PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 28, 1998)
$266,650,773 (APPROXIMATE)
RESIDENTIAL MORTGAGE LOAN TRUST 1998-1 CERTIFICATES
$231,986,000 Class A Variable Pass-Through Rate
$ 16,000,000 Class M-1 Variable Pass-Through Rate
$ 10,666,000 Class M-2 Variable Pass-Through Rate
$ 7,998,773 Class B Variable Pass-Through Rate
FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
----------------------
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
SELLER
----------------------
OCWEN FEDERAL BANK FSB
MASTER SERVICER
----------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-9 IN THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 14 IN THE PROSPECTUS.
The certificates represent obligations of the trust only and do not represent
an interest in or obligation of Financial Asset Securities Corp., Greenwich
Capital Financial Products, Inc., Ocwen Federal Bank FSB or any of their
affiliates.
This prospectus supplement may be used to offer and sell the certificates only
if accompanied by the prospectus.
The trust will issue six classes of certificates. Only the four classes of
certificates identified above are being offered by this prospectus supplement
and the accompanying prospectus.
The Certificates
o The Class A Certificates will be senior certificates.
o The Class M-1 and Class M-2 Certificates will be mezzanine
certificates.
o The Class B Certificates will be subordinate certificates.
o Each class of certificates will accrue interest at a rate equal to
one-month LIBOR plus a fixed margin, subject to certain limitations
described in the prospectus supplement.
Credit Enhancement
o Overcollateralization - Certain excess interest received from the
mortgage loans in the trust will be applied as payments of principal
on the offered certificates to establish and maintain a required
level of overcollateralization.
o Subordination - The mezzanine certificates and the subordinate
certificates are subordinate in right of certain payments to the
senior certificates. The Class M-2 Certificates are subordinate to
the Class M-1 Certificates and the Class B Certificates are
subordinate to the mezzanine certificates.
o Allocation of Losses - Certain losses may be allocated among the
mezzanine and subordinate certificates in reverse order of seniority,
which would reduce the principal balances of the certificates
affected. Although the outstanding principal balance of the Class A
Certificates will not be reduced as a result of realized losses, in
some circumstances such losses may reduce the amount of principal
ultimately paid to the holders of the Class A Certificates.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE
SECURITIES OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The offered certificates are being offered by Greenwich Capital Markets, Inc.
from time to time in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. Proceeds to the depositor with respect to
the offered certificates are expected to be approximately $266,650,873, before
deducting issuance expenses payable by the depositor, estimated to be $455,000.
See "Method of Distribution" in this prospectus supplement.
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 November 12, 1998.
-------------------
[GREENWICH LOGO]
November 10, 1998
<PAGE>
TABLE OF CONTENTS
<PAGE>
PROSPECTUS SUPPLEMENT
Section Page
Summary of Terms............................S-3
Risk Factors................................S-9
The Mortgage Pool...........................S-17
Underwriting Standards......................S-31
The Master Servicer.........................S-32
The Pooling and Servicing
Agreement.................................S-34
Description of the Certificates.............S-39
Yield, Prepayment and Maturity
Considerations............................S-52
Use of Proceeds.............................S-61
Certain Material Federal Income
Tax Consequences..........................S-61
State Taxes.................................S-64
ERISA Considerations........................S-64
Legal Investment Considerations.............S-66
Method of Distribution......................S-66
Legal Matters...............................S-67
Ratings.....................................S-67
Index of Defined Terms......................S-68
PROSPECTUS
Page
Prospectus Supplement....................... 2
Incorporation of Certain Information
by Reference............................ 2
Available Information....................... 3
Reports to Securityholders.................. 3
Summary of Terms............................ 4
Risk Factors................................14
The Trust Fund..............................21
Use of Proceeds.............................28
The Depositor...............................28
Loan Program................................28
Description of The
Securities ..............................31
Credit Enhancement..........................43
Yield and Prepayment
Considerations...........................50
The Agreements..............................54
Certain Legal Aspects
of the Loans.............................70
Certain Material Federal Income
Tax Considerations.......................86
FASIT Securities............................110
State Tax Considerations....................114
ERISA Considerations........................115
Legal Investment............................120
Method of Distribution......................121
Legal Matters...............................122
Financial Information.......................122
Rating......................................122
<PAGE>
SUMMARY OF TERMS
o THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND DOES
NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER IN MAKING
YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF AN OFFERING OF
THE CERTIFICATES, READ CAREFULLY THIS ENTIRE DOCUMENT AND THE ACCOMPANYING
PROSPECTUS.
o THIS SUMMARY PROVIDES AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION TO AID YOUR UNDERSTANDING AND IS
QUALIFIED BY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS. SOME OF THE INFORMATION CONSISTS OF
FORWARD-LOOKING STATEMENTS RELATING TO FUTURE ECONOMIC PERFORMANCE OR
PROJECTIONS AND OTHER FINANCIAL ITEMS. FORWARD-LOOKING STATEMENTS ARE
SUBJECT TO A VARIETY OF RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER FROM THE PROJECTED RESULTS. THOSE RISKS AND
UNCERTAINTIES INCLUDE, AMONG OTHERS, GENERAL ECONOMIC AND BUSINESS
CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL
REGULATIONS, AND VARIOUS OTHER MATTERS, ALL OF WHICH ARE BEYOND OUR
CONTROL. ACCORDINGLY, WHAT ACTUALLY HAPPENS MAY BE VERY DIFFERENT FROM
WHAT WE PREDICT IN OUR FORWARD-LOOKING STATEMENTS.
