treasury regulations, certain
trusts in existence on August 20, 1996, and treated as U.S. Persons prior to
such date, may elect to continue to be U.S. Persons.
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.
Such amounts will be deemed distributed to the affected Certificate
Owner for all purposes of the related Certificates and the Pooling and
Servicing Agreement.
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, regulatory 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, Inc. ("S&P"), Moody's Investors Service, Inc. ("Moody's"),
Duff & Phelps Credit Rating Co. ("DCR") or Fitch IBCA, Inc. ("Fitch"
and, together with S&P, Moody's and DCR, the "Exemption Rating
Agencies");
(4) the trustee must not be an affiliate of any other member of
the Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the
underwriters in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the seller
pursuant to the assignment of the loans to the trust fund represents not
more than the fair market value of such loans; the sum of all payments
made to and retained by the servicer and any other servicer represents
not more than reasonable compensation for such person's services under
the agreement pursuant to which the loans are pooled and reimbursements
of such person's reasonable expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933.
The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of
assets of the type that have been included in other investment
pools;
(ii) certificates in such other investment pools must have
been rated in one of the three highest generic rating categories by
an Exception 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 is acquired by persons independent of the Restricted Group; (ii)
such fiduciary (or its affiliate) is an obligor with respect to five percent
(5%) or less of the fair market value of the obligations contained in the
trust; (iii) the Plan's investment in certificates of any class does not
exceed twenty-five percent (25%) of all of the certificates of that class
outstanding at the time of the acquisition; and (iv) immediately after the
acquisition, no more than twenty-five percent (25%) of the assets of any Plan
with respect to which such person is a fiduciary are invested in certificates
representing an interest in one or more trusts containing assets sold or
serviced by the same entity. The Exemption does not apply to Plans sponsored
by the Underwriter, the Trustee, the Master 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").
It is expected that the Exemption will apply to the acquisition and
holding by Plans of the Class A Certificates and that all conditions of the
Exemption other than those within the control of the investors will be met.
BECAUSE THE CHARACTERISTICS OF THE CLASS M-1, CLASS M-2 AND CLASS B
CERTIFICATES MAY NOT MEET THE REQUIREMENTS OF PTCE 83-1, THE EXEMPTION OR ANY
OTHER ISSUED EXEMPTION UNDER ERISA, THE PURCHASE AND HOLDING OF CLASS M-1,
CLASS M-2 AND CLASS B CERTIFICATES BY A PLAN OR BY INDIVIDUAL RETIREMENT
ACCOUNTS OR OTHER PLANS SUBJECT TO SECTION 4975 OF THE CODE MAY RESULT IN
PROHIBITED TRANSACTIONS OR THE IMPOSITION OF EXCISE TAXES OR CIVIL PENALTIES.
CONSEQUENTLY, INITIAL ACQUISITIONS AND TRANSFERS OF THE CLASS M-1, CLASS M-2
AND CLASS B CERTIFICATES WILL NOT BE REGISTERED BY THE TRUSTEE UNLESS THE
TRUSTEE RECEIVES: (I) A REPRESENTATION FROM THE ACQUIROR OR TRANSFEREE OF
SUCH CERTIFICATE, TO THE EFFECT THAT SUCH TRANSFEREE IS NOT AN EMPLOYEE
BENEFIT PLAN SUBJECT TO SECTION 406 OF ERISA OR A PLAN OR ARRANGEMENT SUBJECT
TO SECTION 4975 OF THE CODE, NOR A PERSON ACTING ON BEHALF OF ANY SUCH PLAN
OR ARRANGEMENT NOR USING THE ASSETS OF ANY SUCH PLAN OR ARRANGEMENT TO EFFECT
SUCH TRANSFER OR (II) IF THE PURCHASER IS AN INSURANCE COMPANY, A
REPRESENTATION THAT THE PURCHASER IS AN INSURANCE COMPANY WHICH IS PURCHASING
SUCH CERTIFICATES WITH FUNDS CONTAINED IN AN "INSURANCE COMPANY GENERAL
ACCOUNT" (AS SUCH TERM IS DEFINED IN SECTION V(E) OF PROHIBITED TRANSACTION
CLASS EXEMPTION 95-60 ("PTCE 95-60")) AND THAT THE PURCHASE AND HOLDING OF
SUCH CERTIFICATES ARE COVERED UNDER PTCE 95-60. SUCH REPRESENTATION AS
DESCRIBED ABOVE SHALL BE DEEMED TO HAVE BEEN MADE TO THE TRUSTEE BY THE
ACQUIROR OR TRANSFEREE'S ACCEPTANCE OF A CLASS M-1, CLASS M-2 OR CLASS B
CERTIFICATE. IN THE EVENT THAT SUCH REPRESENTATION IS VIOLATED, SUCH
ATTEMPTED TRANSFER OR ACQUISITION SHALL BE VOID AND OF NO EFFECT.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 83-1
described in the Prospectus and the Exemption, and the potential consequences
in their specific circumstances, prior to making an investment in the Offered
Certificates. Moreover, each Plan fiduciary should determine whether under
the general fiduciary standards of investment prudence and diversification,
an investment in the Offered Certificates is appropriate for the Plan, taking
into account the overall investment policy of the Plan and the composition of
the Plan's investment portfolio.
LEGAL INVESTMENT CONSIDERATIONS
The Class A Certificates and the Class M-1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") so long as they are rated in one of the two
highest rating categories by at least one nationally recognized statistical
rating organization and, as such, are legal investments for certain entities
to the extent provided for in SMMEA. The Class M-2 Certificates and the
Class B Certificates will not constitute "mortgage related securities" under
SMMEA. Accordingly, many institutions with legal authority to invest in
"mortgage related securities" may not be legally authorized to invest in the
Class M-2 Certificates or the Class B Certificates.
There may be restrictions on the ability of certain investors, including
depository institutions, either to purchase the Certificates or to purchase
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 Underwriter proposes to offer the Offered Certificates in part
directly to purchasers at the initial public offering prices set forth on the
cover page of this Prospectus Supplement and in part to certain securities
dealers at such prices less concessions not to exceed 0.10%, 0.21%, 0.27% and
0.60% of the respective Certificate Principal Balances of the Class A, Class
M-1, Class M-2 and Class B Certificates. The Underwriter may allow, and such
dealers may reallow, concessions not to exceed 0.06%, 0.126%, 0.162%, and
0.36% of the respective Certificate Principal Balances of the Class A, Class
M-1, Class M-2 and Class B Certificates to certain brokers and dealers.
After the Offered Certificates are released for sale to the public, the
offering price and other selling terms may be varied by the Underwriter.
Until the distribution of the Offered Certificates is completed, rules
of the Commission may limit the ability of the Underwriter and certain
selling group members to bid for and purchase the Offered Certificates. As
an exception to these rules, the Underwriter is permitted to engage in
certain transactions that stabilize the price of the Offered Certificates.
Such transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Offered Certificates.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither the Depositor nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the prices of the Offered
Certificates. In addition, neither the Depositor nor the Underwriter makes
any representation that the Underwriter will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
After the initial public offering of the Offered Certificates, the
public offering price and such concessions may be changed.
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 &
Foerster LLP, New York, New York.
RATINGS
It is a condition to the issuance of the Offered Certificates that (i)
the Class A Certificates be rated "Aaa" by Moody's Investors Service
("Moody's") and "AAA" by Duff & Phelps Credit Rating Company ("DCR" and,
together with Moody's the "Rating Agencies"), (ii) the M-1 Certificates be
rated "Aa2" by Moody's and "AA" by DCR, (iii) the M-2 Certificates be rated
"A2" by Moody's and "A" by DCR and (iv) the Class B Certificates be rated
"Baa2" by Moody's and "BBB" by DCR.
The ratings assigned by Moody's to mortgage pass-through certificates
address the likelihood of the receipt of all distributions on the mortgage
loans by the related certificateholders under the agreements pursuant to
which such certificates are issued. Moody's ratings take into consideration
the credit quality of the related mortgage pool, including any credit support
providers, structural and legal aspects associated with such certificates,
and the extent to which the payment stream on the mortgage pool is adequate
to make the payments required by such certificates. Moody's ratings on such
certificates do not, however, constitute a statement regarding frequency of
prepayments of the mortgage loans.
Similarly, the ratings assigned by DCR to mortgage pass-through
certificates address the likelihood of the receipt of all distributions on
the mortgage loans by the related certificateholders under the agreements
pursuant to which such certificates are issued. DCR ratings take into
consideration the credit quality of the related mortgage pool, including any
credit support providers, structural and legal aspects associated with such
certificates, and the extent to which the payment stream on the mortgage pool
is adequate to make the payments required by such certificates. DCR ratings
on such certificates do not, however, constitute a statement regarding
frequency of prepayments of the mortgage loans.
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 ratings on
the Offered Certificates do not address the likelihood of the payment of any
Basis Risk Shortfall Amount. 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 General Excess
Available Amount as described herein, or in the event that the Trust Fund is
terminated prior to the Assumed Final Maturity Date of the Classes of Offered
Certificates.
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.
INDEX OF DEFINED TERMS
Accrual Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-45
Adjustable Rate Mortgage Loans . . . . . . . . . . . . . . . . . . S-2, S-15
Adjustment Date . . . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-22
Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-36
Allocable Loss Amount . . . . . . . . . . . . . . . . . . . . . . . S-7, S-45
Assumed Final Maturity Date . . . . . . . . . . . . . . . . . . . . . . S-54
Available Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-43
Available Funds Cap . . . . . . . . . . . . . . . . . . . . . . . . S-5, S-49
Balloon Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-16
Balloon Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-16
Basic Principal Distribution Amount . . . . . . . . . . . . . . . . . . S-45
Basis Risk Shortfall Amount . . . . . . . . . . . . . . . . . . . . S-6, S-49
BCD Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . S-32
Book-Entry Certificates . . . . . . . . . . . . . . . . . . . . . . . . S-40
Call Option Date . . . . . . . . . . . . . . . . . . . . . . S-5, S-45, S-49
Cap Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-60
Cede . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
Cedel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Cedel Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . S-41
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-14
Certificate Owner . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Certificate Principal Balance . . . . . . . . . . . . . . . . . . . S-2, S-45
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-39
Chase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
Citibank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
Class A Principal Distribution Amount . . . . . . . . . . . . . . . . . S-45
Class B Principal Distribution Amount . . . . . . . . . . . . . . . . . S-46
Class M-1 Principal Distribution Amount . . . . . . . . . . . . . . . . S-45
Class M-2 Principal Distribution Amount . . . . . . . . . . . . . . . . S-46
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2, S-54
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-60
Collection Account . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . inside cover
Compensating Interest . . . . . . . . . . . . . . . . . . . . . . . . . S-37
Contributions Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . S-62
Cumulative Loss Trigger . . . . . . . . . . . . . . . . . . . . . . . . S-48
Cut-off Date . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-2, S-15
Cut-off Date Principal Balance . . . . . . . . . . . . . . . . . . . . . S-1
DCR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-9, S-64, S-66
Debt Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-27
Defective Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . S-35
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-45
Definitive Certificate . . . . . . . . . . . . . . . . . . . . . . . . S-40
Delayed First Adjustment Mortgage Loan . . . . . . . . . . . . . . S-3, S-15
Delinquency Percentage . . . . . . . . . . . . . . . . . . . . . . . . S-46
Delinquent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-46
Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-2
Depository . . . . . . . . . . . . . . . . . . . . . . . . . . inside cover
Determination Date . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Directing Holder . . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
Distribution Account . . . . . . . . . . . . . . . . . . . . . . . . . S-36
Distribution Date . . . . . . . . . . . . . . . . . . . . . . . . . S-4, S-39
DOL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-63
DTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Due Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-15
Due Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-46
Eligible Account . . . . . . . . . . . . . . . . . . . . . . . . . . . S-36
Eligible Substitute Mortgage Loan . . . . . . . . . . . . . . . . . . . S-35
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8, S-63
Euroclear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Euroclear Operator . . . . . . . . . . . . . . . . . . . . . . . . . . S-41
Euroclear Participant . . . . . . . . . . . . . . . . . . . . . . . . . S-41
European Depositaries . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
Excess Reserve Fund Account . . . . . . . . . . . . . . . . . . . . S-6, S-50
Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-63
Exemption Rating Agencies . . . . . . . . . . . . . . . . . . . . . . . S-64
Extra Principal Distribution Amount . . . . . . . . . . . . . . . . . . S-46
Financial Intermediary . . . . . . . . . . . . . . . . . . . . . . . . S-40
Fitch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-64
Fixed Rate Mortgage Loans . . . . . . . . . . . . . . . . . . . . . S-2, S-15
Foreclosure Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
General Excess Available Amount . . . . . . . . . . . . . . . . . . . . S-47
Gross Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-22
HUD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-32
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-15
Initial Subsidiary REMIC . . . . . . . . . . . . . . . . . . . . . . . . S-8
Interest Distributable Amount . . . . . . . . . . . . . . . . . . . . . S-47
IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-62
LIBOR Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . S-49
LIBOR Determination Date . . . . . . . . . . . . . . . . . . . . . . . S-49
Liquidated Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . S-48
Loan Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Loss Reimbursement Entitlement . . . . . . . . . . . . . . . . . . . . S-47
Majority Residual Interestholder . . . . . . . . . . . . . . . . . . . . S-8
Master REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
Master Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-2
Maximum Cap . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6, S-49
Maximum Collateral Amount . . . . . . . . . . . . . . . . . . . . . . . S-47
Maximum Loan Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
Mezzanine Certificates . . . . . . . . . . . . . . . . . . . . . . S-1, S-39
Minimum Loan Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
Monthly Interest Distributable Amount . . . . . . . . . . . . . . . . . S-47
Moody's . . . . . . . . . . . . . . . . . . . . . . . . . . . S-9, S-64, S-66
Mortgage Loan Schedule . . . . . . . . . . . . . . . . . . . . . . . . S-34
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Mortgage Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover
Mortgaged Properties . . . . . . . . . . . . . . . . . . . . . . . S-1, S-15
Net Gains/(Losses) . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
Net income from foreclosure property . . . . . . . . . . . . . . . . . S-62
Net Liquidation Proceeds . . . . . . . . . . . . . . . . . . . . . . . S-48
Non-U.S. Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-62
Ocwen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-31
Offered Certificates . . . . . . . . . . . . . . . . . . . . . . . S-1, S-39
OID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-60
One-Month LIBOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-49
Original Certificate Principal Balance . . . . . . . . . . . . . . S-1, S-45
Originator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-27
Overcollateralization Deficiency Amount . . . . . . . . . . . . . . . . S-47
Overcollateralization Release Amount . . . . . . . . . . . . . . . . . S-47
Overcollateralization Stepdown Trigger Event . . . . . . . . . . . . . S-48
Overcollateralization Target Amount . . . . . . . . . . . . . . . . . . S-47
Overcollateralized Amount . . . . . . . . . . . . . . . . . . . . . . . S-47
Pass-Through Margin . . . . . . . . . . . . . . . . . . . . . . . . S-5, S-49
Pass-Through Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
Periodic Rate Cap . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8, S-63
Pool Principal Balance . . . . . . . . . . . . . . . . . . . . . . S-1, S-6
Pooling and Servicing Agreement . . . . . . . . . . . . . . . . . . S-1, S-39
Prepayment Assumption . . . . . . . . . . . . . . . . . . . . . . . . . S-54
Prepayment Interest Shortfall . . . . . . . . . . . . . . . . . . . . . S-37
Prepayment Period . . . . . . . . . . . . . . . . . . . . . . . . . . . S-43
Principal Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Principal Distribution Amount . . . . . . . . . . . . . . . . . . . . . S-47
Principal Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . S-47
Principal Remittance Amount . . . . . . . . . . . . . . . . . . . . . . S-47
Prohibited Transactions Tax . . . . . . . . . . . . . . . . . . . . . . S-62
Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . . inside cover
PTCE 95-60 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-65
Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . inside cover
Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
Purchaser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-27
Qualifying Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-28
Rating Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . S-9, S-66
Realized Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-48
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4, S-39
Reference Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-49
Regular Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
Related Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
Relief Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-36
REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover
Required Reserve Amount . . . . . . . . . . . . . . . . . . . . . . . . S-50
Reserve Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . S-50
Residual Certificates . . . . . . . . . . . . . . . . . . . . . . . S-1, S-39
Restricted Group . . . . . . . . . . . . . . . . . . . . . . . . . . . S-65
Rolling Delinquency Percentage . . . . . . . . . . . . . . . . . . . . S-48
Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-40
S&P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-64
Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-2, S-27
Senior Certificates . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-39
Senior Credit Enhancement Percentage . . . . . . . . . . . . . . . . . S-48
Senior Specified Enhancement Percentage . . . . . . . . . . . . . . . . S-48
Servicing Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
Servicing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
Servicing Fee Rate . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
SMMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-9, S-65
Special Servicer . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-31
Special Servicer Fee . . . . . . . . . . . . . . . . . . . . . . . . . S-31
Special Servicer Incentive Fee . . . . . . . . . . . . . . . . . . . . S-31
Specially Serviced Mortgage Loan . . . . . . . . . . . . . . . . . . . S-31
Stepdown Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-48
Structuring Assumptions . . . . . . . . . . . . . . . . . . . . . . . . S-54
Subordinate Certificates . . . . . . . . . . . . . . . . . . . . . S-1, S-39
Subservicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-31
Subsidiary REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
Substitution Adjustment . . . . . . . . . . . . . . . . . . . . . . . . S-35
Tax Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-60
Telerate Page 3750 . . . . . . . . . . . . . . . . . . . . . . . . . . S-49
Total Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
Trigger Event . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-48
Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, S-1
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-2
Trustee Fee Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
Underwriter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . cover
Unpaid Interest Shortfall Amount . . . . . . . . . . . . . . . . . . . S-48
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Ocwen
Mortgage Loan Asset Backed Certificates, Series 1998-OFS1 (the "Global
Securities") will be available only in book-entry form. Investors in the
Global Securities may hold such Global Securities through any of The
Depository Trust Company ("DTC"), Cedel or Euroclear. The Global Securities
will be tradeable as home market instruments in both the European and U.S.