<PAGE>
OFFERED CERTIFICATES
On the closing date, Residential Mortgage Loan Trust 1998-1 will issue six
classes of certificates, four of which are being offered pursuant to this
prospectus supplement and the accompanying prospectus. The assets of the trust
that will support the certificates will consist of a pool of fixed-rate
mortgage loans with a principal balance of approximately $93,060,949 and
adjustable-rate mortgage loans with a principal balance of approximately
$173,589,925 as of October 1, 1998. All of the adjustable rate mortgage loans
are indexed to six-month LIBOR, of which 79.09% have initial fixed rate
periods. The mortgage loans will have original terms to maturity ranging from
five years to 30 years and will be secured by first liens on one- to
four-family residential properties.
Each class of certificates that is being offered will be book-entry securities
clearing through DTC (in the United States) or Cedel or Euroclear (in Europe)
in minimum denominations of $50,000.
OTHER CERTIFICATES
The trust will issue two additional classes of certificates. These certificates
will be designated the Class OC and Class R Certificates and are not being
offered to the public pursuant to this prospectus supplement and the
prospectus. The Class OC Certificates will not have an original principal
certificate balance. The Class R Certificates will have an original certificate
principal balance of $100.
SEE "DESCRIPTION OF THE CERTIFICATES-- GENERAL" AND "--BOOK-ENTRY CERTIFICATES"
IN THIS PROSPECTUS SUPPLEMENT; AND "THE MORTGAGE POOL" IN THIS PROSPECTUS
SUPPLEMENT AND "THE TRUST FUND--THE LOANS--GENERAL" IN THE PROSPECTUS.
<PAGE>
CUT-OFF DATE
October 1, 1998
CLOSING DATE
On or about November 12, 1998
THE DEPOSITOR
Financial Asset Securities Corp.
600 Steamboat Road
Greenwich, Connecticut 06830
(203) 625-2700
SELLER
Greenwich Capital Financial Products, Inc.
MASTER SERVICER
Ocwen Federal Bank FSB
TRUSTEE
Bankers Trust Company
of California, N.A.
DESIGNATIONS
Each class of certificates will have different characteristics, some of which
are reflected in the following general designations.
o OFFERED CERTIFICATES
Class A, Class M-1, Class M-2 and Class B Certificates
o SENIOR CERTIFICATES
Class A Certificates
o MEZZANINE CERTIFICATES
Class M-1 and Class M-2 Certificates
o SUBORDINATE CERTIFICATES
Class B Certificates
o RESIDUAL CERTIFICATES
Class R Certificates
o EXCESS RESERVE FUND SUPPORT CERTIFICATES
Class OC Certificates
o BOOK-ENTRY CERTIFICATES
Class A, Class M-1, Class M-2 and
Class B Certificates
o PHYSICAL CERTIFICATES
Class OC and Class R Certificates
DISTRIBUTION DATES
The trustee will make distributions on the certificates on the 25th day of each
calendar month beginning on November 25, 1998 to the holder of record of the
certificates as of the business day preceding such date of distribution. If the
25th day of a month is not a business day, then the distribution will be made
on the next business day.
PAYMENTS ON THE CERTIFICATES
INTEREST PAYMENTS
The pass-through rate for each class of offered certificates will be calculated
at the rates specified below, subject to the limitations described under
"Description of the Certificates -- Pass-Through Rates" in this prospectus
supplement:
THROUGH THE CALL OPTION DATE
Class A LIBOR + 75 basis points
Class M-1 LIBOR + 95 basis points
Class M-2 LIBOR + 140 basis points
Class B LIBOR + 300 basis points
AFTER THE CALL OPTION DATE
Class A LIBOR + 150 basis points
Class M-1 LIBOR + 142.5 basis points
Class M-2 LIBOR + 210 basis points
Class B LIBOR + 450 basis points
Interest payable on the certificates on a distribution date will accrue during
the period commencing on the prior distribution date and ending on the day
before the current distribution date. The first accrual period will begin on
the Closing Date and end on November 24, 1998. Interest will be calculated on
the basis of the actual number of days included in the interest accrual period,
based on a 360-day year.
SEE "DESCRIPTION OF THE CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT.
PAYMENT PRIORITIES
On each distribution date available funds in the trust will be paid in the
following order of priority and subject to the limitations described under
"Description of the Certificates--Allocation of Available Funds" in this
prospectus supplement:
(i) to the Class A Certificates, as current interest and any previously
unpaid interest;
(ii) as current interest sequentially to the Class M-1, Class M-2 and Class B
Certificates;
(iii) as principal of the Class A, Class M-1, Class M-2 and Class B
Certificates, in that order, to the extent such classes are entitled to
receive distributions of principal, up to the aggregate amount received
on account of principal of the mortgage loans;
(iv) as principal of the Class A, Class M-1, Class M-2 and Class B
Certificates, in that order, to the extent such classes are entitled to
receive distributions of principal, up to the amount necessary to
achieve the required levels of overcollateralization;
(v) as unpaid interest and reimbursement of certain previously allocated
losses, if any, to the Class M-1, Class M-2, and Class B Certificates;
(vi) to the Class OC Certificates for deposit into a reserve account to cover
shortfalls or required reserves, before being released to the Class OC
Certificates; and
(vii) any remaining amounts to the Class R Certificates.