domestic markets. Initial settlement and all secondary trades will settle in
same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures
applicable to U.S. corporate debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of Cedel
and Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name
of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Cedel and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts
as DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional eurobonds, except
that there will be no temporary global security and no "lock-up" or
restricted period. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global
security and no 'lock-up' or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior
mortgage loan asset backed certificates issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and Cedel or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC Participant
to the account of a Cedel Participant or a Euroclear Participant, the
purchaser will send instructions to Cedel or Euroclear through a Cedel
Participant or Euroclear Participant at least one business day prior to
settlement. Cedel or Euroclear will instruct the respective Depositary, as
the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis
of the actual number of days in such accrual period and a year assumed to
consist of 360 days. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the respective Depositary of
the DTC Participant's account against delivery of the Global Securities.
After settlement has been completed, the Global Securities will be system and
by the clearing system, in accordance with its usual procedures, to the Cedel
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade
fails), the Cedel or Euroclear cash debt will be valued instead as of the
actual settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines
of credit, as they would for any settlement occurring within Cedel or
Euroclear. Under this approach, they may take on credit exposure to Cedel or
Euroclear until the Global Securities are credited to their accounts one day
later.
As an alternative, if Cedel or Euroclear has extended a line of credit
to them, Cedel Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Cedel Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for
one day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially
reduce or offset the amount of such overdraft charges, although this result
will depend on each Cedel Participant's or Euroclear Participant's particular
cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of Cedel Participants
or Euroclear Participants. The sale proceeds will be available to the DTC
seller on the settlement date. Thus, to the DTC Participants a cross-market
transaction will settle no differently than a trade between two DTC
Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. In these cases
Cedel or Euroclear will instruct the respective Depositary, as appropriate,
to deliver the Global Securities to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Securities from
and including the last coupon payment to and excluding the settlement date on
the basis of the actual number of days in such accrual period and a year
assumed to consist of 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day
of the following month. The payment will then be reflected in the account of
the Cedel Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the Cedel Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Cedel Participant or
Euroclear Participant have a line of credit with its respective clearing
system and elect to be in debt in anticipation of receipt of the sale
proceeds in its account, the back-valuation will extinguish any overdraft
incurred over that one-day period. If settlement is not completed on the
intended value date (i.e., the trade fails), receipt of the cash proceeds in
the Cedel Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give
the Global Securities sufficient time to be reflected in their Cedel or
Euroclear account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC Participant
is at least one day prior to the value date for the sale to the Cedel
Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel
or Euroclear (or through DTC if the holder has an address outside the U.S.)
will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course
of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes
one of the following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status).
If the information shown on Form W-8 changes, a new Form W-8 must be filed
within 30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with its
conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form 4224 (Exemption from Withholding of
Tax on Income Effectively Connected with the Conduct of a Trade or Business
in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are Certificate Owners residing
in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form
1001 (Ownership, Exemption or Reduced Rate Certificate). If the treaty
provides only for a reduced rate, withholding tax will be imposed at that
rate unless the filer alternatively files Form W-8. Form 1001 may be filed by
the Certificate Owners or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom it
holds (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity treated as a
corporation or partnership for United States federal income tax purposes
organized in or under the laws of the United States or any state thereof or
the District of Columbia or (iii) an estate the income of which is includible
in gross income for United States tax purposes, regardless of its source, or
(iv) a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United
States persons have authority to control all substantial decisions of the
trust. This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Securities.
Investors are advised to consult their own tax advisors for specific tax
advice concerning their holding and disposing of the Global Securities.
============================================================================
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 by liens on one- to four-family
residential properties, which may be subordinated to one or more senior liens
on such 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 Considerations."
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 ACRIMINAL 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.
March 17, 1998
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 interestsin the Home
Improvements financed thereby. The Mortgaged
Properties and the Home Improvements are
collectively referred to herein as the "Properties".
B. Private Asset-
Backed Securities Private Asset Backed Securities may include (a)
pass-through certificates representing beneficial
interests in certain loans and/or (b) collateralized
obligations secured by such loans. Private Asset
Backed Securities may include stripped securities
representing an undivided interest in all or a part
of either the principal distributions (but not the
interest distributions) or the interest
distributions (but not the principal distributions)
or in some specified portion of the principal and
interest distributions (but not all of such
distributions) on certain loans. Although
individual loans underlying a Private Asset Backed
Security may be insured or guaranteed by the United
States or an agency or instrumentality thereof, they
need not be, and the Private Asset Backed Securities
themselves will not be so insured or guaranteed.
Payments on the Private Asset Backed Securities will
be distributed directly to the Trustee as registered
owner of such Private Asset Backed Securities. See
"The Trust Fund--Private Asset Backed Securities".
Description of
the Securities Each Security will represent a beneficial ownership
interest in, or will be secured by the assets of, a
Trust Fund created by the Depositor pursuant to an
Agreement among the Depositor, the Master Servicer
and the Trustee for the related Series. The
Securities of any Series may be issued in one or
more classes as specified in the related Prospectus
Supplement. A Series of Securities may include one
or more classes of senior Securities (collectively,
the "Senior Securities") and one or more classes of
subordinate Securities (collectively, the
"Subordinated Securities"). Certain Series or
classes of Securities may be covered by insurance
policies or other forms of credit enhancement, in
each case as described herein and in the related
Prospectus Supplement.
One or more classes of Securities of each Series (i)
may be entitled to receive distributions allocable
only to principal, only to interest or to any
combination thereof; (ii) may be entitled to receive
distributions only of prepayments of principal
throughout the lives of the Securities or during
specified periods; (iii) may be subordinated in the
right to receive distributions of scheduled payments
of principal, prepayments of principal, interest or
any combination thereof to one or more other classes
of Securities of such Series throughout the lives of
the Securities or during specified periods; (iv)
may be entitled to receive such distributions only
after the occurrence of events specified in the
related Prospectus Supplement; (v) may be entitled
to receive distributions in accordance with a
schedule or formula or on the basis of collections
from designated portions of the assets in the
related Trust Fund; (vi) as to Securities entitled
to distributions allocable to interest, may be
entitled to receive interest at a fixed rate or a
rate that is subject to change from time to time;
and (vii) as to Securities entitled to distributions
allocable to interest, may be entitled to
distributions allocable to interest only after the
occurrence of events specified in the related
Prospectus Supplement and may accrue interest until
such events occur, in each case as specified in the
related Prospectus Supplement. The timing and
amounts of such distributions may vary among
classes, over time, or otherwise as specified in the
related Prospectus Supplement.
Distributions on
the Securities Distributions on the Securities entitled thereto
will be made monthly or at such other intervals and
on the dates specified in the related Prospectus
Supplement (each, a "Distribution Date") out of the
payments received in respect of the assets of the
related Trust Fund or Funds or other assets pledged
for the benefit of the Securities as specified in
the related Prospectus Supplement. The amount
allocable to payments of principal and interest on
any Distribution Date will be determined as
specified in the related Prospectus Supplement.
Allocations of distributions among Securityholders
of a single class shall be set forth in the related
Prospectus Supplement.
Unless otherwise specified in the related Prospectus
Supplement, the aggregate original principal balance
of the Securities will not exceed the aggregate
distributions allocable to principal that such
Securities will be entitled to receive. If specified
in the related Prospectus Supplement, the Securities
will have an aggregate original principal balance
equal to the aggregate unpaid principal balance of
the Trust Fund Assets as of the first day of the
month of creation of the Trust Fund and will bear
interest in the aggregate at a rate equal to the
interest rate borne by the underlying Loans (the
"Loan Rate") and/or Private Asset Backed Securities,
net of the aggregate servicing fees and any other
amounts specified in the related Prospectus
Supplement (the "Pass-Through Rate"). If specified
in the related Prospectus Supplement, the ag-
gregate 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
Considerations 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 Considerations".
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 20% (by principal balance) of the Trust Fund Assets for any
particular Series of Securities will be delinquent by their terms as of the
related Cut-off Date.
OTHER CONSIDERATIONS
There is no assurance that the market value of the Trust Fund Assets or
any other assets of a Series will at any time be equal to or greater than the
principal amount of the Securities of such Series then outstanding, plus
accrued interest thereon. Moreover, upon an event of default under the
Agreement for a Series and a sale of the assets in the Trust Fund or upon a
sale of the assets of a Trust Fund for a Series of Securities, the Trustee,
the Master Servicer, the credit enhancer, if any, and any other service
provider specified in the related Prospectus Supplement generally will be
entitled to receive the proceeds of any such sale to the extent of unpaid
fees and other amounts owing to such persons under the related Agreement
prior to distributions to Securityholders. Upon any such sale, the proceeds
thereof may be insufficient to pay in full the principal of and interest on
the Securities of such Series.
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/F1/ Whenever the terms "Pool", "Certificates" and "Notes" are used
in this Prospectus, such terms will be deemed to apply, unless the context
indicates otherwise, to one specific Pool and the Certificates representing
certain undivided interests in, or Notes secured by the assets of, a single
trust fund (the "Trust Fund") consisting primarily of the Loans in such Pool.
Similarly, the term "Pass-Through Rate" will refer to the Pass-Through Rate
borne by the Certificates or Notes of one specific Series and the term "Trust
Fund" will refer to one specific Trust Fund.
THE TRUST FUND
The Certificates of each Series will represent interests in the assets
of the related Trust Fund, and the Notes of each Series will be secured by
the pledge of the assets of the related Trust Fund. The Trust Fund for each
Series will be held by the Trustee for the benefit of the related
Securityholders. Each Trust Fund will consist of certain assets (the "Trust
Fund Assets") consisting of a pool (each, a "Pool") comprised of Loans or
Private Asset Backed Securities, in each case as specified in the related
Prospectus Supplement, together with payments in respect of such Trust Fund
Assets and certain other accounts, obligations or agreements, in each case as
specified in the related Prospectus Supplement./F1/ The Pool will be created
on the first day of the month of the issuance of the related Series of
Securities or such other date specified in the Prospectus Supplement (the
"Cut-off Date"). The Securities will be entitled to payment from the assets
of the related Trust Fund or Funds or other assets pledged for the benefit of
the Securityholders as specified in the related Prospectus Supplement and
will not be entitled to payments in respect of the assets of any other trust
fund established by the Depositor.
The Trust Fund Assets will be acquired by the Depositor, either directly
or through affiliates, from originators or sellers which may be affiliates of
the Depositor (the "Sellers"), and conveyed by the Depositor to the related
Trust Fund. Loans acquired by the Depositor will have been originated in
accordance with the underwriting criteria specified below under "Loan
Program-Underwriting Standards" or as otherwise described in a related
Prospectus Supplement. See "Loan Program--Underwriting Standards".
The Depositor will cause the Trust Fund Assets to be assigned to the
Trustee named in the related Prospectus Supplement for the benefit of the
holders of the Securities of the related Series. The Master Servicer named
in the related Prospectus Supplement will service the Trust Fund Assets,
either directly or through other servicing institutions ("Sub-Servicers"),
pursuant to a Pooling and Servicing Agreement among the Depositor, the Master
Servicer and the Trustee with respect to a Series of Certificates, or a
servicing agreement (each, a "Servicing Agreement") between the Trustee and
the Servicer with respect to a Series of Notes, and will receive a fee for
such services. See "Loan Program" and "The Pooling and Servicing Agreement".
With respect to Loans serviced by the Master Servicer through a Sub-Servicer,
the Master Servicer will remain liable for its servicing obligations under
the related Agreement as if the Master Servicer alone were servicing such
Loans.
As used herein, "Agreement" means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and
with respect to a Series of Notes, the Indenture and the Servicing Agreement,
as the context requires.
If so specified in the related Prospectus Supplement, a Trust Fund
relating to a Series of Securities may be a business trust formed under the
laws of the state specified in the related Prospectus Supplement pursuant to
a trust agreement (each, a "Trust Agreement") between the Depositor and the
trustee of such Trust Fund.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or
liabilities. No Trust Fund is expected to engage in any activities other
than acquiring, managing and holding of the related Trust Fund Assets and
other assets contemplated herein and in the related Prospectus Supplement and
the proceeds thereof, issuing Securities and making payments and
distributions thereon and certain related activities. No Trust Fund is
expected to have any source of capital other than its assets and any related
credit enhancement.
Unless otherwise specified in the related Prospectus Supplement, the
only obligations of the Depositor with respect to a Series of Securities will
be to obtain certain representations and warranties from the Sellers and to
assign to the Trustee for such Series of Securities the Depositor's rights
with respect to such representations and warranties. See "The Agreements--
Assignment of Trust Fund Assets". The obligations of the Master Servicer
with respect to the Loans will consist principally of its contractual
servicing obligations under the related Agreement (including its obligation
to enforce the obligations of the Sub-Servicers or Sellers, or both, as more
fully described herein under "Loan Program--Representations by Sellers;
Repurchases" and "The Agreements--Sub-Servicing of Loans", "--Assignment of
Trust Fund Assets") and its obligation, if any, to make certain cash advances
in the event of delinquencies in payments on or with respect to the Loans in
the amounts described herein under "Description of the Securities--Advances".
The obligations of the Master Servicer to make advances may be subject to
limitations, to the extent provided herein and in the related Prospectus
Supplement.
The following is a brief description of the assets expected to be
included in the Trust Funds. If specific information respecting the Trust
Fund Assets is not known at the time the related Series of Securities
initially is offered, more general information of the nature described below
will be provided in the related Prospectus Supplement, and specific
information will be set forth in a report on Form 8-K to be filed with the
Securities and Exchange Commission within fifteen days after the initial
issuance of such Securities (the "Detailed Description"). A copy of the
Agreement with respect to each Series of Securities will be attached to the
Form 8-K and will be available for inspection at the corporate trust office
of the Trustee specified in the related Prospectus Supplement. A schedule of
the Trust Fund Assets relating to such Series will be attached to the
Agreement delivered to the Trustee upon delivery of the Securities.
THE LOANS
General. For purposes hereof, "Home Equity Loans" includes "Closed-End
Loans" and "Revolving Credit Line Loans". The real property which secures
repayment of the Loans is referred to as "Properties". Unless otherwise
specified in the related Prospectus Supplement, the Loans will be secured by
mortgages or deeds of trust or other similar security instruments creating a
lien on a Property, which may be subordinated to one or more senior liens on
the related Properties, each as described in the related Prospectus
Supplement. As more fully described in the related Prospectus Supplement,
the Loans may be "conventional" loans or loans that are insured or guaranteed
by a governmental agency such as the FHA or VA. The proceeds of the Closed-
End Loans may have been applied to the purchase of the related Property.