SEE "DESCRIPTION OF THE CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT.
ADVANCES
The Master Servicer will make cash advances with respect to delinquent payments
of principal and interest to the extent the Master Servicer reasonably believes
that the cash advances are recoverable from future payments on the related
mortgage loans. Advances are intended to maintain a regular flow of scheduled
interest and principal payments on the certificates and are not intended to
guarantee or insure against losses.
SEE "THE POOLING AND SERVICING AGREEMENT--ADVANCES" IN THIS PROSPECTUS
SUPPLEMENT.
OPTIONAL TERMINATION
The holder of the majority interest in the residual certificates may purchase
all of the remaining assets of the trust after the principal balance of the
mortgage loans and any real estate owned by the trust declines below 10% of the
principal balance of the mortgage loans on October 1, 1998.
If the holder of the majority interest in the residual certificates does not
exercise this option, then the Master Servicer will have the right to exercise
this option. If the option is not exercised, the offered certificates still
outstanding will accrue interest at a higher rate.
SEE "THE POOLING AND SERVICING AGREEMENT --TERMINATION" AND "DESCRIPTION OF THE
CERTIFICATES -- PASS-THROUGH RATES" IN THIS PROSPECTUS SUPPLEMENT.
CREDIT ENHANCEMENT
The credit enhancements include overcollateralization, subordination and
allocation of losses. These credit enhancements are designed to increase the
likelihood that certificateholders with a higher payment priority will receive
regular payments of interest and principal.
OVERCOLLATERALIZATION
The mortgage loans owned by the trust pay interest each month that in the
aggregate is expected to exceed the amount needed to pay monthly interest on
the offered certificates and certain fees and expenses of the trust. A portion
of this excess interest applied to pay principal on the offered certificates,
which reduces the principal balance of the certificates at a faster rate than
the principal balance on the mortgage loans is being reduced. As a result, the
aggregate principal balance of the mortgage loans is expected to exceed the
aggregate principal balance of the offered certificates. This feature is
referred to as "overcollateralization." The required level of
overcollateralization may increase or decrease over time. We cannot assure you
that sufficient interest will be generated by the mortgage loans to maintain
the required level of overcollateralization.
SEE "DESCRIPTION OF THE CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT.
SUBORDINATION AND ALLOCATION OF LOSSES
The Class A Certificates will have a payment priority over the mezzanine
certificates and the subordinate certificates. Within the classes of mezzanine
certificates, the Class M-1 Certificates will have payment priority over the
Class M-2 Certificates. The Class M-1 and Class M-2 Certificates will have a
payment priority over the Class B Certificates.
Subordination is designed to provide the holders of certificates with a higher
payment priority protection against losses up to a certain level that are
realized when the unpaid principal balance on a mortgage loan exceeds the
proceeds recovered upon the liquidation of that mortgage loan. Losses will
first be applied to reduce the overcollateralization amount. Thereafter, loss
protection is accomplished by allocating the realized losses first to the
subordinate certificates, until the principal amount of the subordinate
certificates is reduced to zero. Realized losses would then be allocated to the
next most junior class of certificates, the Class M-2 Certificates, until the
principal amount of the Class M-2 Certificates is reduced to zero. Thereafter,
realized losses would be applied to the Class M-1 Certificates. Although the
outstanding principal balance of the Class A Certificates will not be reduced
as a result of realized losses, in some circumstances such losses may reduce
the amount of principal ultimately paid to the holders of the Class A
Certificates.
SEE "DESCRIPTION OF THE CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT.
RATINGS
It is a condition of the issuance of the offered certificates that they be
assigned the following ratings by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("S&P") and Duff & Phelps Credit Rating Company
("DCR").
S&P DCR
Class Rating Rating
----- ---------- ------
A AAA AAA
M-1 AA *
M-2 A *
B BBB- *
*DCR was not asked to rate these certificates
A rating is not a recommendation to buy, sell or hold securities. These
ratings may be lowered or withdrawn at any time by either of the rating
agencies.
SEE "RATINGS" IN THIS PROSPECTUS SUPPLEMENT.
TAX STATUS
In the opinion of Brown & Wood LLP, for federal income tax purposes the trust
will include multiple segregated asset pools. An election will be made to treat
each pool as a separate "real estate mortgage investment conduit" ("REMIC").
Certain classes of certificates that are designated as the regular certificates
will constitute "regular interests" in the Master REMIC. The Class R
Certificates will represent the sole class of "residual interests" in the
Master REMIC. The class of certificates designated as the residual certificates
will represent the sole class of residual interests in each subsidiary REMIC.