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 Considerations--Tax Treatment of Foreign
Investors" and "--Tax Consequences to Holders of Notes--Backup Withholding"
herein. Because DTC can only act on behalf of Financial Intermediaries, the
ability of a beneficial owner to pledge Book-Entry Securities to persons or
entities that do not participate in the Depository system, or otherwise take
actions in respect of such Book-Entry Securities, may be limited due to the
lack of physical certificates for such Book-Entry Securities. In addition,
issuance of the Book-Entry Securities in book-entry form may reduce the
liquidity of such Securities in the secondary market since certain potential
investors may be unwilling to purchase Securities for which they cannot
obtain physical certificates.
Monthly and annual reports on the Trust will be provided to CEDE, as
nominee of DTC, and may be made available by CEDE to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose
DTC accounts the Book-Entry Securities of such beneficial owners are
credited.
DTC has advised the Trustee that, unless and until Definitive Securities
are issued, DTC will take any action permitted to be taken by the holders of
the Book-Entry Securities under the applicable Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Securities are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Securities. CEDEL or the Euroclear Operator, as the case may be, will take
any other action permitted to be taken by a Securityholder under the
Agreement on behalf of a CEDEL Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the ability
of the Relevant Depositary to effect such actions on its behalf through DTC.
DTC may take actions, at the direction of the related Participants, with
respect to some Securities which conflict with actions taken with respect to
other Securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee will recognize the holders of such Definitive Securities as
Securityholders under the applicable Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued
at any time.
None of the Servicer, the Depositor or the Trustee will have any
responsibility for any aspect of the records relating, to or payments made
on account of beneficial ownership interests of the Book-Entry Securities
held by Cede & Co., as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes
of a Series of Securities or with respect to the Trust Fund Assets in the
related Trust Fund. Credit enhancement may be in the form of a limited
financial guaranty policy issued by an entity named in the related Prospectus
Supplement, the subordination of one or more classes of the Securities of
such Series, the establishment of one or more Reserve Accounts, the use of a
cross-support feature, use of a mortgage pool insurance policy, FHA
Insurance, VA Guarantee, bankruptcy bond, special hazard insurance policy,
surety bond, letter of credit, guaranteed investment contract or another
method of credit enhancement described in the related Prospectus Supplement,
or any combination of the foregoing. Unless otherwise specified in the
related Prospectus Supplement, credit enhancement will not provide protection
against all risks of loss and will not guarantee repayment of the entire
principal balance of the Securities and interest thereon. If losses occur
which exceed the amount covered be credit enhancement or which are not
covered by the credit enhancement, Securityholders will bear their allocable
share of deficiencies.
SUBORDINATION
Protection afforded to holders of one or more classes of Securities of a
Series by means of the subordination feature may be accomplished by the
preferential right of holders of one or more other classes of such Series
(the "Senior Securities") to distributions in respect of scheduled principal,
Principal Prepayments, interest or any combination thereof that otherwise
would have been payable to holders of Subordinated Securities under the
circumstances and to the extent specified in the related Prospectus
Supplement. Protection may also be afforded to the holders of Senior
Securities of a Series by: (i) reducing the ownership interest of the related
Subordinated Securities; (ii) a combination of the immediately preceding
sentence and clause (i) above; or (iii) as otherwise described in the related
Prospectus Supplement. Delays in receipt of scheduled payments on the Loans
and losses on defaulted Loans may be borne first by the various classes of
Subordinated Securities and thereafter by the various classes of Senior
Securities, in each case under the circumstances and subject to the
limitations specified in such related Prospectus Supplement. The aggregate
distributions in respect of delinquent payments on the Loans over the lives
of the Securities or at any time, the aggregate losses in respect of
defaulted Loans which must be borne by the Subordinated Securities by virtue
of subordination and the amount of the distributions otherwise distributable
to the Subordinated Securityholders that will be distributable to Senior
Securityholders on any Distribution Date may be limited as specified in the
related Prospectus Supplement. If aggregate distributions in respect of
delinquent payments on the Loans or aggregate losses in respect of such Loans
were to exceed an amount specified in the related Prospectus Supplement,
holders of Senior Securities would experience losses on the Securities.
In addition to or in lieu of the foregoing, if so specified in the
related Prospectus Supplement, all or any portion of distributions otherwise
payable to holders of Subordinated Securities on any Distribution Date may
instead be deposited into one or more Reserve Accounts established with the
Trustee or distributed to holders of Senior Securities. Such deposits may be
made on each Distribution Date, for specified periods or until the balance in
the Reserve Account has reached a specified amount and, following payments
from the Reserve Account to holders of Senior Securities or otherwise,
thereafter to the extent necessary to restore the balance in the Reserve
Account to required levels, in each case as specified in the related
Prospectus Supplement. Amounts on deposit in the Reserve Account may be
released to the holders of certain classes of Securities at the times and
under the circumstances specified in such Prospectus Supplement.
Various classes of Senior Securities and Subordinated Securities may
themselves be subordinate in their right to receive certain distributions to
other classes of Senior and Subordinated Securities, respectively, through a
cross support mechanism or otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among such classes
(i) in the order of their scheduled final distribution dates, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise, in each case as specified in the related
Prospectus Supplement. As between classes of Subordinated Securities,
payments to holders of Senior Securities on account of delinquencies or
losses and payments to any Reserve Account will be allocated as specified in
the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
A separate Special Hazard Insurance Policy may be obtained for the Pool
and issued by the insurer (the "Special Hazard Insurer") named in the related
Prospectus Supplement. Each Special Hazard Insurance Policy will, subject to
limitations described below, protect holders of the related Securities from
(i) loss by reason of damage to Properties caused by certain hazards
(including earthquakes and, to a limited extent, tidal waves and related
water damage or as otherwise specified in the related Prospectus Supplement)
not insured against under the standard form of hazard insurance policy for
the respective states in which the Properties are located or under a flood
insurance policy if the Property is located in a federally designated flood
area, and (ii) loss caused by reason of the application of the coinsurance
clause contained in hazard insurance policies. See "The Agreements-Hazard
Insurance". Each Special Hazard Insurance Policy will not cover losses
occasioned by fraud or conversion by the Trustee or Master Servicer, war,
insurrection, civil war, certain governmental action, errors in design,
faulty workmanship or materials (except under certain circumstances), nuclear
or chemical reactions, flood (if the Property is located in a federally
designated flood area), nuclear or chemical contamination and certain other
risks. The amount of coverage under any Special Hazard Insurance Policy will
be specified in the related Prospectus Supplement. Each Special Hazard
Insurance Policy will provide that no claim may be paid unless hazard and, if
applicable, flood insurance on the Property securing the Loan have been kept
in force and other protection and preservation expenses have been paid.
Subject to the foregoing limitations, and unless otherwise specified in
the related Prospectus Supplement, each Special Hazard Insurance Policy will
provide that where there has been damage to Property securing a foreclosed
Loan (title to which has been acquired by the insured) and to the extent such
damage is not covered by the hazard insurance policy or flood insurance
policy, if any, maintained by the borrower or the Master Servicer, the
Special Hazard Insurer will pay the lesser of (i) the cost of repair or
replacement of such property or (ii) upon transfer of the Property to the
Special Hazard Insurer, the unpaid principal balance of such Loan at the time
of acquisition of such Property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim settlement and
certain expenses incurred by the Master Servicer with respect to such
Property. If the unpaid principal balance of a Loan plus accrued interest
and certain expenses is paid by the Special Hazard Insurer, the amount of
further coverage under the related Special Hazard Insurance Policy will be
reduced by such amount less any net proceeds from the sale of the Property.
Any amount paid as the cost of repair of the Property will further reduce
coverage by such amount.
The Master Servicer may deposit cash, an irrevocable letter of credit or
any other instrument acceptable to each Rating Agency rating the Securities
of the related Series in a special trust account to provide protection in
lieu of or in addition to that provided by a Special Hazard Insurance Policy.
The amount of any Special Hazard Insurance Policy or of the deposit to the
special trust account relating to such Securities in lieu thereof may be
reduced so long as any such reduction will not result in a downgrading of the
rating of such Securities by any such Rating Agency.
BANKRUPTCY BONDS
A bankruptcy bond ("Bankruptcy Bond") for proceedings under the federal
Bankruptcy Code may be issued by an insurer named in such Prospectus
Supplement. Each Bankruptcy Bond will cover certain losses resulting from a
reduction by a bankruptcy court of scheduled payments of principal and
interest on a Loan or a reduction by such court of the principal amount of a
Loan and will cover certain unpaid interest on the amount of such a principal
reduction from the date of the filing of a bankruptcy petition. The required
amount of coverage under each Bankruptcy Bond will be set forth in the
related Prospectus Supplement. The Master Servicer may deposit cash, an
irrevocable letter of credit or any other instrument acceptable to each
Rating Agency rating the Securities of the related Series in a special trust
account to provide protection in lieu of or in addition to that provided by a
Bankruptcy Bond. Coverage under a Bankruptcy Bond may be cancelled or
reduced by the Master Servicer if such cancellation or reduction would not
adversely affect the then current rating or ratings of the related
Securities. See "Certain Legal Aspects of the Loans-Anti-Deficiency
Legislation and Other Limitations on Lenders".
RESERVE ACCOUNTS
Credit support with respect to a Series of Securities may be provided by
the establishment and maintenance with the Trustee for such Series of
Securities, in trust, of one or more Reserve Accounts for such Series. The
related Prospectus Supplement will specify whether or not any such Reserve
Accounts will be included in the Trust Fund for such Series.
The Reserve Account for a Series will be funded (i) by the deposit
therein of cash, United States Treasury securities, instruments evidencing
ownership of principal or interest payments thereon, letters of credit,
demand notes, certificates of deposit or a combination thereof in the
aggregate amount specified in the related Prospectus Supplement, (ii) by the
deposit therein from time to time of certain amounts, as specified in the
related Prospectus Supplement to which the Subordinate Securityholders, if
any, would otherwise be entitled or (iii) in such other manner as may be
specified in the related Prospectus Supplement.
Any amounts on deposit in the Reserve Account and the proceeds of any
other instrument upon maturity will be held in cash or will be invested in
Permitted Investments which may include obligations of the United States and
certain agencies thereof, certificates of deposit, certain commercial paper,
time deposits and bankers acceptances sold by eligible commercial banks and
certain repurchase agreements of United States government securities with
eligible commercial banks. If a letter of credit is deposited with the
Trustee, such letter of credit will be irrevocable. Any instrument deposited
therein will name the Trustee, in its capacity as trustee for the holders of
the Securities, as beneficiary and will be issued by an entity acceptable to
each Rating Agency that rates the Securities. Additional information with
respect to such instruments deposited in the Reserve Accounts will be set
forth in the related Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the Reserve Account for distribution to the
holders of Securities for the purposes, in the manner and at the times
specified in the related Prospectus Supplement.
POOL INSURANCE POLICIES
A separate pool insurance policy ("Pool Insurance Policy") may be
obtained for the Pool and issued by the insurer (the "Pool Insurer") named in
the related Prospectus Supplement. Each Pool Insurance Policy will, subject
to the limitations described below, cover loss by reason of default in
payment on Loans in the Pool in an amount equal to a percentage specified in
such Prospectus Supplement of the aggregate principal balance of such Loans
on the Cut-off Date which are not covered as to their entire outstanding
principal balances by Primary Mortgage Insurance Policies. As more fully
described below, the Master Servicer will present claims thereunder to the
Pool Insurer on behalf of itself, the Trustee and the holders of the
Securities. The Pool Insurance Policies, however, are not blanket policies
against loss, since claims thereunder may only be made respecting particular
defaulted Loans and only upon satisfaction of certain conditions precedent
described below. Unless otherwise specified in the related Prospectus
Supplement, the Pool Insurance Policies will not cover losses due to a
failure to pay or denial of a claim under a Primary Mortgage Insurance
Policy.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will provide that no claims may be validly presented
unless (i) any required Primary Mortgage Insurance Policy is in effect for
the defaulted Loan and a claim thereunder has been submitted and settled;
(ii) hazard insurance on the related Property has been kept in force and real
estate taxes and other protection and preservation expenses have been paid;
(iii) if there has been physical loss or damage to the Property, it has been
restored to its physical condition (reasonable wear and tear excepted) at the
time of issuance of the policy; and (iv) the insured has acquired good and
merchantable title to the Property free and clear of liens except certain
permitted encumbrances. Upon satisfaction of these conditions, the Pool
Insurer will have the option either (a) to purchase the property securing the
defaulted Loan at a price equal to the principal balance thereof plus accrued
and unpaid interest at the Loan Rate to the date of purchase and certain
expenses incurred by the Master Servicer on behalf of the Trustee and
Securityholders, or (b) to pay the amount by which the sum of the principal
balance of the defaulted Loan plus accrued and unpaid interest at the Loan
Rate to the date of payment of the claim and the aforementioned expenses
exceeds the proceeds received from an approved sale of the Property, in
either case net of certain amounts paid or assumed to have been paid under
the related Primary Mortgage Insurance Policy. If any Property securing a
defaulted Loan is damaged and proceeds, if any, from the related hazard
insurance policy or the applicable Special Hazard Insurance Policy are
insufficient to restore the damaged Property to a condition sufficient to
permit recovery under the Pool Insurance Policy, the Master Servicer will not
be required to expend its own funds to restore the damaged Property unless it
determines that (i) such restoration will increase the proceeds to
securityholders on liquidation of the Loan after reimbursement of the Master
Servicer for its expenses and (ii) such expenses will be recoverable by it
through proceeds of the sale of the Property or proceeds of the related Pool
Insurance Policy or any related Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will not insure (and many Primary Mortgage Insurance
Policies do not insure) against loss sustained by reason of a default arising
from, among other things, (i) fraud or negligence in the origination or
servicing of a Loan, including misrepresentation by the borrower, the
originator or persons involved in the origination thereof, or (ii) failure to
construct a Property in accordance with plans and specifications. A failure
of coverage attributable to one of the foregoing events might result in a
breach of the related Seller's representations described above, and, in such
events might give rise to an obligation on the part of such Seller to
purchase the defaulted Loan if the breach cannot be cured by such Seller. No
Pool Insurance Policy will cover (and many Primary Mortgage Insurance
Policies do not cover) a claim in respect of a defaulted Loan occurring when
the servicer of such Loan, at the time of default or thereafter, was not
approved by the applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Pool Insurance Policy will be reduced
over the life of the related Securities by the aggregate dollar amount of
claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all foreclosed properties. The amount of claims
paid may include certain expenses incurred by the Master Servicer as well as
accrued interest on delinquent Loans to the date of payment of the claim.
Accordingly, if aggregate net claims paid under any Pool Insurance Policy
reach the original policy limit, coverage under that Pool Insurance Policy
will be exhausted and any further losses will be borne by the
Securityholders.
FHA INSURANCE; VA GUARANTEES
Loans designated in the related Prospectus Supplement as insured by the
FHA will be insured by the FHA as authorized under the United States Housing
Act of 1934, as amended. In addition to the Title I Program of the FHA, see
"Certain Legal Considerations -- Title I Program", certain Loans will be
insured under various FHA programs including the standard FHA 203(b) program
to finance the acquisition of one- to four-family housing units and the FHA
245 graduated payment mortgage program. These programs generally limit the
principal amount and interest rates of the mortgage loans insured.
The insurance premiums for Loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development ("HUD")
or by the Master Servicer or any Sub-Servicer and are paid to the FHA. The
regulations governing FHA single-family mortgage insurance programs provide
that insurance benefits are payable either upon foreclosure (or other
acquisition of possession) and conveyance of the mortgaged premises to the
United States of America or upon assignment of the defaulted Loan to the
United States of America. With respect to a defaulted FHA-insured Loan, the
Master Servicer or any Sub-Servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the Master
Servicer or any Sub-Servicer or HUD, that default was caused by circumstances
beyond the mortgagor's control, the Master Servicer or any Sub-Servicer is
expected to make an effort to avoid foreclosure by entering, if feasible,
into one of a number of available forms of forbearance plans with the
mortgagor. Such plans may involve the reduction or suspension of regular
mortgage payments for a specified period, with such payments to be made upon
or before the maturity date of the mortgage, or the recasting of payments due
under the mortgage up to or, other than Loans originated under the Title I
Program of the FHA, beyond the maturity date. In addition, when a default
caused by such circumstances is accompanied by certain other criteria, HUD
may provide relief by making payments to the Master Servicer or any Sub-
Servicer in partial or full satisfaction of amounts due under the Loan (which
payments are to be repaid by the mortgagor to HUD) or by accepting assignment
of the loan from the Master Servicer or any Sub-Servicer. With certain
exceptions, at least three full monthly installments must be due and unpaid
under the Loan, and HUD must have rejected any request for relief from the
mortgagor before the Master Servicer or any Sub-Servicer may initiate
foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. The Master Servicer or any Sub-Servicer of each
FHA-insured Single Family Loan will be obligated to purchase any such
debenture issued in satisfaction of such Loan upon default for an amount
equal to the principal amount of any such debenture.
Other than in relation to the Title I Program of the FHA, the amount of
insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted Loan adjusted to reimburse the Master
Servicer or Sub-Servicer for certain costs and expenses and to deduct certain
amounts received or retained by the Master Servicer or Sub-Servicer after
default. When entitlement to insurance benefits results from foreclosure (or
other acquisition of possession) and conveyance to HUD, the Master Servicer
or Sub-Servicer is compensated for no more than two-thirds of its foreclosure
costs, and is compensated for interest accrued and unpaid prior to such date
but in general only to the extent it was allowed pursuant to a forbearance
plan approved by HUD. When entitlement to insurance benefits results from
assignment of the Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Loan, bears
interest from a date 30 days after the borrower's first uncorrected failure
to perform any obligation to make any payment due under the mortgage and,
upon assignment, from the date of assignment to the date of payment of the
claim, in each case at the same interest rate as the applicable HUD debenture
interest rate as described above.
Loans designated in the related Prospectus Supplement as guaranteed by
the VA will be partially guaranteed by the VA under the Serviceman's
Readjustment Act of 1944, as amended (a "VA Guaranty Policy"). The
Serviceman's Readjustment Act of 1944, as amended, permits a veteran (or in
certain instances the spouse of a veteran) to obtain a mortgage loan
guarantee by the VA covering mortgage financing of the purchase of a one- to
four-family dwelling unit at interest rates permitted by the VA. The program
has no mortgage loan limits, requires no down payment from the purchaser and
permits the guarantee of mortgage loans of up to 30 years' duration.
However, no Loan guaranteed by the VA will have an original principal amount
greater than five times the partial VA guarantee for such Loan.
The maximum guarantee that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage
loan, as further described in 38 United States Code Section 1803(a), as
amended. As of January 1, 1990, the maximum guarantee that may be issued by
the VA under a VA guaranteed mortgage loan of more than $144,000 is the
lesser of 25% of the original principal amount of the mortgage loan and
$46,000. The liability on the guarantee is reduced or increased pro rata
with any reduction or increase in the amount of indebtedness, but in no event
will the amount payable on the guarantee exceed the amount of the original
guarantee. The VA may, at its option and without regard to the guarantee,
make full payment to a mortgage holder of unsatisfied indebtedness on a
mortgage upon its assignment to the VA.
With respect to a defaulted VA guaranteed Loan, the Master Servicer or
Sub-Servicer is, absent exceptional circumstances, authorized to announce its
intention to foreclose only when the default has continued for three months.
Generally, a claim for the guarantee is submitted after liquidation of the
Property.
The amount payable under the guarantee will be the percentage of the VA-
insured Loan originally guaranteed applied to indebtedness outstanding as of
the applicable date of computation specified in the VA regulations. Payments
under the guarantee will be equal to the unpaid principal amount of the Loan,
interest accrued on the unpaid balance of the Loan to the appropriate date of
computation and limited expenses of the mortgagee, but in each case only to
the extent that such amounts have not been recovered through liquidation of
the Property. The amount payable under the guarantee may in no event exceed
the amount of the original guarantee.
CROSS-SUPPORT
The beneficial ownership of separate groups of assets included in a
Trust Fund may be evidenced by separate classes of the related Series of
Securities. In such case, credit support may be provided by a cross-support
feature which requires that distributions be made with respect to Securities
evidencing a beneficial ownership interest in, or secured by, other asset
groups within the same Trust Fund. The related Prospectus Supplement for a
Series which includes a cross-support feature will describe the manner and
conditions for applying such cross-support feature.
The coverage provided by one or more forms of credit support may apply
concurrently to two or more related Trust Funds. If applicable, the related
Prospectus Supplement will identify the Trust Funds to which such credit
support relates and the manner of determining the amount of the coverage
provided thereby and of the application of such coverage to the identified
Trust Funds.
OTHER INSURANCE, SURETY BONDS, GUARANTIES, LETTERS OF CREDIT AND SIMILAR
INSTRUMENTS OR AGREEMENTS
A Trust Fund may also include insurance, guaranties, surety bonds,
letters of credit or similar arrangements for the purpose of (i) maintaining
timely payments or providing additional protection against losses on the
assets included in such Trust Fund, (ii) paying administrative expenses or
(iii) establishing a minimum reinvestment rate on the payments made in
respect of such assets or principal payment rate on such assets. Such
arrangements may include agreements under which Securityholders are entitled
to receive amounts deposited in various accounts held by the Trustee upon the
terms specified in such Prospectus Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Securities will
be affected primarily by the amount and timing of principal payments received
on or in respect of the Trust Fund Assets included in the related Trust Fund.
With respect to a Trust Fund which includes Private Asset Backed Securities,
the possible effects of the amount and timing of principal payments received
with respect to the underlying mortgage loans will be described in the
related Prospectus Supplement. The original terms to maturity of the Loans
in a given Pool will vary depending upon the type of Loans included therein.
Each Prospectus Supplement will contain information with respect to the type
and maturities of the Loans in the related Pool. Unless otherwise specified
in the related Prospectus Supplement, Loans may be prepaid without penalty in
full or in part at any time. The prepayment experience on the Loans in a
Pool will affect the life of the related Series of Securities.
The rate of prepayment on the Loans cannot be predicted. Home equity
loans and home improvement contracts have been originated in significant
volume only during the past few years and the Depositor is not aware of any
publicly available studies or statistics on the rate of prepayment of such
loans. Generally, home equity loans and home improvement contracts are not
viewed by borrowers as permanent financing. Accordingly, the Loans may
experience a higher rate of prepayment than traditional first mortgage loans.
On the other hand, because home equity loans such as the Revolving Credit
Line Loans generally are not fully amortizing, the absence of voluntary
borrower prepayments could cause rates of principal payments lower than, or
similar to, those of traditional fully-amortizing first mortgages. The
prepayment experience of the related Trust Fund may be affected by a wide
variety of factors, including general economic conditions, prevailing
interest rate levels, the availability of alternative financing and homeowner
mobility and the frequency and amount of any future draws on any Revolving
Credit Line Loans. Other factors that might be expected to affect the
prepayment rate of a pool of home equity mortgage loans or home improvement
contracts include the amounts of, and interest rates on, the underlying
senior mortgage loans, and the use of first mortgage loans as long-term
financing for home purchase and subordinate mortgage loans as shorter-term
financing for a variety of purposes, including home improvement, education
expenses and purchases of consumer durables such as automobiles.
Accordingly, the Loans may experience a higher rate of prepayment than
traditional fixed-rate mortgage loans. In addition, any future limitations
on the right of borrowers to deduct interest payments on home equity loans
for federal income tax purposes may further increase the rate of prepayments
of the Loans. The enforcement of a "due-on-sale" provision (as described
below) will have the same effect as a prepayment of the related Loan. See
"Certain Legal Aspects of the Loans--Due-on-Sale Clauses". The yield to an
investor who purchases Securities in the secondary market at a price other
than par will vary from the anticipated yield if the rate of prepayment on
the Loans is actually different than the rate anticipated by such investor at
the time such Securities were purchased.
Collections on Revolving Credit Line Loans may vary because, among other
things, borrowers may (i) make payments during any month as low as the
minimum monthly payment for such month or, during the interest-only period
for certain Revolving Credit Line Loans and, in more limited circumstances,
Closed-End Loans, with respect to which an interest-only payment option has
been selected, the interest and the fees and charges for such month or (ii)
make payments as high as the entire outstanding principal balance plus
accrued interest and the fees and charges thereon. It is possible that
borrowers may fail to make the required periodic payments. In addition,
collections on the Loans may vary due to seasonal purchasing and the payment
habits of borrowers.
Unless otherwise specified in the related Prospectus Supplement, the
Loans will contain due-on-sale provisions permitting the mortgagee to
accelerate the maturity of the loan upon sale or certain transfers by the
borrower. Loans insured by the FHA, and Single Family Loans partially
guaranteed by the VA, are assumable with the consent of the FHA and the VA,
respectively. Thus, the rate of prepayments on such Loans may be lower than
that of conventional Loans bearing comparable interest rates. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
generally will enforce any due-on-sale or due-on-encumbrance clause, to the
extent it has knowledge of the conveyance or further encumbrance or the
proposed conveyance or proposed further encumbrance of the Property and
reasonably believes that it is entitled to do so under applicable law;
provided, however, that the Master Servicer will not take any enforcement
action that would impair or threaten to impair any recovery under any related
insurance policy. See "The Agreements-Collection Procedures" and "Certain
Legal Aspects of the Loans" for a description of certain provisions of each
Agreement and certain legal developments that may affect the prepayment
experience on the Loans.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. If prevailing rates fall
significantly below the Loan Rates borne by the Loans, such Loans may be
subject to higher prepayment rates than if prevailing interest rates remain
at or above such Loan Rates. Conversely, if prevailing interest rates rise
appreciably above the Loan Rates borne by the Loans, such Loans may
experience a lower prepayment rate than if prevailing rates remain at or
below such Loan Rates. However, there can be no assurance that such will be
the case.
When a full prepayment is made on a Loan, the borrower is charged
interest on the principal amount of the Loan so prepaid only for the number
of days in the month actually elapsed up to the date of the prepayment,
rather than for a full month. Unless the Master Servicer remits amounts
otherwise payable to it as servicing compensation, see "Description of the
Securities-Compensating Interest", the effect of prepayments in full will be
to reduce the amount of interest passed through in the following month to
holders of Securities because interest on the principal amount of any Loan so
prepaid will be paid only to the date of prepayment. Partial prepayments in
a given month may be applied to the outstanding principal balances of the
Loans so prepaid on the first day of the month of receipt or the month
following receipt. In the latter case, partial prepayments will not reduce
the amount of interest passed through in such month. Unless otherwise
specified in the related Prospectus Supplement, neither full nor partial
prepayments will be passed through until the month following receipt.
Even assuming that the Properties provide adequate security for the
Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Loans and corresponding delays in the receipt of
related proceeds by Securityholders could occur. An action to foreclose on a
Property securing a Loan is regulated by state statutes and rules and is
subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a property. In the event of a
default by a borrower, these restrictions among other things, may impede the
ability of the Master Servicer to foreclose on or sell the Property or to
obtain liquidation proceeds sufficient to repay all amounts due on the
related Loan. In addition, the Master Servicer will be entitled to deduct
from related liquidation proceeds all expenses reasonably incurred in
attempting to recover amounts due on defaulted Loans and not yet repaid,
including payments to senior lienholders, legal fees and costs of legal
action, real estate taxes and maintenance and preservation expenses.
Liquidation expenses with respect to defaulted mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time
of default. Therefore, assuming that a servicer took the same steps in
realizing upon a defaulted mortgage loan having a small remaining principal
balance as it would in the case of a defaulted mortgage loan having a large
remaining principal balance, the amount realized after expenses of
liquidation would be smaller as a percentage of the remaining principal
balance of the small mortgage loan than would be the case with the other
defaulted mortgage loan having a large remaining principal balance.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of certain
originators and servicers of Loans. In addition, most have other laws,
public policy and general principles of equity relating to the protection of
consumers, unfair and deceptive practices and practices which may apply to
the origination, servicing and collection of the Loans. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Master Servicer to collect all or part of the principal of or
interest on the Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Master Servicer to
damages and administrative sanctions.
If the rate at which interest is passed through to the holders of
Securities of a Series is calculated on a Loan-by-Loan basis,
disproportionate principal prepayments among Loans with different Loan Rates
will affect the yield on such Securities. In most cases, the effective yield
to Securityholders will be lower than the yield otherwise produced by the
applicable Pass-Through Rate and purchase price, because while interest will
accrue on each Loan from the first day of the month (unless otherwise
specified in the related Prospectus Supplement), the distribution of such
interest will not be made earlier than the month following the month of
accrual.
Under certain circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or any person specified in the related
Prospectus Supplement may have the option to purchase the assets of a Trust
Fund thereby effecting earlier retirement of the related Series of
Securities. See "The Agreements--Termination; Optional Termination".
Factors other than those identified herein and in the related Prospectus
Supplement could significantly affect principal prepayments at any time and
over the lives of the Securities. The relative contribution of the various
factors affecting prepayment may also vary from time to time. There can be
no assurance as to the rate of payment of principal of the Trust Fund Assets
at any time or over the lives of the Securities.
The Prospectus Supplement relating to a Series of Securities will
discuss in greater detail the effect of the rate and timing of principal
payments (including prepayments), delinquencies and losses on the yield,
weighted average lives and maturities of such Securities.
THE AGREEMENTS
Set forth below is a summary of certain provisions of each Agreement
which are not described elsewhere in this Prospectus. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of each Agreement. Where particular provisions
or terms used in the Agreements are referred to, such provisions or terms are
as specified in the Agreements. Except as otherwise specified, the Agreement
described herein contemplates a Trust Fund comprised of Loans. The
provisions of an Agreement with respect to a Trust Fund which consists of or
includes Private Asset Backed Securities may contain provisions similar to
those described herein but will be more fully described in the related
Prospectus Supplement.
ASSIGNMENT OF THE TRUST FUND ASSETS
Assignment of the Loans. At the time of issuance of the Securities of a
Series, the Depositor will cause the Loans comprising the related Trust Fund
to be assigned to the Trustee, together with all principal and interest
received by or on behalf of the Depositor on or with respect to such Loans
after the Cut-off Date, other than principal and interest due on or before
the Cut-off Date and other than any Retained Interest specified in the
related Prospectus Supplement. The Trustee will, concurrently with such
assignment, deliver the Securities to the Depositor in exchange for the
Loans. Each Loan will be identified in a schedule appearing as an exhibit to
the related Agreement. Such schedule will include information as to the
outstanding principal balance of each Loan after application of payments due
on or before the Cut-off Date, as well as information regarding the Loan Rate
or APR, the current scheduled monthly payment of principal and interest, the
maturity of the Loan, the Combined Loan-to-Value Ratios at origination and
certain other information.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will as to each Home Improvement Contract, deliver or cause to be
delivered to the Trustee the original Home Improvement Contract and copies of
documents and instruments related to each Home Improvement Contract and,
other than in the case of unsecured Home Improvement Contracts, the security
interest in the Property securing such Home Improvement Contract. In order
to give notice of the right, title and interest of Securityholders to the
Home Improvement Contracts, the Depositor will cause a UCC-1 financing
statement to be executed by the Depositor or the Seller identifying the
Trustee as the secured party and identifying all Home Improvement Contracts
as collateral. Unless otherwise specified in the related Prospectus
Supplement, the Home Improvement Contracts will not be stamped or otherwise
marked to reflect their assignment to the Trustee. Therefore, if, through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Home Improvement Contracts without notice of such
assignment, the interest of Securityholders in the Home Improvement Contracts
could be defeated. See "Certain Legal Aspects of the Loans--The Home
Improvement Contracts."
Unless otherwise specified in the related Prospectus Supplement, the
Agreement will require that, within the time period specified therein, the
Depositor will also deliver or cause to be delivered to the Trustee (or to
the custodian hereinafter referred to) as to each Home Equity Loan, among
other things, (i) the mortgage note or contract endorsed without recourse in
blank or to the order of the Trustee, (ii) the mortgage, deed of trust or
similar instrument (a "Mortgage") with evidence of recording indicated
thereon (except for any Mortgage not returned from the public recording
office, in which case the Depositor will deliver or cause to be delivered a
copy of such Mortgage together with a certificate that the original of such
Mortgage was delivered to such recording office), (iii) an assignment of the
Mortgage to the Trustee, which assignment will be in recordable form in the
case of a Mortgage assignment, and (iv) such other security documents,
including those relating to any senior interests in the Property, as may be
specified in the related Prospectus Supplement. Unless otherwise specified
in the related Prospectus Supplement, the Depositor will promptly cause the
assignments of the related Loans to be recorded in the appropriate public
office for real property records, except in states in which, in the opinion
of counsel acceptable to the Trustee, such recording is not required to
protect the Trustee's interest in such Loans against the claim of any
subsequent transferee or any successor to or creditor of the Depositor or the
originator of such Loans.