The offered certificates will also represent the right to receive payments from
the excess reserve fund account. The excess reserve fund account will be
treated as an "outside reserve fund" and the right to receive payments from
such account will be treated as an interest rate cap agreement for federal
income tax purposes. Beneficial owners of the offered certificates will be
treated for federal income tax purposes as having purchased an undivided
beneficial interest in a regular interest in the Master REMIC and as having
acquired rights under an interest rate cap agreement, both to the extent of the
owner's proportionate interest in the offered certificates. A certificateholder
generally will recognize ordinary income equal to such certificateholder's
proportionate share of interest and original issue discount, if any, accrued on
the offered certificates and will take into account a proportionate share of
any payments received under the interest rate cap agreement. A
certificateholder's income derived from payments received under the interest
rate cap agreement generally must be accounted for under the notional principal
contract regulations.
SEE "CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES" IN THIS PROSPECTUS
SUPPLEMENT AND "CERTAIN MATERIAL FEDERAL INCOME TAX CONSIDERATIONS" IN THE
PROSPECTUS.
ERISA CONSIDERATIONS
It is expected that the Class A Certificates may be purchased by a pension or
other employee benefit plan subject to the Employee Retirement Income Security
Act of 1974 or Section 4975 of the Internal Revenue Code of 1986, so long as
certain conditions are met. A fiduciary of an employee benefit plan must
determine that the purchase of a certificate is consistent with its fiduciary
duties under applicable law and does not result in a nonexempt prohibited
transaction under applicable law.
SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS.
LEGAL INVESTMENT
The Class A Certificates and Class M-1 Certificates will be "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 as long as they are rated in one of the two highest rating categories by
at least one nationally recognized statistical rating organization. The Class
M-2 and Class B Certificates will not be rated in one of the two highest rating
categories by a nationally recognized statistical rating organization and,
therefore, will not be "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984.
SEE "LEGAL INVESTMENT CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND "LEGAL
INVESTMENT" IN THE PROSPECTUS.
<PAGE>
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER, IDENTIFIES
CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN THE
CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH
UNDER "RISK FACTORS" IN THE PROSPECTUS.
UNPREDICTABILITY
OF PREPAYMENTS AND
EFFECT ON YIELDS................... Borrowers may prepay their mortgage
loans in whole or in part at any time.
We cannot predict the rate at which
borrowers will repay their mortgage
loans. A prepayment of a mortgage loan
generally will result in a prepayment
on the certificates.
If you purchase your certificates at a
discount and principal is repaid slower
than you anticipate, then your yield
may be lower than you anticipate.
If you purchase your certificates at a
premium and principal is repaid faster
than you anticipate, then your yield
may be lower than you anticipate.
The rate of prepayments on the mortgage
loans will be sensitive to prevailing
interest rates. Generally, if
prevailing interest rates decline
significantly below the interest rates
on the fixed-rate mortgage loans, those
mortgage loans are more likely to
prepay than if prevailing rates remain
above the interest rates on such
mortgage loans. In addition, if
interest rates decline, adjustable-rate
mortgage loan prepayments may increase
due to the availability of fixed-rate
mortgage loans at lower interest rates.
Conversely, if prevailing interest
rates rise significantly, the
prepayments on fixed-rate and
adjustable-rate mortgage loans are
likely to decrease.
1.71% of the principal balance of the
mortgage loans on October 1, 1998 are
"balloon loans." Balloon loans
generally provide for scheduled monthly
payments of principal up to the 179th
month with a final lump sum payment on
the 180th month. This lump sum payment
is substantially larger than the
previous scheduled payments. Having
balloon loans in the trust may cause
the prepayment rate to vary more than
if there were no balloon loans, because
the mortgagor generally must refinance
the mortgage loan or sell the mortgaged
property prior to payment of the lump
sum on the maturity date.
A majority of the mortgage loans
require the mortgagor to pay a penalty
if the mortgagor prepays the mortgage
loan during periods ranging from six
months to five years after the mortgage
loan was originated. A prepayment
penalty may discourage a mortgagor from
prepaying the mortgage loan during the
applicable period.
The Seller may be required to purchase
mortgage loans from the trust due to
certain breaches of representations and
warranties that have not been cured.
These purchases will have the same
effect on the holders of the offered
certificates as a prepayment of the
mortgage loans.
So long as the overcollateralization
level remains greater than zero,
liquidations of defaulted mortgage
loans will have the same effect on
holders of the Offered Certificates as
a prepayment of the related mortgage
loans.
If the rate of default and the amount
of losses on the mortgage loans is
higher than you expect, then your yield
may be lower than you expect.
SEE "YIELD, PREPAYMENT AND MATURITY
CONSIDERATIONS" FOR A DESCRIPTION OF
FACTORS THAT MAY INFLUENCE THE RATE AND
TIMING OF PREPAYMENTS ON THE MORTGAGE
LOANS.
POTENTIAL INADEQUACY
OF CREDIT ENHANCEMENT.............. The certificates are not insured by any
financial guaranty insurance policy.
The overcollateralization,
subordination and allocation of loss
features described in the summary are
intended to enhance the likelihood that
holders of the Class A Certificates
will receive regular payments of
interest and principal.