The Trustee (or the custodian hereinafter referred to) will review such
Loan documents within the time period specified in the related Prospectus
Supplement after receipt thereof, and the Trustee will hold such documents in
trust for the benefit of the Securityholders. Unless otherwise specified in
the related Prospectus Supplement, if any such document is found to be
missing or defective in any material respect, the Trustee (or such custodian)
will notify the Master Servicer and the Depositor, and the Master Servicer
will notify the related Seller. If the Seller cannot cure the omission or
defect within a specified number of days after receipt of such notice (or
such other period as may be specified in the related Prospectus Supplement),
the Seller will be obligated either (i) to purchase the related Loan from the
Trust at the Purchase Price or (ii) to remove such Loan from the Trust Fund
and substitute in its place one or more other Loans. There can be no
assurance that a Seller will fulfill this purchase or substitution
obligation. Although the Master Servicer may be obligated to enforce such
obligation to the extent described above under "Loan Program-Representations
by Sellers; Repurchases", neither the Master Servicer nor the Depositor will
be obligated to purchase or replace such Loan if the Seller defaults on its
obligation, unless such breach also constitutes a breach of the
representations or warranties of the Master Servicer or the Depositor, as the
case may be. Unless otherwise specified in the related Prospectus
Supplement, this purchase obligation constitutes the sole remedy available to
the Securityholders or the Trustee for omission of, or a material defect in,
a constituent document.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review
the documents relating to the Loans as agent of the Trustee.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Agreement. Upon a breach of any such representation
of the Master Servicer which materially and adversely affects the interests
of the Securityholders in a Loan, the Master Servicer will be obligated
either to cure the breach in all material respects or to purchase or replace
the Loan at the Purchase Price. Unless otherwise specified in the related
Prospectus Supplement, this obligation to cure, purchase or substitute
constitutes the sole remedy available to the Securityholders or the Trustee
for such a breach of representation by the Master Servicer.
Assignment of Private Asset Backed Securities. The Depositor will cause
Private Asset Backed Securities to be registered in the name of the Trustee.
The Trustee (or the custodian) will have possession of any certificated
Private Asset Backed Securities. Unless otherwise specified in the related
Prospectus Supplement, the Trustee will not be in possession of or be
assignee of record of any underlying assets for a Private Asset Backed
Security. See "The Trust Fund-Private Asset Backed Securities" herein. Each
Private Asset Backed Security will be identified in a schedule appearing as
an exhibit to the related Agreement which will specify the original principal
amount, outstanding principal balance as of the Cut-off Date, annual pass-
through rate or interest rate and maturity date and certain other pertinent
information for each Private Asset Backed Security conveyed to the Trustee.
Notwithstanding the foregoing provisions, with respect to a Trust Fund
for which a REMIC election is to be made, no purchase or substitution of a
Loan will be made if such purchase or substitution would result in a
prohibited transaction tax under the Code.
PAYMENTS ON LOANS; DEPOSITS TO SECURITY ACCOUNT
Each Sub-Servicer servicing a Loan pursuant to a Sub-Servicing Agreement
(as defined below under "-Sub-Servicing of Loans") will establish and
maintain an account (the "Sub-Servicing Account") which meets the following
requirements and is otherwise acceptable to the Master Servicer. A Sub-
Servicing Account must be established with a Federal Home Loan Bank or with a
depository institution (including the Sub-Servicer itself) whose accounts are
insured by either the Bank Insurance Fund (the "BIF") of the FDIC or the
Savings Association Insurance Fund (as successor to the Federal Savings and
Loan Insurance Corporation ("SAIF")) of the FDIC. If a Sub-Servicing Account
is maintained at an institution that is a Federal Home Loan Bank or an FDIC-
insured institution and, in either case, the amount on deposit in the Sub-
Servicing Account exceeds the FDIC insurance coverage amount, then such
excess amount must be remitted to the Master Servicer within one business day
of receipt. In addition, the Sub-Servicer must maintain a separate account
for escrow and impound funds relating to the Loans. Each Sub-Servicer is
required to deposit into its Sub-Servicing Account on a daily basis all
amounts described below under "-Sub-Servicing of Loans" that are received by
it in respect of the Loans, less its servicing or other compensation. On or
before the date specified in the Sub-Servicing Agreement, the Sub-Servicer
will remit or cause to be remitted to the Master Servicer or the Trustee all
funds held in the Sub-Servicing Account with respect to Loans that are
required to be so remitted. The Sub-Servicer may also be required to advance
on the scheduled date of remittance an amount corresponding to any monthly
installment of interest and/or principal, less its servicing or other
compensation, on any Loan for which payment was not received from the
mortgagor. Unless otherwise specified in the related Prospectus Supplement,
any such obligation of the Sub-Servicer to advance will continue up to and
including the first of the month following the date on which the related
Property is sold at a foreclosure sale or is acquired on behalf of the
Securityholders by deed in lieu of foreclosure, or until the related Loan is
liquidated.
The Master Servicer will establish and maintain or cause to be
established and maintained with respect to the related Trust Fund a separate
account or accounts for the collection of payments on the related Trust Fund
Assets in the Trust Fund (the "Security Account") must be either (i)
maintained with a depository institution the debt obligations of which (or in
the case of a depository institution that is the principal subsidiary of a
holding company, the obligations of which) are rated in one of the two
highest rating categories by the Rating Agency or Rating Agencies that rated
one or more classes of the related Series of Securities, (ii) an account or
accounts the deposits in which are fully insured by either the BIF or SAIF,
(iii) an account or accounts the deposits in which are insured by the BIF or
SAIF (to the limits established by the FDIC), and the uninsured deposits in
which are otherwise secured such that, as evidenced by an opinion of counsel,
the Securityholders have a claim with respect to the funds in the Security
Account or a perfected first priority security interest against any
collateral securing such funds that is superior to the claims of any other
depositors or general creditors of the depository institution with which the
Security Account is maintained, or (iv) an account or accounts otherwise
acceptable to each Rating Agency. The collateral eligible to secure amounts
in the Security Account is limited to United States government securities and
other high-quality investments ("Permitted Investments"). A Security Account
may be maintained as an interest bearing account or the funds held therein
may be invested pending each succeeding Distribution Date in Permitted
Investments. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer or its designee will be entitled to receive
any such interest or other income earned on funds in the Security Account as
additional compensation and will be obligated to deposit in the Security
Account the amount of any loss immediately as realized. The Security Account
may be maintained with the Master Servicer or with a depository institution
that is an affiliate of the Master Servicer, provided it meets the standards
set forth above.
The Master Servicer will deposit or cause to be deposited in the
Security Account for each Trust Fund on a daily basis, to the extent
applicable and provided in the Agreement, the following payments and
collections received or advances made by or on behalf of it subsequent to the
Cut-off Date (other than payments due on or before the Cut-off Date and
exclusive of any amounts representing Retained Interest):
(i) all payments on account of principal, including Principal
Prepayments and any applicable prepayment penalties, on the Loans;
(ii) all payments on account of interest on the Loans, net of
applicable servicing compensation;
(iii) all proceeds (net of unreimbursed payments of property taxes,
insurance premiums and similar items ("Insured Expenses") incurred, and
unreimbursed advances made, by the related Sub-Servicer, if any) of the
hazard insurance policies and any Primary Mortgage Insurance Policies,
to the extent such proceeds are not applied to the restoration of the
property or released to the Mortgagor in accordance with the Master
Servicer's normal servicing procedures (collectively, "Insurance
Proceeds") and all other cash amounts (net of unreimbursed expenses
incurred in connection with liquidation or foreclosure ("Liquidation
Expenses") and unreimbursed advances made, by the related Sub-Servicer,
if any) received and retained in connection with the liquidation of
defaulted Loans, by foreclosure or otherwise ("Liquidation Proceeds"),
together with any net proceeds received on a monthly basis with respect
to any properties acquired on behalf of the Securityholders by
foreclosure or deed in lieu of foreclosure;
(iv) all proceeds of any Loan or property in respect thereof
purchased by the Master Servicer, the Depositor, any Sub-Servicer or any
Seller as described under "Loan Program-Representations by Sellers;
Repurchases" or "-Assignment of Trust Fund Assets" above and all
proceeds of any Loan repurchased as described under "-Termination;
Optional Termination" below;
(v) all payments required to be deposited in the Security Account
with respect to any deductible clause in any blanket insurance policy
described under "-Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments for the benefit of the
Master Servicer of funds held in the Security Account; and
(vii) all other amounts required to be deposited in the Security
Account pursuant to the Agreement.
PRE-FUNDING ACCOUNT
If so provided in the related Prospectus Supplement, the Master Servicer
will establish and maintain a Pre-Funding Account, in the name of the related
Trustee on behalf of the related Securityholders, into which the Depositor
will deposit the Pre-Funded Amount on the related Closing Date. The Pre-
Funded Amount will not exceed 25% of the initial aggregate principal amount
of the Certificates and Notes of the related Series. The Pre-Funded Amount
will be used by the related Trustee to purchase Subsequent Loans from the
Depositor from time to time during the Funding Period. The Funding Period,
if any, for a Trust Fund will begin on the related Closing Date and will end
on the date specified in the related Prospectus Supplement, which in no event
will be later than the date that is three months after the Closing Date. Any
amounts remaining in the Pre-Funding Account at the end of the Funding Period
will be distributed to the related Securityholders in the manner and priority
specified in the related Prospectus Supplement, as a prepayment of principal
of the related Securities.
SUB-SERVICING OF LOANS
Each Seller of a Loan or any other servicing entity may act as the Sub-
Servicer for such Loan pursuant to an agreement (each, a "Sub-Servicing
Agreement"), which will not contain any terms inconsistent with the related
Agreement. While each Sub-Servicing Agreement will be a contract solely
between the Master Servicer and the Sub-Servicer, the Agreement pursuant to
which a Series of Securities is issued will provide that, if for any reason
the Master Servicer for such Series of Securities is no longer the Master
Servicer of the related Loans, the Trustee or any successor Master Servicer
must recognize the Sub-Servicer's rights and obligations under such Sub-
Servicing Agreement.
With the approval of the Master Servicer, a Sub-Servicer may delegate
its servicing obligations to third-party servicers, but such Sub-Servicer
will remain obligated under the related Sub-Servicing Agreement. Each Sub-
Servicer will be required to perform the customary functions of a servicer of
mortgage loans. Such functions generally include collecting payments from
mortgagors or obligors and remitting such collections to the Master Servicer;
maintaining hazard insurance policies as described herein and in any related
Prospectus Supplement, and filing and settling claims thereunder, subject in
certain cases to the right of the Master Servicer to approve in advance any
such settlement; maintaining escrow or impoundment accounts of mortgagors or
obligors for payment of taxes, insurance and other items required to be paid
by the mortgagor or obligor pursuant to the related Loan; processing
assumptions or substitutions, although, the Master Servicer is generally
required to exercise due-on-sale clauses to the extent such exercise is
permitted by law and would not adversely affect insurance coverage;
attempting to cure delinquencies; supervising foreclosures; inspecting and
managing Properties under certain circumstances; maintaining accounting
records relating to the Loans; and, to the extent specified in the related
Prospectus Supplement, maintaining additional insurance policies or credit
support instruments and filing and settling claims thereunder. A Sub-
Servicer will also be obligated to make advances in respect of delinquent
installments of interest and/or principal on Loans, as described more fully
above under "-Payments on Loans; Deposits to Security Account", and in
respect of certain taxes and insurance premiums not paid on a timely basis by
mortgagors or obligors.
As compensation for its servicing duties, each Sub-Servicer will be
entitled to a monthly servicing fee (to the extent the scheduled payment on
the related Loan has been collected) in the amount set forth in the related
Prospectus Supplement. Each Sub-Servicer is also entitled to collect and
retain, as part of its servicing compensation, any prepayment or late charges
provided in the Mortgage Note or related instruments. Each Sub-Servicer will
be reimbursed by the Master Servicer for certain expenditures which it makes,
generally to the same extent the Master Servicer would be reimbursed under
the Agreement. The Master Servicer may purchase the servicing of Loans if
the Sub-Servicer elects to release the servicing of such Loans to the Master
Servicer. See "-Servicing and Other Compensation and Payment of Expenses".
Each Sub-Servicer may be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Sub-Servicer in its
servicing capacity. Each Sub-Servicer will be required to maintain a
fidelity bond and an errors and omissions policy with respect to its
officers, employees and other persons acting on its behalf or on behalf of
the Master Servicer.
Each Sub-Servicer will be required to service each Loan pursuant to the
terms of the Sub-Servicing Agreement for the entire term of such Loan, unless
the Sub-Servicing Agreement is earlier terminated by the Master Servicer or
unless servicing is released to the Master Servicer. The Master Servicer may
terminate a Sub-Servicing Agreement without cause, upon written notice to the
Sub-Servicer in the manner specified in such Sub-Servicing Agreement.
The Master Servicer may agree with a Sub-Servicer to amend a Sub-
Servicing Agreement or, upon termination of the Sub-Servicing Agreement, the
Master Servicer may act as servicer of the related Loans or enter into new
Sub-Servicing Agreements with other Sub-Servicers. If the Master Servicer
acts as servicer, it will not assume liability for the representations and
warranties of the Sub-Servicer which it replaces. Each Sub-Servicer must be
a Seller or meet the standards for becoming a Seller or have such servicing
experience as to be otherwise satisfactory to the Master Servicer and the
Depositor. The Master Servicer will make reasonable efforts to have the new
Sub-Servicer assume liability for the representations and warranties of the
terminated Sub-Servicer, but no assurance can be given that such an
assumption will occur. In the event of such an assumption, the Master
Servicer may in the exercise of its business judgment release the terminated
Sub-Servicer from liability in respect of such representations and
warranties. Any amendments to a Sub-Servicing Agreement or new Sub-Servicing
Agreements may contain provisions different from those which are in effect in
the original Sub-Servicing Agreement. However, each Agreement will provide
that any such amendment or new agreement may not be inconsistent with or
violate such Agreement.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers, will
make reasonable efforts to collect all payments called for under the Loans
and will, consistent with each Agreement and any Pool Insurance Policy,
Primary Mortgage Insurance Policy, FHA Insurance, VA Guaranty Policy and
Bankruptcy Bond or alternative arrangements, follow such collection
procedures as are customary with respect to loans that are comparable to the
Loans. Consistent with the above, the Master Servicer may, in its
discretion, (i) waive any assumption fee, late payment or other charge in
connection with a Loan and (ii) to the extent not inconsistent with the
coverage of such Loan by a Pool Insurance Policy, Primary Mortgage Insurance
Policy, FHA Insurance, VA Guaranty or Bankruptcy Bond or alternative
arrangements, if applicable, arrange with a borrower a schedule for the
liquidation of delinquencies running for no more than 125 days after the
applicable due date for each payment. Both the Sub-Servicer and the Master
Servicer may be obligated to make Advances during any period of such an
arrangement.
Except as otherwise specified in the related Prospectus Supplement, in
any case in which property securing a Loan has been, or is about to be,
conveyed by the mortgagor or obligor, the Master Servicer will, to the extent
it has knowledge of such conveyance or proposed conveyance, exercise or cause
to be exercised its rights to accelerate the maturity of such Loan under any
due-on-sale clause applicable thereto, but only if the exercise of such
rights is permitted by applicable law. If these conditions are not met or if
the Master Servicer reasonably believes it is unable under applicable law to
enforce such due-on-sale clause, or the Master Servicer will enter into or
cause to be entered into an assumption and modification agreement with the
person to whom such property has been or is about to be conveyed, pursuant to
which such person becomes liable for repayment of the Loan and, to the extent
permitted by applicable law, the mortgagor remains liable thereon. Any fee
collected by or on behalf of the Master Servicer for entering into an
assumption agreement will be retained by or on behalf of the Master Servicer
as additional servicing compensation. See "Certain Legal Aspects of the
Loans-Due-on-Sale Clauses". In connection with any such assumption, the
terms of the related Loan may not be changed.
HAZARD INSURANCE
Except as otherwise specified in the related Prospectus Supplement, the
Master Servicer will require the mortgagor or obligor on each Loan to
maintain a hazard insurance policy providing for no less than the coverage of
the standard form of fire insurance policy with extended coverage customary
for the type of Property in the state in which such Property is located. All
amounts collected by the Master Servicer under any hazard policy (except for
amounts to be applied to the restoration or repair of the Property or
released to the mortgagor or obligor in accordance with the Master Servicer's
normal servicing procedures) will be deposited in the related Security
Account. In the event that the Master Servicer maintains a blanket policy
insuring against hazard losses on all the Loans comprising part of a Trust
Fund, it will conclusively be deemed to have satisfied its obligation
relating to the maintenance of hazard insurance. Such blanket policy may
contain a deductible clause, in which case the Master Servicer will be
required to deposit from its own funds into the related Security Account the
amounts which would have been deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements securing a Loan
by fire, lightning, explosion, smoke, windstorm and hail, riot, strike and
civil commotion, subject to the conditions and exclusions particularized in
each policy. Although the policies relating to the Loans may have been
underwritten by different insurers under different state laws in accordance
with different applicable forms and therefore may not contain identical terms
and conditions, the basic terms thereof are dictated by respective state
laws, and most such policies typically do not cover any physical damage
resulting from the following: war, revolution, governmental actions, floods
and other water-related causes, earth movement (including earthquakes,
landslides and mud flows), nuclear reactions, wet or dry rot, vermin,
rodents, insects or domestic animals, theft and, in certain cases, vandalism.
The foregoing list is merely indicative of certain kinds of uninsured risks
and is not intended to be all inclusive. If the Property securing a Loan is
located in a federally designated special flood area at the time of
origination, the Master Servicer will require the mortgagor or obligor to
obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Loans
typically contain a clause which in effect requires the insured at all time
to carry insurance of a specified percentage of the full replacement value of
the insured property in order to recover the full amount of any partial loss.
If the insured's coverage falls below this specified percentage, then the
insurer's liability in the event of partial loss will not exceed the larger
of (i) the actual cash value (generally defined as replacement cost at the
time and place of loss, less physical depreciation) of the improvements
damaged or destroyed or (ii) such proportion of the loss as the amount of
insurance carried bears to the specified percentage of the full replacement
cost of such improvements. Since the amount of hazard insurance the Master
Servicer may cause to be maintained on the improvements securing the Loans
declines as the principal balances owing thereon decrease, and since improved
real estate generally has appreciated in value over time in the past, the
effect of this requirement in the event of partial loss may be that hazard
insurance proceeds will be insufficient to restore fully the damaged
property. If specified in the related Prospectus Supplement, a special
hazard insurance policy will be obtained to insure against certain of the
uninsured risks described above. See "Credit Enhancement-Special Hazard
Insurance Policies".
If the Property securing a defaulted Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged Property, the Master Servicer is not required to expend its own funds
to restore the damaged Property unless it determines (i) that such
restoration will increase the proceeds to Securityholders on liquidation of
the Loan after reimbursement of the Master Servicer for its expenses and (ii)
that such expenses will be recoverable by it from related Insurance Proceeds
or Liquidation Proceeds.
If recovery on a defaulted Loan under any related Insurance Policy is
not available for the reasons set forth in the preceding paragraph, or if the
defaulted Loan is not covered by an Insurance Policy, the Master Servicer
will be obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Loan. If the proceeds of any liquidation of the Property securing the
defaulted Loan are less than the principal balance of such Loan plus interest
accrued thereon that is payable to Securityholders, the Trust Fund will
realize a loss in the amount of such difference plus the aggregate of
expenses incurred by the Master Servicer in connection with such proceedings
and which are reimbursable under the Agreement. In the unlikely event that
any such proceedings result in a total recovery which is, after reimbursement
to the Master Servicer of its expenses, in excess of the principal balance of
such Loan plus interest accrued thereon that is payable to Securityholders,
the Master Servicer will be entitled to withdraw or retain from the Security
Account amounts representing its normal servicing compensation with respect
to such Loan and, unless otherwise specified in the related Prospectus
Supplement, amounts representing the balance of such excess, exclusive of any
amount required by law to be forwarded to the related borrower, as additional
servicing compensation.
Unless otherwise specified in the related Prospectus Supplement, if the
Master Servicer or its designee recovers Insurance Proceeds which, when added
to any related Liquidation Proceeds and after deduction of certain expenses
reimbursable to the Master Servicer, exceed the principal balance of such
Loan plus interest accrued thereon that is payable to Securityholders, the
Master Servicer will be entitled to withdraw or retain from the Security
Account amounts representing its normal servicing compensation with respect
to such Loan. In the event that the Master Servicer has expended its own
funds to restore the damaged Property and such funds have not been reimbursed
under the related hazard insurance policy, it will be entitled to withdraw
from the Security Account out of related Liquidation Proceeds or Insurance
Proceeds in an amount equal to such expenses incurred by it, in which event
the Trust Fund may realize a loss up to the amount so charged. Since
Insurance Proceeds cannot exceed deficiency claims and certain expenses
incurred by the Master Servicer, no such payment or recovery will result in a
recovery to the Trust Fund which exceeds the principal balance of the
defaulted Loan together with accrued interest thereon. See "Credit
Enhancement".
REALIZATION UPON DEFAULTED LOANS
Primary Mortgage Insurance Policies. The Master Servicer will maintain
or cause each Sub-Servicer to maintain, as the case may be, in full force and
effect, to the extent specified in the related Prospectus Supplement, a
Primary Mortgage Insurance Policy with regard to each Loan for which such
coverage is required. The Master Servicer will not cancel or refuse to renew
any such Primary Mortgage Insurance Policy in effect at the time of the
initial issuance of a Series of Securities that is required to be kept in
force under the applicable Agreement unless the replacement Primary Mortgage
Insurance Policy for such cancelled or nonrenewed policy is maintained with
an insurer whose claims-paying ability is sufficient to maintain the current
rating of the classes of Securities of such Series that have been rated.
Although the terms and conditions of primary mortgage insurance vary,
the amount of a claim for benefits under a Primary Mortgage Insurance Policy
covering a Loan will consist of the insured percentage of the unpaid
principal amount of the covered Loan and accrued and unpaid interest thereon
and reimbursement of certain expenses, less (i) all rents or other payments
collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to the Property, (ii)
hazard insurance proceeds in excess of the amount required to restore the
Property and which have not been applied to the payment of the Loan, (iii)
amounts expended but not approved by the issuer of the related Primary
Mortgage Insurance Policy (the "Primary Insurer"), (iv) claim payments
previously made by the Primary Insurer and (v) unpaid premiums.
Primary Mortgage Insurance Policies reimburse certain losses sustained
by reason of defaults in payments by borrowers. Primary Mortgage Insurance
Policies will not insure against, and exclude from coverage, a loss sustained
by reason of a default arising from or involving certain matters, including
(i) fraud or negligence in origination or servicing of the Loans, including
misrepresentation by the originator, borrower or other persons involved in
the origination of the Loans; (ii) failure to construct the Property subject
to the Loan in accordance with specified plans; (iii) physical damage to the
Property; and (iv) the related Master Servicer or Sub-servicer not being
approved as a servicer by the Primary Insurer.
Recoveries Under a Primary Mortgage Insurance Policy. As conditions
precedent to the filing of or payment of a claim under a Primary Mortgage
Insurance Policy covering a Loan, the insured will be required to (i) advance
or discharge (a) all hazard insurance policy premiums and (b) as necessary
and approved in advance by the Primary Insurer, (1) real estate property
taxes, (2) all expenses required to maintain the related Property in at least
as good a condition as existed at the effective date of such Primary Mortgage
Insurance Policy, ordinary wear and tear excepted, (3) Property sales
expenses, (4) any outstanding liens (as defined in such Primary Mortgage
Insurance Policy) on the Property and (5) foreclosure costs, including court
costs and reasonable attorneys' fees; (ii) in the event of any physical loss
or damage to the Property, to have the Property restored and repaired to at
least as good a condition as existed at the effective date of such Primary
Mortgage Insurance Policy, ordinary wear and tear excepted; and (iii) tender
to the Primary Insurer good and merchantable title to and possession of the
Property.
In those cases in which a Loan is serviced by a Sub-Servicer, the Sub-
Servicer, on behalf of itself, the Trustee and Securityholders, will present
claims to the Primary Insurer, and all collection thereunder will be
deposited in the Sub-Servicing Account. In all other cases, the Master
Servicer, on behalf of itself, the Trustee and the Securityholders, will
present claims to the insurer under each Primary Mortgage Insurance Policy,
and will take such reasonable steps as are necessary to receive payment or to
permit recovery thereunder with respect to defaulted Loans. As set forth
above, all collections by or on behalf of the Master Servicer under any
Primary Mortgage Insurance Policy and, when the Property has not been
restored, the hazard insurance policy, are to be deposited in the Security
Account, subject to withdrawal as heretofore described.
If the Property securing a defaulted Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged Property to a condition sufficient to permit recovery under the
related Primary Mortgage Insurance Policy, if any, the Master Servicer is not
required to expend its own funds to restore the damaged Property unless it
determines (i) that such restoration will increase the proceeds to
Securityholders on liquidation of the Loan after reimbursement of the Master
Servicer for its expenses and (ii) that such expenses will be recoverable by
it from related Insurance Proceeds or Liquidation Proceeds.
If recovery on a defaulted Loan under any related Primary Mortgage
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Loan is not covered by a Primary Mortgage
Insurance Policy, the Master Servicer will be obligated to follow or cause to
be followed such normal practices and procedures as it deems necessary or
advisable to realize upon the defaulted Loan. If the proceeds of any
liquidation of the Property securing the defaulted Loan are less than the
principal balance of such Loan plus interest accrued thereon that is payable
to Securityholders, the Trust Fund will realize a loss in the amount of such
difference plus the aggregate of expenses incurred by the Master Servicer in
connection with such proceedings and which are reimbursable under the
Agreement. In the unlikely event that any such proceedings result in a total
recovery which is, after reimbursement to the Master Servicer of its
expenses, in excess of the principal balance of such Loan plus interest
accrued thereon that is payable to Securityholders, the Master Servicer will
be entitled to withdraw or retain from the Security Account amounts
representing its normal servicing compensation with respect to such Loan and,
except as otherwise specified in the Prospectus Supplement, amounts
representing the balance of such excess, exclusive of any amount required by
law to be forwarded to the related borrower, as additional servicing
compensation.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer's primary servicing compensation with respect to a Series of
Securities will come from the monthly payment to it, out of each interest
payment on a Loan, of an amount equal to the percentage per annum specified
in the related Prospectus Supplement of the outstanding principal balance
thereof. Since the Master Servicer's primary compensation is a percentage of
the outstanding principal balance of each Loan, such amounts will decrease as
the Loans amortize. In addition to primary compensation, the Master Servicer
or the Sub-Servicers may be entitled to retain all assumption fees and late
payment charges, to the extent collected from borrowers, and, if so provided
in the related Prospectus Supplement, any prepayment penalties and any
interest or other income which may be earned on funds held in the Security
Account or any Sub-Servicing Account. Unless otherwise specified in the
related Prospectus Supplement, any Sub-Servicer will receive a portion of the
Master Servicer's primary compensation as its sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, the Master Servicer
will, unless otherwise specified in the related Prospectus Supplement, pay
from its servicing compensation certain expenses incurred in connection with
its servicing of the Loans, including, without limitation, payment of any
premium for any insurance policy, guaranty, surety or other form of credit
enhancement as specified in the related Prospectus Supplement, payment of the
fees and disbursements of the Trustee and independent accountants, payment of
expenses incurred in connection with distributions and reports to
Securityholders, and payment of any other expenses described in the related
Prospectus Supplement.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to
the Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with the Uniform Single Audit Program
for Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC,
the servicing by or on behalf of the Master Servicer of mortgage loans or
private asset backed securities, or under pooling and servicing agreements
substantially similar to each other (including the related Agreement) was
conducted in compliance with such agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, the Audit
Program for Mortgages serviced for FHLMC, or the Uniform Single Audit Program
for Mortgage Bankers, it is required to report. In rendering its statement
such firm may rely, as to matters relating to the direct servicing of Loans
or Private Asset Backed Securities by Sub-Servicers, upon comparable
statements for examinations conducted substantially in compliance with the
Uniform Single Audit Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FHLMC (rendered within one year of such statement) of
firms of independent public accountants with respect to the related Sub-
Servicer.
Each Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of
officers of the Master Servicer may be obtained by Securityholders of the
related Series without charge upon written request to the Master Servicer at
the address set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The Master Servicer under each Agreement will be named in the related
Prospectus Supplement. The entity serving as Master Servicer may have normal
business relationships with the Depositor or the Depositor's affiliates.
Each Agreement will provide that the Master Servicer may not resign from
its obligations and duties under the Agreement except upon a determination
that its duties thereunder are no longer permissible under applicable law.
The Master Servicer may, however, be removed from its obligations and duties
as set forth in the Agreement. No such resignation will become effective
until the Trustee or a successor servicer has assumed the Master Servicer's
obligations and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer,
the Depositor nor any director, officer, employee, or agent of the Master
Servicer or the Depositor will be under any liability to the related Trust
Fund or Securityholders for any action taken or for refraining from the
taking of any action in good faith pursuant to the Agreement, or for errors
in judgment; provided, however, that neither the Master Servicer, the
Depositor nor any such person will be protected against any liability which
would otherwise be imposed by reason of wilful misfeasance or gross
negligence in the performance of duties thereunder or by reasons of reckless
disregard of obligations and duties thereunder. To the extent provided in
the related Agreement, the Master Servicer, the Depositor and any director,
officer, employee or agent of the Master Servicer or the Depositor may be
entitled to indemnification by the related Trust Fund and may be held
harmless against any loss, liability or expense incurred in connection with
any legal action relating to the Agreement or the Securities, other than any
loss, liability or expense related to any specific Loan or Loans (except any
such loss, liability or expense otherwise reimbursable pursuant to the
Agreement) and any loss, liability or expense incurred by reason of willful
misfeasance or gross negligence in the performance of duties thereunder or by
reason of reckless disregard of obligations and duties thereunder. In
addition, each Agreement will provide that neither the Master Servicer nor
the Depositor will be under any obligation to appear in, prosecute or defend
any legal action which is not incidental to its respective responsibilities
under the Agreement and which in its opinion may involve it in any expense or
liability. The Master Servicer or the Depositor may, however, in its
discretion undertake any such action which it may deem necessary or desirable
with respect to the Agreement and the rights and duties of the parties
thereto and the interests of the Securityholders thereunder. In such event,
the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Trust Fund and the
Master Servicer or the Depositor, as the case may be, will be entitled to be
reimbursed therefor out of funds otherwise distributable to Securityholders.
Except as otherwise specified in the related Prospectus Supplement, any
person into which the Master Servicer may be merged or consolidated, or any
person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Agreement.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Servicing Agreement. Except as
otherwise specified in the related Prospectus Supplement, Events of Default
under each Agreement will consist of (i) any failure by the Master Servicer
to distribute or cause to be distributed to Securityholders of any class any
required payment (other than an Advance) which continues unremedied for five
business days after the giving of written notice of such failure to the
Master Servicer by the Trustee or the Depositor, or to the Master Servicer,
the Depositor and the Trustee by the holders of Securities of such class
evidencing not less than 25% of the aggregate Percentage Interests evidenced
by such class; (ii) any failure by the Master Servicer to make an Advance as
required under the Agreement, unless cured as specified therein; (iii) any
failure by the Master Servicer duly to observe or perform in any material
respect any of its other covenants or agreements in the Agreement which
continues unremedied for thirty days after the giving of written notice of
such failure to the Master Servicer by the Trustee or the Depositor, or to
the Master Servicer, the Depositor and the Trustee by the holders of
Securities of any class evidencing not less than 25% of the aggregate
Percentage Interests constituting such class; and (iv) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceeding and certain actions by or on behalf of the Master Servicer
indicating its insolvency, reorganization or inability to pay its
obligations.
If specified in the related Prospectus Supplement, the Agreement will
permit the Trustee to sell the Trust Fund Assets and the other assets of the
Trust Fund in the event that payments in respect thereto are insufficient to
make payments required in the Agreement. The assets of the Trust Fund will
be sold only under the circumstances and in the manner specified in the
related Prospectus Supplement.