If delinquencies or defaults occur on
the mortgage loans, neither the Master
Servicer nor any other entity will
advance scheduled monthly payments of
interest and principal on delinquent or
defaulted mortgage loans if such
advances are not likely to be
recovered. We cannot assure you that
the applicable credit enhancement will
adequately cover any shortfalls in cash
available to pay your certificates as a
result of such delinquencies or
defaults.
If substantial losses occur as a result
of defaults and delinquent payments on
the mortgage loans, investors,
particularly investors in the
subordinate certificates, may lose
their initial investment.
OVERCOLLATERALIZATION.............. Because the weighted average of the
interest rates on the mortgage loans is
expected to be higher than the weighted
average of the interest rates on the
certificates, the mortgage loans are
expected to generate more interest than
is needed to pay interest owed on the
certificates as well as certain fees
and expenses of the trust. Any
remaining interest will then be used to
compensate for losses that occur on the
mortgage loans. After these financial
obligations of the trust are covered,
the available excess interest will be
used to create and maintain
overcollateralization. We cannot assure
you, however, that enough excess
interest will be generated to maintain
the overcollateralization level
required by the rating agencies. The
factors described below will affect the
amount of excess interest that the
mortgage loans will generate.
O Every time a mortgage loan is
prepaid, excess interest may be
reduced because the mortgage loan
will no longer be outstanding and
generating interest or, in the case
of a partial prepayment, will be
generating less interest.
O Every time a mortgage loan is
liquidated or written off, excess
interest will be reduced because
such mortgage loans will no longer
be outstanding and generating
interest.
0 If the rates of delinquencies,
defaults or losses on the mortgage
loans turn out to be higher than
expected, excess interest will be
reduced by the amount necessary to
compensate for any shortfalls in
cash available on such date to pay
certificateholders.
0 The mortgage loans have rates that
are fixed or that adjust based on
an index that is different from the
index used to determine rates on
the certificates. As a result,
interest rates on the certificates
may increase relative to interest
rates on the mortgage loans,
requiring that more of the interest
generated by the mortgage loans be
applied to cover interest on the
certificates.
SUBORDINATION...................... When certain classes of certificates
provide credit enhancement for other
classes of certificates, this form of
credit enhancement is referred to as
"subordination." For any particular
class, "related junior classes" means
the class or classes that are
subordinate to such class. The order of
seniority, beginning with the most
senior class, is Class A, Class M-1,
Class M-2 and Class B.
Credit enhancement is provided for
the certificates first by the right of
the holders of certain classes of
certificates to receive certain
payments of interest prior to the
related junior classes and certain
payments of principal prior to the
related junior classes. This form of
credit enhancement is provided solely
from collections on the mortgage loans
otherwise payable to the holders of the
related junior classes. Credit
enhancement also is provided by the
allocation of realized losses first to
the related junior classes.
Accordingly, if the aggregate principal
balance of the related junior classes
were to be reduced to zero,
delinquencies and defaults on the
mortgage loans would reduce the amount
of funds available for monthly payments
to holders of the remaining
certificates.
SEE "DESCRIPTION OF THE
CERTIFICATES" IN THIS PROSPECTUS
SUPPLEMENT AND "CREDIT ENHANCEMENT --
SUBORDINATION" IN THE PROSPECTUS.
RISK OF LIMITATIONS
TO ADJUSTMENTS OF
THE LOAN RATES.................... The offered certificates accrue
interest at pass-through rates based on
the one-month LIBOR index plus a
specified margin, but are subject to
certain caps. The caps on interest paid
on the certificates are based on the
weighted average of the interest rates
on the mortgage loans in the trust net
of certain trust expenses. The trust
includes fixed-rate and adjustable-rate
mortgage loans with rates that are
based on the six-month LIBOR index. The
adjustable-rate mortgage loans have
periodic and maximum limitations on
adjustments to the mortgage loan rate.
As a result, the offered certificates
may accrue less interest than they
would accrue if their rates were based
solely on the one-month LIBOR index
plus the specified margin. If this
circumstance occurred, the value of the
offered certificates may be temporarily
or permanently reduced.
A variety of factors could limit
the pass-through rates on the offered
certificates in a rising interest rate
environment. Some of these factors are
described below.
The trust includes fixed-rate mortgage
loans on which the rate of interest
does not adjust.
The one-month LIBOR index used to
calculate the pass-through rates on the
offered certificates is different from
the index used to calculate the loan
rates on the adjustable-rate mortgage
loans in the trust.
The pass-through rates adjust monthly
while the loan rates on the
adjustable-rate mortgage loans adjust
less frequently, and some
adjustable-rate mortgage loans have
initial fixed rate periods of two to
five years following the date of
origination.
It is possible that interest rates on
the adjustable-rate mortgage loans may
decline while interest rates on the
certificates are stable or rising. It
is also possible that interest rates on
both the adjustable-rate mortgage loans
and the certificates may decline or
increase during the same period, but
that the interest rates on the
certificates may decline more slowly or
increase more rapidly.
These factors may adversely affect the
yields to maturity on the offered
certificates.