So long as an Event of Default under an Agreement remains unremedied,
the Depositor or the Trustee may, and at the direction of holders of
Securities of any class evidencing not less than 51% of the aggregate
Percentage Interests constituting such class and under such other
circumstances as may be specified in such Agreement, the Trustee shall,
terminate all of its rights and obligations of the Master Servicer under the
Agreement relating to such Trust Fund and in and to the Trust Fund Assets,
whereupon the Trustee will succeed to all of the responsibilities, duties and
liabilities of the Master Servicer under the Agreement, including, if
specified in the related Prospectus Supplement, the obligation to make
advances, and will be entitled to similar compensation arrangements. In the
event that the Trustee is unwilling or unable so to act, it may appoint, or
petition a court of competent jurisdiction for the appointment of, a mortgage
loan servicing institution with a net worth of a least $10,000,000 to act as
successor to the Master Servicer under the Agreement. Pending such
appointment, the Trustee is obligated to act in such capacity. The Trustee
and any such successor may agree upon the servicing compensation to be paid,
which in no event may be greater than the compensation payable to the Master
Servicer under the Agreement.
No Securityholder, solely by virtue of such holder's status as a
Securityholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Securities of any class of such Series evidencing not less than 25% of the
aggregate Percentage Interests constituting such class have made written
request upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity, and
the Trustee for 60 days has neglected or refused to institute any such
proceeding.
Indenture. Except as otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for five (5) days or more in the payment of any
principal of or interest on any Note of such Series; (ii) failure to perform
any other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of thirty (30) days after notice thereof is given in
accordance with the procedures described in the related Prospectus
Supplement; (iii) any representation or warranty made by the Depositor or the
Trust Fund in the Indenture or in any certificate or other writing delivered
pursuant thereto or in connection therewith with respect to or affecting such
Series having been incorrect in a material respect as of the time made, and
such breach is not cured within thirty (30) days after notice thereof is
given in accordance with the procedures described in the related Prospectus
Supplement; (iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust Fund; or (v) any other Event of
Default provided with respect to Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, either the Trustee or the holders
of a majority of the then aggregate outstanding amount of the Notes of such
Series may declare the principal amount (or, if the Notes of that Series have
a Pass-Through Rate of 0%, such portion of the principal amount as may be
specified in the terms of that Series, as provided in the related Prospectus
Supplement) of all the Notes of such Series to be due and payable
immediately. Such declaration may, under certain circumstances, be rescinded
and annulled by the holders of more than 50% of the Percentage Interests of
the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes,
the Notes of such Series have been declared to be due and payable, the
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such Series and
to continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide
sufficient funds for the payment of principal of and interest on the Notes of
such Series as they would have become due if there had not been such a
declaration. In addition, the Trustee may not sell or otherwise liquidate
the collateral securing the Notes of a Series following an Event of Default,
unless (a) the holders of 100% of the Percentage Interests of the Notes of
such Series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued
interest, due and unpaid, on the outstanding Notes of such Series at the date
of such sale or (c) the Trustee determines that such collateral would not be
sufficient on an ongoing basis to make all payments on such Notes as such
payments would have become due if such Notes had not been declared due and
payable, and the Trustee obtains the consent of the holders of 662/3% of the
Percentage Interests of 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 Considerations"
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
involvesufficient stateactiontoafford constitutionalprotectionto theborrower.
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 (the
"Relief Act") 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.
As used herein, the term "U.S. Person" means 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 (other than 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 authority to control all substantial decisions of
the trust. Notwithstanding the preceding sentence, 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 be considered U.S. Persons as well.
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)(4)(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") 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 application of recently finalized regulations under
Section 171 issued December 30, 1997.
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)(5)(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)(5)(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 such gain will generally be
capital gain or loss, assuming that the Security is held as a capital asset
and will generally be long-term capital gain or loss if the holding period of
the security is one year or more. The Taxpayer Relief Act of 1997 (the
"Act") 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). The capital gains rate for capital assets
held by individual taxpayers for more than twelve months but less than
eighteen months was not changed by the Act ("Mid-Term Rate"). The Act does
not change the capital gain rates for corporations. Prospective investors
should consult their own tax advisors concerning these tax law changes.
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.
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.
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding,
backup withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New Regulations will generally be effective for payments made
after December 31, 1998, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds as to which
a partnership election is made, under the Code, unless interest (including
OID) paid on a Security (other than a Residual Interest Security) is
considered to be "effectively connected" with a trade or business conducted
in the United States by a nonresident alien individual, foreign partnership
or foreign corporation ("Nonresidents"), in the opinion of Tax Counsel, such
interest will normally qualify as portfolio interest (except where (i) the
recipient is a holder, directly or by attribution, of 10% or more of the
capital or profits interest in the issuer, or (ii) the recipient is a
controlled foreign corporation to which the issuer is a related person) and
will be exempt from federal income tax. Upon receipt of appropriate
ownership statements, the issuer normally will be relieved of obligations to
withhold tax from such interest payments. These provisions supersede the
generally applicable provisions of United States law that would otherwise
require the issuer to withhold at a 30% rate (unless such rate were reduced
or eliminated by an applicable tax treaty) on, among other things, interest
and other fixed or determinable, annual or periodic income paid to
Nonresidents. Holders of Pass-Through Securities and Stripped Securities,
including Ratio Strip Securities, however, may be subject to withholding to
the extent that the Loans were originated on or before July 18, 1984.
Interest and OID of holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the holder. They will, however, generally be subject to the
regular United States income tax.
Payments to holders of Residual Interest Securities who are foreign
persons will generally be treated as interest for purposes of the 30% (or
lower treaty rate) United States withholding tax. Holders should assume that
such income does not qualify for exemption from United States withholding tax
as "portfolio interest." It is clear that, to the extent that a payment
represents a portion of REMIC taxable income that constitutes excess
inclusion income, a holder of a Residual Interest Security will not be
entitled to an exemption from or reduction of the 30% (or lower treaty rate)
withholding tax rule. If the payments are subject to United States
withholding tax, they generally will be taken into account for withholding
tax purposes only when paid or distributed (or when the Residual Interest
Security is disposed of). The Treasury has statutory authority, however, to
promulgate regulations which would require such amounts to be taken into
account at an earlier time in order to prevent the avoidance of tax. Such
regulations could, for example, require withholding prior to the distribution
of cash in the case of Residual Interest Securities that do not have
significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest
Security to a Nonresident will be disregarded for all Federal tax purposes.
A Residual Interest Security has tax avoidance potential unless, at the time
of the transfer the transferor reasonably expects that the REMIC will
distribute to the transferee residual interest holder amounts that will equal
at least 30% of each excess inclusion, and that such amounts will be
distributed at or after the time at which the excess inclusions accrue and
not later than the calendar year following the calendar year of accrual. If
a Nonresident transfers a Residual Interest Security to a United States
person, and if the transfer has the effect of allowing the transferor to
avoid tax on accrued excess inclusions, then the transfer is disregarded and
the transferor continues to be treated as the owner of the Residual Interest
Security for purposes of the withholding tax provisions of the Code. See "--
Excess Inclusions."
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Tax Counsel is of the opinion that a Trust Fund structured as a
partnership will not be an association (or publicly traded partnership)
taxable as a corporation for federal income tax purposes. This opinion is
based on the assumption that the terms of the Trust Agreement and related
documents will be complied with, and on counsel's conclusions that the nature
of the income of the Trust Fund will exempt it from the rule that certain
publicly traded partnerships are taxable as corporations or the issuance of
the Certificates has been structured as a private placement under an IRS safe
harbor, so that the Trust Fund will not be characterized as a publicly traded
partnership taxable as a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, in the opinion of Tax Counsel, the Trust Fund would be subject to
corporate income tax on its taxable income. The Trust Fund's taxable income
would include all its income, possibly reduced by its interest expense on the
Notes. Any such corporate income tax could materially reduce cash available
to make payments on the Notes and distributions on the Certificates, and
Certificateholders could be liable for any such tax that is unpaid by the
Trust Fund.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and
the Noteholders will agree by their purchase of Notes, to treat the Notes as
debt for federal income tax purposes. In such a circumstance, Tax Counsel
is, except as otherwise provided in the related Prospectus Supplement, of the
opinion that the Notes will be classified as debt for federal income tax
purposes. The discussion below assumes this characterization of the Notes is
correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that
the interest formula for the Notes meets the requirements for "qualified
stated interest" under the OID regulations, and that any OID on the Notes
(i.e., any excess of the principal amount of the Notes over their issue
price) does not exceed a de minimis amount (i.e., 0.25% of their principal
amount multiplied by the number of full years included in their term), all
within the meaning of the OID regulations. If these conditions are not
satisfied with respect to any given series of Notes, additional tax
considerations with respect to such Notes will be disclosed in the applicable
Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, in the opinion of Tax Counsel, the
Notes will not be considered issued with OID. The stated interest thereon
will be taxable to a Noteholder as ordinary interest income when received or
accrued in accordance with such Noteholder's method of tax accounting. Under
the OID regulations, a holder of a Note issued with a de minimis amount of
OID must include such OID in income, on a pro rata basis, as principal
payments are made on the Note. It is believed that any prepayment premium
paid as a result of a mandatory redemption will be taxable as contingent
interest when it becomes fixed and unconditionally payable. A purchaser who
buys a Note for more or less than its principal amount will generally be
subject, respectively, to the premium amortization or market discount rules
of the Code.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (a "Short-Term Note") may be subject to
special rules. An accrual basis holder of a Short-Term Note (and certain
cash method holders, including regulated investment companies, as set forth
in Section 1281 of the Code) generally would be required to report interest
income as interest accrues on a straight-line basis over the term of each
interest period. Other cash basis holders of a Short-Term Note would, in
general, be required to report interest income as interest is paid (or, if
earlier, upon the taxable disposition of the Short-Term Note). However, a
cash basis holder of a Short-Term Note reporting interest income as it is
paid may be required to defer a portion of any interest expense otherwise
deductible on indebtedness incurred to purchase or carry the Short-Term Note
until the taxable disposition of the Short-Term Note. A cash basis taxpayer
may elect under Section 1281 of the Code to accrue interest income on all
nongovernment debt obligations with a term of one year or less, in which case
the taxpayer would include interest on the Short-Term Note in income as it
accrues, but would not be subject to the interest expense deferral rule
referred to in the preceding sentence. Certain special rules apply if a
Short-Term Note is purchased for more or less than its principal amount.
Sale or Other Disposition. In the opinion of Tax Counsel, if a
Noteholder sells a Note, the holder will recognize gain or loss in an amount
equal to the difference between the amount realized on the sale and the
holder's adjusted tax basis in the Note. The adjusted tax basis of a Note to
a particular Noteholder will equal the holder's cost for the Note, increased
by any market discount, acquisition discount, OID and gain previously
included by such Noteholder in income with respect to the Note and decreased
by the amount of bond premium (if any) previously amortized and by the amount
of principal payments previously received by such Noteholder with respect to
such Note. Any such gain or loss will be capital gain or loss if the Note
was held as a capital asset, except for gain representing accrued interest
and accrued market discount not previously included in income. Capital
losses generally may be used only to offset capital gains.
Foreign Holders. In the opinion of Tax Counsel, interest payments made
(or accrued) to a Noteholder who is a nonresident alien, foreign corporation
or other non-United States person (a "foreign person") generally will be
considered "portfolio interest", and generally will not be subject to United
States federal income tax and withholding tax, if the interest is not
effectively connected with the conduct of a trade or business within the
United States by the foreign person and the foreign person (i) is not
actually or constructively a "10 percent shareholder" of the Trust or the
Seller (including a holder of 10% of the outstanding Certificates) or a
"controlled foreign corporation" with respect to which the Trust or the
Seller is a "related person" within the meaning of the Code and (ii) provides
the Owner Trustee or other person who is otherwise required to withhold U.S.
tax with respect to the Notes with an appropriate statement (on Form W-8 or a
similar form), signed under penalties of perjury, certifying that the
beneficial owner of the Note is a foreign person and providing the foreign
person's name and address. If a Note is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide the relevant signed statement to the withholding
agent; in that case, however, the signed statement must be accompanied by a
Form W-8 or substitute form provided by the foreign person that owns the
Note. If such interest is not portfolio interest, then it will be subject to
United States federal income and withholding tax at a rate of 30 percent,
unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days
or more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's
name, address, correct federal taxpayer identification number and a statement
that the holder is not subject to backup withholding. Should a nonexempt
Noteholder fail to provide the required certification, the Trust Fund will be
required to withhold 31 percent of the amount otherwise payable to the
holder, and remit the withheld amount to the IRS as a credit against the
holder's federal income tax liability.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of Tax Counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for federal income tax purposes, the Notes might
be treated as equity interests in the Trust Fund. If so treated, the Trust
Fund might be treated as a publicly traded partnership that would not be
taxable as a corporation because it would meet certain qualifying income
tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including
pension funds) would be "unrelated business taxable income", income to
foreign holders generally would be subject to U.S. tax and U.S. tax return
filing and withholding requirements, and individual holders might be subject
to certain limitations on their ability to deduct their share of the Trust
Fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase
of Certificates, to treat the Trust Fund as a partnership for purposes of
federal and state income tax, franchise tax and any other tax measured in
whole or in part by income, with the assets of the partnership being the
assets held by the Trust Fund, the partners of the partnership being the
Certificateholders, and the Notes being debt of the partnership. However,
the proper characterization of the arrangement involving the Trust Fund, the
Certificates, the Notes, the Trust Fund and the Servicer is not clear because
there is no authority on transactions closely comparable to that contemplated
herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series
of Securities includes a single class of Certificates. If these conditions
are not satisfied with respect to any given Series of Certificates,
additional tax considerations with respect to such Certificates will be
disclosed in the applicable Prospectus Supplement.
Partnership Taxation. If the Trust Fund is a partnership, in the
opinion of Tax Counsel, the Trust Fund will not be subject to federal income
tax. Rather, in the opinion of Tax Counsel, each Certificateholder will be
required to separately take into account such holder's allocated share of
income, gains, losses, deductions and credits of the Trust Fund. The Trust
Fund's income will consist primarily of interest and finance charges earned
on the Loans (including appropriate adjustments for market discount, OID and
bond premium) and any gain upon collection or disposition of Loans. The
Trust Fund's deductions will consist primarily of interest accruing with
respect to the Notes, servicing and other fees, and losses or deductions upon
collection or disposition of Loans.
In the opinion of Tax Counsel, the tax items of a partnership are
allocable to the partners in accordance with the Code, Treasury regulations
and the partnership agreement (here, the Trust Agreement and related
documents). The Trust Agreement will provide, in general, that the
Certificateholders will be allocated taxable income of the Trust Fund for
each month equal to the sum of (i) the interest that accrues on the
Certificates in accordance with their terms for such month, including
interest accruing at the Pass-Through Rate for such month and interest on
amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Loans that corresponds to
any excess of the principal amount of the Certificates over their initial
issue price (iii) prepayment premium payable to the Certificateholders for
such month; and (iv) any other amounts of income payable to the
Certificateholders for such month. Such allocation will be reduced by any
amortization by the Trust Fund of premium on Loans that corresponds to any
excess of the issue price of Certificates over their principal amount. All
remaining taxable income of the Trust Fund will be allocated to the
Depositor. Based on the economic arrangement of the parties, in the opinion
of Tax Counsel, this approach for allocating Trust Fund income should be
permissible under applicable Treasury regulations, although no assurance can
be given that the IRS would not require a greater amount of income to be
allocated to Certificateholders. Moreover, in the opinion of Tax Counsel,
even under the foregoing method of allocation, Certificateholders may be
allocated income equal to the entire Pass-Through Rate plus the other items
described above even though the Trust Fund might not have sufficient cash to
make current cash distributions of such amount. Thus, cash basis holders
will in effect be required to report income from the Certificates on the
accrual basis and Certificateholders may become liable for taxes on Trust
Fund income even if they have not received cash from the Trust Fund to pay
such taxes. In addition, because tax allocations and tax reporting will be
done on a uniform basis for all Certificateholders but Certificateholders may
be purchasing Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns taxable
income that is greater or less than the amount reported to them by the Trust
Fund.
In the opinion of Tax Counsel, all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan
or other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
In the opinion of Tax Counsel, an individual taxpayer's share of
expenses of the Trust Fund (including fees to the Servicer but not interest
expense) would be miscellaneous itemized deductions. Such deductions might
be disallowed to the individual in whole or in part and might result in such
holder being taxed on an amount of income that exceeds the amount of cash
actually distributed to such holder over the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income
and allocations to Certificateholders on an aggregate basis. If the IRS were
to require that such calculations be made separately for each Loan, the Trust
Fund might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued
with OID, and, therefore, the Trust should not have OID income. However, the
purchase price paid by the Trust Fund for the Loans may be greater or less
than the remaining principal balance of the Loans at the time of purchase.
If so, in the opinion of Tax Counsel, the Loan will have been acquired at a
premium or discount, as the case may be. (As indicated above, the Trust Fund
will make this calculation on an aggregate basis, but might be required to
recompute it on a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium,
the Trust Fund will elect to include any such discount in income currently as
it accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. Pursuant to final Treasury regulations issued
May 9, 1997 under section 708 of the Code a sale or exchange of 500 percent
or more of the capital and profits in the issuer entity within a 12-month tax
period would cause a deemed contribution of assets of the issuer entity (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. The New Regulations described herein make
certain modifications to the backup withholding and information reporting
rules. The New Regulations will generally be effective for payments made
after December 31, 1998, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
FASIT SECURITIES
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory
vehicle for the issuance of mortgage-backed and asset-backed securities.
Although the FASIT provisions of the Code became effective on September 1,
1997, no Treasury regulations or other administrative guidance has been
issued with respect to those provisions. Accordingly, definitive guidance
cannot be provided with respect to many aspects of the tax treatment of FASIT
Securityholders. Investors also should note that the FASIT discussions
contained herein constitutes only a summary of the federal income tax
consequences to holders of FASIT Securities. With respect to each Series of
FASIT Securities, the related Prospectus Supplement will provide a detailed
discussion regarding the federal income tax consequences associated with the
particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect
to the taxable income or loss of the related Series. The Prospectus
Supplement for each Series of Securities will indicate whether one or more
FASIT elections will be made for that Series and which Securities of such
Series will be designated as Regular Securities, and which, if any, will be
designated as Ownership Securities.
Qualification as a FASIT. The Trust Fund underlying a Series (or one or
more designated pools of assets held in the Trust Fund) will qualify under
the Code as a FASIT in which the FASIT Regular Securities and the FASIT
Ownership Securities will constitute the "regular interests" and the
"ownership interests," respectively, if (i) a FASIT election is in effect,
(ii) certain tests concerning (A) the composition of the FASIT's assets and
(B) the nature of the Securityholders' interest in the FASIT are met on a
continuing basis, and (iii) the Trust Fund is not a regulated company as
defined in Section 851(a) of the Code.
Asset Composition. In order for a Trust Fund (on one or more designated
pools of assets held by a Trust Fund) to be eligible for FASIT status,
substantially all of the assets of the Trust Fund (or the designated pool)
must consist of "permitted assets" as of the close of the third month
beginning after the closing date and at all times thereafter (the "FASIT
Qualification Test"). Permitted assets include (i) cash or cash equivalents,
(ii) debt instruments with fixed terms that would qualify as REMIC regular
interests if issued by a REMIC (generally, instruments that provide for
interest at a fixed rate, a qualifying variable rate, or a qualifying
interest-only ("IO") type rate, (iii) foreclosure property, (iv) certain
hedging instruments (generally, interest and currency rate swaps and credit
enhancement contracts) that are reasonably required to guarantee or hedge
against the FASIT's risks associated with being the obligor on FASIT
interests, (v) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments, (vi) FASIT regular interests, and (vii) REMIC
regular interests. Permitted assets do not include any debt instruments
issued by the holder of the FASIT's ownership interest or by any person
related to such holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements.
All of the interests in a FASIT must belong to either of the following: (i)
one or more classes of regular interests or (ii) a single class of ownership
interest that is held by a fully taxable domestic corporation. In the case
of Series that include FASIT Ownership Securities, the ownership interest
will be represented by the FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater
than thirty years, (iii) it entitles its holder to a specified principal
amount, (iv) the issue price of the interest does not exceed 125% of its
stated principal amount, (v) the yield to maturity of the interest is less
than the applicable Treasury rate published by the IRS plus 5%, and (vi) if
it pays interest, such interest is payable at either (a) a fixed rate with
respect to the principal amount of the regular interest or (b) a permissible
variable rate with respect to such principal amount. Permissible variable
rates for FASIT regular interests are the same as those for REMIC regular
interest (i.e., certain qualified floating rates and weighted average rates).
See "Certain Material Federal Income Tax Considerations--Taxation of Debt
Securities--Variable Rate Debt Securities."
If a FASIT Security fails to meet one or more of the requirements set
out in clauses (iii), (iv) or (v) above, but otherwise meets the above
requirements, it may still qualify as a type of regular interest known as a
"High-Yield Interest." In addition, if a FASIT Security fails to meet the
requirements of clause (vi), but the interest payable on the Security
consists of a specified portion of the interest payments on permitted assets
and that portion does not vary over the life of the Security, the Security
also will qualify as a High-Yield Interest. A High-Yield Interest may be
held only by domestic corporations that are fully subject to corporate income
tax ("Eligible Corporations"), other FASITs and dealers in securities who
acquire such interests as inventory, rather than for investment. In
addition, holders of High-Yield Interests are subject to limitations on
offset of income derived from such interest. See "Certain Material Federal
Income Tax Considerations--FASIT Securities--Tax Treatment of FASIT Regular
Securities--Treatment of High-Yield Interests."
Consequences of Disqualification. If a Series of FASIT Securities fails
to comply with one or more of the Code's ongoing requirements for FASIT
status during any taxable year, the Code provides that its FASIT status may
be lost for that year and thereafter. If FASIT status is lost, the treatment
of the former FASIT and the interests therein for federal income tax purposes
is uncertain. The former FASIT might be treated as a grantor trust, as a
separate association taxed as a corporation, or as a partnership. The FASIT
Regular Securities could be treated as debt instruments for federal income
tax purposes or as equity interests. Although the Code authorizes the
Treasury to issue regulations that address situations where a failure to meet
the requirements for FASIT status occurs inadvertently and in good faith,
such regulations have not yet been issued. It is possible that
disqualification relief might be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the FASIT's income for a
period of time in which the requirements for FASIT status are not satisfied.
Tax Treatment of FASIT Regular Securities. Payments received by holders
of FASIT Regular Securities generally should be accorded the same tax
treatment under the Code as payments received on other taxable corporate debt
instruments and on REMIC Regular Securities. As in the case of holders of
REMIC Regular Securities, holders of FASIT Regular Securities must report
income from such Securities under an accrual method of accounting, even if
they otherwise would have used the case receipts and disbursements method.
Except in the case of FASIT Regular Securities issued with original issue
discount or acquired with market discount or premium, interest paid or
accrued on a FASIT Regular Security generally will be treated as ordinary
income to the Securityholder and a principal payment on such Security will be
treated as a return of capital to the extent that the Securityholder's basis
is allocable to that payment. FASIT Regular Securities issued with original
issue discount or acquired with market discount or premium generally will
treat interest and principal payments on such Securities in the same manner
described for REMIC Regular Securities. See "Certain Material Federal Income
Tax Considerations--Taxation of Debt Securities," "--Market Discount," and "-
- -Premium" above. High-Yield Securities may be held only by fully taxable
domestic corporations, other FASITs, and certain securities dealers. Holders
of High-Yield Securities are subject to limitations on their ability to use
current losses or net operating loss carryforwards or carrybacks to offset
any income derived from those Securities.
If a FASIT Regular Security is sold or exchanged, the Securityholder
generally will recognize gain or loss upon the sale in the manner described
above for REMIC Regular Securities. See "Certain Material Federal Income Tax
Considerations--Sale or Exchange." In addition, if a FASIT Regular Security
becomes wholly or partially worthless as a result of Default and
Delinquencies of the underlying Assets, the holder of such Security should be
allowed to deduct the loss sustained (or alternatively be able to report a
lesser amount of income). See "Certain Material Federal Income Tax
Considerations--Taxation of Debt Instruments--Effects of Default and
Delinquencies."
FASIT Regular Securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c)(5) of the Code, and interest on
such Securities will be considered Qualifying REIT Interest to the same
extent that REMIC Securities would be so considered. FASIT Regular
Securities held by a Thrift Institution taxed as a "domestic building and
loan association" will represent qualifying assets for purposes of the
qualification requirements set forth in Code Section 7701(a)(19) to the same
extent that REMIC Securities would be so considered. See "Certain Material
Federal Income Tax Considerations--Taxation of Debt Securities--Status as
Real Property Loans." In addition, FASIT Regular Securities held by a
financial institution to which Section 585 of the Code applies will be
treated as evidences of indebtedness for purposes of Section 582(c)(1) of the
Code. FASIT Securities will not qualify as "Government Securities" for
either REIT or RIC qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject to
special rules regarding the eligibility of holders of such interests, and the
ability of such holders to offset income derived from their FASIT Security
with losses. High-Yield Interests may be held only by Eligible Corporations
other FASITs, and dealers in securities who acquire such interests as
inventory. If a securities dealer (other than an Eligible Corporation)
initially acquires a High-Yield Interest as inventory, but later begins to
hold it for investment, the dealer will be subject to an excise tax equal to
the income from the High-Yield Interest multiplied by the highest corporate
income tax rate. In addition, transfers of High-Yield Interests to
disqualified holders will be disregarded for federal income tax purposes, and
the transferor still will be treated as the holder of the High-Yield
Interest.
The holder of a High-Yield Interest may not use non-FASIT current losses
or net operating loss carryforwards or carrybacks to offset any income
derived from the High-Yield Interest, for either regular Federal income tax
purposes or for alternative minimum tax purposes. In addition, the FASIT
provisions contain an anti-abuse rule that imposes corporate income tax on
income derived from a FASIT Regular Security that is held by a pass-through
entity (other than another FASIT) that issues debt or equity securities
backed by the FASIT Regular Security and that have the same features as High-
Yield Interests.
Tax Treatment of FASIT Ownership Securities. A FASIT Ownership Security
represents the residual equity interest in a FASIT. As such, the holder of a
FASIT Ownership Security determines its taxable income by taking into account
all assets, liabilities and items of income, gain, deduction, loss and credit
of a FASIT. In general, the character of the income to the holder of a FASIT
Ownership Interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
holder of a FASIT Ownership Interest is treated as ordinary income. In
determining that taxable income, the holder of a FASIT Ownership Security
must determine the amount of interest, original issue discount, market
discount and premium recognized with respect to the FASIT's assets and the
FASIT Regular Securities issued by the FASIT according to a constant yield
methodology and under an accrual method of accounting. In addition, holders
of FASIT Ownership Securities are subject to the same limitations on their
ability to use losses to offset income from their FASIT Security as are the
holders of High-Yield Interests. See "Certain Material Federal Income Tax
Considerations--Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly,
losses on dispositions of a FASIT Ownership Security generally will be
disallowed where, within six months before or after the disposition, the
seller of such Security acquires any other FASIT Ownership Security or, in
the case of a FASIT holding mortgage assets, any interest in a Taxable
Mortgage Pool that is economically comparable to a FASIT Ownership Security.
In addition, if any security that is sold or contributed to a FASIT by the
holder of the related FASIT Ownership Security was required to be marked-to-
market under Code section 475 by such holder, then section 475 will continue
to apply to such securities, except that the amount realized under the mark-
to-market rules will be a greater of the securities' value under present law
or the securities' value after applying special valuation rules contained in
the FASIT provisions. Those special valuation rules generally require that
the value of debt instruments that are not traded on an established
securities market be determined by calculating the present value of the
reasonably expected payments under the instrument using a discount rate of
120% of the applicable Federal rate, compounded semiannually.
The holder of a FASIT Ownership Security will be subject to a tax equal
to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include (i) the receipt of income
derived from assets that are not permitted assets, (ii) certain dispositions
of permitted assets, (iii) the receipt of any income derived from any loan
originated by a FASIT, and (iv) in certain cases, the receipt of income
representing a servicing fee or other compensation. Any Series for which a
FASIT election is made generally will be structured in order to avoid
application of the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
Securities will be subject to backup withholding to the same extent holders
of REMIC Securities would be subject. See "Certain Material Federal Income
Tax Considerations--Miscellaneous Tax Aspects--Backup Withholding." For
purposes of reporting and tax administration, holders of record of FASIT
Securities generally will be treated in the same manner as holders of REMIC
Securities.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
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.
On July 21, 1997, the DOL published in the Federal Register an amendment
to the Exemption which extends exemptive relief to certain mortgage-backed
and asset-backed securities transactions using pre-funding accounts for
trusts issuing pass-through certificates. The amendment 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) Either:
(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 related
underwriter and the related trustee) stating whether or not the
characteristics of the Additional Obligations conform to the
characteristics described in the related 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 investments which are permitted by the Exemption
Rating Agencies rating the certificates and must:
(i) be direct obligations of, or obligations fully guaranteed as
to timely payment of principal and interest by, the United States or
any agency or instrumentality thereof (provided that such
obligations are backed by the full faith and credit of the United
States); or
(ii) have been rated (or the obligor has been rated) in one
or the three highest generic rating categories by an Exemption
Rating Agency ("Permitted Investments").
(8) The related 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 related 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.
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.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN OCWEN MORTGAGE LOAN ASSET BACKED CERTIFICATES,
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY SERIES
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS 1998-OFS1
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
DEPOSITOR OR THE UNDERWRITER. THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN
OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH
THEY RELATE OR AN OFFER TO SELL, OR A SOLICITATION $125,489,000 CLASS A
OF AN OFFER TO BUY, TO ANY PERSON IN ANY VARIABLE PASS-THROUGH RATE
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION
WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY $13,719,000 CLASS M-1
SALE MADE HEREUNDER SHALL, UNDER ANY VARIABLE PASS-THROUGH RATE
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THEIR RESPECTIVE DATES. $11,701,000 CLASS M-2
VARIABLE PASS-THROUGH RATE
------------------------------------
TABLE OF CONTENTS
$10,491,329 CLASS B
VARIABLE PASS-THROUGH RATE
PAGE
PROSPECTUS SUPPLEMENT
Incorporation of Certain Documents by Reference iv
Summary of Terms . . . . . . . . . . . . . . S-1
Risk Factors . . . . . . . . . . . . . . . . S-10 FINANCIAL ASSET SECURITIES CORP.
The Mortgage Pool . . . . . . . . . . . . . . S-15 (DEPOSITOR)
Underwriting Standards . . . . . . . . . . . S-27
The Master Servicer . . . . . . . . . . . . . S-31 ---------------------------
The Pooling and Servicing Agreement . . . . . S-33
Description of the Certificates . . . . . . . S-38 PROSPECTUS SUPPLEMENT
Yield, Prepayment and Maturity Considerations S-50
Use of Proceeds . . . . . . . . . . . . . . . S-59 ---------------------------
Certain Material Federal Income Tax
Consequences. . . . . . . . . . . . . . . . . S-59
State Taxes . . . . . . . . . . . . . . . . . S-61 (GREENWICH CAPITAL MARKETS, INC.)
ERISA Considerations . . . . . . . . . . . . S-62
Legal Investment Considerations . . . . . . . S-64 IN LOGO
Method of Distribution . . . . . . . . . . . S-64
Legal Matters . . . . . . . . . . . . . . . . S-65
Ratings . . . . . . . . . . . . . . . . . . . S-65
Index of Defined Terms . . . . . . . . . . . S-67
PROSPECTUS
Prospectus Supplement or Current Report
on Form 8-K . . . . . . . . . . . . . . . 2 ---------------------------
Incorporation of Certain Information
by Reference. . . . . . . . . . . . . . . 2
Available Information . . . . . . . . . . . 2
Reports to Securitholders . . . . . . . . . 3 March 17, 1998
Summary to 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
Fasit Securities. . . . . . . . . . . . . . 87
State Tax Considerations. . . . . . . . . . 90
ERISA Considerations. . . . . . . . . . . . 90
Legal Investment. . . . . . . . . . . . . . 94
Method of Distribution. . . . . . . . . . . 95
Legal Matters . . . . . . . . . . . . . . . 96
Financial Information . . . . . . . . . . . 96
Rating. . . . . . . . . . . . . . . . . . . 96
</TABLE>