PREPAYMENT INTEREST
SHORTFALLS........................ When a mortgage loan is prepaid in
full, the borrower is charged interest
only up to the date on which payment is
made, rather than for an entire month.
This may result in a shortfall in
interest collections available for
payment on the next distribution date.
The Master Servicer is required to
cover a portion of the shortfall in
interest collections that are
attributable to prepayments, but only
up to one-half of the Master Servicer's
servicing fee for the related one-month
accrual period.
UNDERWRITING STANDARDS AND
DEFAULT RISKS..................... The mortgage loans were originated by
various originators, none of which is
affiliated with the Seller or
Depositor. The originators'
underwriting standards are primarily
intended to assess the value of the
mortgaged property and the adequacy of
that property as collateral for the
mortgage loan. The originators provide
loans primarily to borrowers who do not
qualify for loans conforming to Fannie
Mae and Freddie Mac guidelines. Many of
the mortgage loans were originated
pursuant to alternative documentation
programs. Consequently, the mortgage
loans in the trust are likely to
experience substantially higher rates
of delinquency, foreclosure and
bankruptcy than mortgage loans
underwritten in a more traditional
manner.
RISKS OF EARLY DEFAULT Defaults on mortgage loans are
generally expected to occur more
frequently in the early years of the
terms of mortgage loans. Substantially
all of the mortgage loans in the trust
were originated within twelve months
prior to October 1, 1998.
HIGH LTV RATIOS.................... Mortgage loans with higher
loan-to-value ratios may present a
greater risk of loss than mortgage
loans with loan-to-value ratios of 80%
or below. Approximately 39.40% of the
mortgage loans in the trust, based on
the initial pool principal balance, had
a loan-to-value ratio in excess of 80%
at origination.
GEOGRAPHIC CONCENTRATION The following chart reflects the three
states with highest concentrations of
mortgage loans in the trust based on
the initial pool principal balance.
California 24.84%
Illinois 6.78%
Georgia 6.57%
Property in California may be
particularly susceptible to certain
types of uninsurable hazards, such as
earthquakes, floods, mudslides and
other natural disasters.
In addition, the conditions below will
have a disproportionate impact on the
mortgage loans in general.
Economic conditions in California,
Illinois and Georgia (which may or may
not affect real property values) may
affect the ability of borrowers to
repay their loans on time.
Declines in the California, Illinois
and Georgia residential real estate
markets may reduce the values of
properties located in those states,
which would result in an increase in
the loan-to-value ratios.
Any increase in the market value of
properties located in California,
Illinois and Georgia would reduce the
loan-to-value ratios and could,
therefore, make alternative sources of
financing available to the borrowers at
lower interest rates, which could
result in an increased rate of
prepayment of the mortgage loans.
CERTIFICATES MAY NOT BE
APPROPRIATE FOR CERTAIN
INVESTORS.......................... The offered certificates may not be an
appropriate investment for investors
who do not have sufficient resources or
expertise to evaluate the particular
characteristics of the applicable class
of offered certificates. This may be
the case because, among other things:
The yield to maturity of offered
certificates purchased at a price other
than par will be sensitive to the
uncertain rate and timing of principal
prepayments on the mortgage loans.
The rate of principal distributions on
and the weighted average lives of the
offered certificates will be sensitive
to the uncertain rate and timing of
principal prepayments on the mortgage
loans and the priority of principal
payments among the classes of
certificates. Therefore, the offered
certificates may be an inappropriate
investment if you are an investor that
requires a payment of a particular
amount of principal on a specific date
or an otherwise predictable stream of
payments.
You may be unable to reinvest amounts
received as principal on an offered
certificate at a rate comparable to the
pass-through rate applicable to the
certificate. In general, principal
prepayments are expected to be greater
during periods of relatively low
interest rates.
A market for resale of the offered
certificates may not develop or provide
certificateholders with liquidity of
investment.
You should also carefully consider the
further matters discussed under the
heading "Yield, Prepayment and Maturity
Considerations" in this prospectus
supplement and under the heading "Risk
Factors" in the prospectus.
YEAR 2000 SYSTEMS RISK.............. In the event that the computer systems
of the Trustee and the Master Servicer
fail to be year 2000 compliant, the
resulting potential disruptions in the
collection or distribution of funds
could adversely affect your investment.
LIQUIDITY........................... The Underwriter intends to make a
secondary market in the classes of
certificates actually purchased by it,
but it has no obligation to do so.
There is no assurance that such a
secondary market will develop or, if it
develops, that it will continue.
Consequently, you may not be able to
sell your certificates readily or at
prices that will enable you to realize
your desired yield. The market values
of the certificates are likely to
fluctuate; these fluctuations may be
significant and could result in
significant losses to you.
The secondary markets for mortgage
backed securities have experienced
periods of illiquidity and can be
expected to do so in the future.
Illiquidity can have a severely adverse
effect on the prices of securities that
are especially sensitive to prepayment,
credit, or interest rate risk, or that
have been structured to meet the
investment requirements of limited
categories of investors.
<PAGE>
THE MORTGAGE POOL
GENERAL
Residential Mortgage Loan Trust 1998-1 (the "Trust Fund") will consist of
a pool of closed-end, fixed-rate and adjustable-rate mortgage loans (the
"Mortgage Pool") secured by conventional, one- to four-family, first lien
mortgage loans having original terms to maturity ranging from 5 to 30 years
(the "Mortgage Loans"). All Mortgage Loan statistics set forth herein are based
on principal balances, interest rates, terms to maturity, mortgage loan counts
and similar statistics as of October 1, 1998 (the "Cut-off Date"), unless
indicated to the contrary herein. All weighted averages specified herein are
weighted based on the principal balances of the Mortgage Loans as of the
Cut-Off Date (the "Cut-off Date Principal Balance"). References to percentages
of the Mortgage Loans mean percentages based on the Pool Principal Balance as
of the Cut-off Date, unless otherwise specified.
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties (as defined herein) is based upon the Mortgage Pool as
constituted at the close of business on the Cut-off Date, as adjusted for the
principal payments received on or before such date. Prior to the issuance of
the Certificates by the Trust, Mortgage Loans may be removed from the Mortgage
Pool as a result of incomplete documentation or otherwise if Financial Asset
Securities Corp. (the "Depositor") deems such removal necessary or desirable,
and may be prepaid at any time. A limited number of other mortgage loans may be
included in the Mortgage Pool prior to the issuance of the Certificates unless
including such mortgage loans would materially alter the characteristics of the
Mortgage Pool as described herein. The Depositor believes that the information
set forth herein will be representative of the characteristics of the Mortgage
Pool as it will be constituted at the time the Certificates are issued,
although the range of the interest rates on the individual Mortgage Loans (the
"Loan Rates") and maturities and certain other characteristics of the Mortgage
Loans may vary.
MORTGAGE LOAN STATISTICS
The Mortgage Pool will consist of approximately 2,580 conventional,
fixed-rate and adjustable-rate Mortgage Loans secured by first liens on
residential real property (the "Mortgaged Property"). The Mortgage Loans have
original terms to maturity ranging from five years to 30 years. The Mortgage
Pool consists of fixed-rate Mortgage Loans (the "Fixed Rate Mortgage Loans"),
which will consist of approximately 1,128 Mortgage Loans having an aggregate
principal balance as of the Cut-off Date of approximately $93,060,949 and
adjustable-rate Mortgage Loans (the "Adjustable Rate Mortgage Loans"), which
will consist of approximately 1,452 Mortgage Loans having an aggregate
principal balance as of the Cut-off Date of approximately $173,589,925, 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 73.33% of the Adjustable Rate
Mortgage Loans, the first adjustment for such Mortgage Loan will occur after an
initial period of two years, in the case of 5.06% of the Adjustable Rate
Mortgage Loans, three years, and in the case of 0.71% 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").
The Mortgage Loans are secured by first mortgages or deeds of trust or
other similar security instruments (each, a "Mortgage") creating first liens on
one- to four-family residential properties consisting of detached or
semi-detached one- to four-family dwelling units and individual condominium
units. Approximately 39.40% of the Mortgage Loans had a Loan-to-Value Ratio at
origination in excess of 80%. Approximately 2.65% of the Mortgage Loans had 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. The
Mortgage Loans have scheduled monthly payments due on the first day of the
month (with respect to each Mortgage Loan , a "Due Date"), except for
approximately 6.20% of the Mortgage Loans which have Due Dates on other dates
during the month. Each Mortgage Loan will contain a customary "due-on-sale"
clause.
Approximately 70.42% 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 provided in the related Mortgage Note and 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.
There are 46 Fixed Rate Mortgage Loans comprising approximately 1.71% of
the Pool Principal Balance as of the Cut-off Date that are balloon payment
mortgage loans (each, a "Balloon Loan"). Each Balloon Loan 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 6.700% per annum
and not more than 15.000% per annum and as of the Cut-off Date the weighted
average Loan Rate was approximately 9.837% per annum.
The weighted average remaining term to maturity of the Mortgage Loans will
be approximately 344 months as of the Cut-off Date. None of the Mortgage Loans
will have a first Due Date prior to October 1, 1996 or after September 1, 1998
or will have a remaining term to maturity of less than 55 months or greater
than 30 years as of the Cut-off Date. The month of the latest maturity date of
any Mortgage Loan is August 2028.
The average principal balance of the Mortgage Loans at origination was
approximately $103,809. The average principal balance of the Mortgage Loans as
of the Cut-off Date was approximately $103,353.
No Mortgage Loan had a principal balance as of the Cut-off Date of greater
than approximately $848,371 or less than approximately $540. The Mortgage Loans
are expected to have the following characteristics as of the Cut-off Date (the
sum in any column may not equal the total indicated due to rounding):
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS OF
PRINCIPAL BALANCE ($) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------------------------------- -------------- --------------------- ---------------------------
<S> <C> <C> <C>
540.86 - 50,000.00........... 574 $ 20,401,182.73 7.65%
50,000.01 - 100,000.00.............. 1,036 76,236,370.17 28.59
100,000.01 - 150,000.00................ 506 61,234,835.90 22.96
150,000.01 - 200,000.00................ 237 41,016,247.50 15.38
200,000.01 - 250,000.00................ 105 23,223,962.35 8.71
250,000.01 - 300,000.00................ 50 13,715,865.92 5.14
300,000.01 - 350,000.00................ 23 7,564,122.77 2.84
350,000.01 - 400,000.00................ 16 6,063,263.88 2.27
400,000.01 - 450,000.00................. 9 3,828,541.86 1.44
450,000.01 - 500,000.00................. 9 4,329,762.94 1.62
500,000.01 - 550,000.00................. 4 2,131,659.41 0.80
550,000.01 - 600,000.00................. 7 3,957,939.20 1.48
600,000.01 - 650,000.00................. 1 622,252.05 0.23
650,000.01 - 700,000.00................. 1 698,464.33 0.26
750,000.01 - 800,000.00................. 1 778,031.69 0.29
800,000.01 - 848,371.04................. 1 848,371.04 0.32
============== ===================== ===========================
Total............................... 2,580 $266,650,873.74 100.00%
============== ===================== ===========================
- ----------------------
(1) The average principal balance of the Mortgage Loans as of the Cut-off Date
was $103,353.
</TABLE>
<TABLE>
<CAPTION>
ORIGINAL TERMS TO MATURITY OF THE MORTGAGE LOANS(1)
NUMBER PRINCIPAL BALANCE % OF AGGREGATE
OF MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OUTSTANDING AS OF
ORIGINAL TERM (MONTHS) THE CUT-OFF DATE
<S> <C> <C> <C>
60 ......................... 2 $ 37,271.63 0.01%
120.......................... 4 114,952.60 0.04
180.......................... 234 14,604,383.40 5.48
240.......................... 10 646,381.37 0.24
360.......................... 2,330 251,247,884.74 94.22
------------------- -----------------------
========================
Total................... 2,580 $266,650,873.74 100.00%
=================== ======================== =======================
- --------------------
(1) The weighted average original term of the Mortgage Loans was 350 months.
</TABLE>
<TABLE>
<CAPTION>
PROPERTY TYPES OF THE MORTGAGE LOANS
PROPERTY TYPE NUMBER PRINCIPAL BALANCE % OF AGGREGATE
OF MORTGAGE OUTSTANDING AS OF PRINCIPAL BALANCE
LOANS THE CUT-OFF DATE OUTSTANDING AS OF
THE CUT-OFF DATE
<S> <C> <C> <C>
2-4 Units.................... 173 $ 18,067,236.66 6.78%
Condominium.................. 81 7,418,556.55 2.78
Manufactured Housing......... 16 1,217,461.63 0.46
PUD.......................... 87 13,253,249.42 4.97
Single Family Detached....... 2,217 225,851,863.22 84.70
Unknown..................... 6 842,506.26 0.32
=================== ======================== =======================
Total................... 2,580 $266,650,873.74 100.00%
=================== ======================== =======================
</TABLE>
<TABLE>
<CAPTION>
OCCUPANCY STATUS OF THE MORTGAGE LOANS
OCCUPANCY STATUS NUMBER PRINCIPAL BALANCE % OF AGGREGATE
OF MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OUTSTANDING AS OF
THE CUT-OFF DATE
<S> <C> <C> <C>
Investor..................... 261 $ 19,489,165.32 7.31%
Primary...................... 2,297 243,682,557.25 91.39
Second Home.................. 22 3,479,151.17 1.30
=================== ======================== =======================
Total................... 2,580 $266,650,873.74 100.00%
=================== ======================== =======================
</TABLE>
<TABLE>
<CAPTION>
PURPOSE OF THE MORTGAGE LOANS
PURPOSE NUMBER PRINCIPAL BALANCE % OF AGGREGATE
OF MORTGAGE OUTSTANDING AS OF PRINCIPAL BALANCE
LOANS THE CUT-OFF DATE OUTSTANDING AS OF
THE CUT-OFF DATE
<S> <C> <C> <C>
Equity Refinance............. 571 $ 68,297,066.84 25.61%
Purchase..................... 748 80,722,938.17 30.27
Rate/Term Refinance.......... 1,261 117,630,868.73 44.11
=================== ======================== =======================
Total................... 2,580 $266,650,873.74 100.00%
=================== ======================== =======================
</TABLE>
<TABLE>
<CAPTION>
LOAN RATES OF THE MORTGAGE LOANS (1)
LOAN RATE (%) NUMBER PRINCIPAL BALANCE % OF AGGREGATE
OF MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OUTSTANDING AS OF
THE CUT-OFF DATE
<S> <C> <C> <C>
6.700 - 7.000............... 13 $ 1,323,093.79 0.50%
7.001 - 8.000............... 89 10,856,287.42 4.07
8.001 - 9.000............... 492 62,966,741.71 23.61
9.001 - 10.000.............. 786 90,130,974.68 33.80
10.001 - 11.000............. 710 68,259,235.12 25.60
11.001 - 12.000............. 296 21,524,904.13 8.07
12.001 - 13.000............. 159 9,954,424.35 3.73
13.001 - 14.000............. 28 1,370,394.13 0.51
14.001 - 15.000............ 7 264,818.41 0.10
=================== ======================== =======================
Total....................... 2,580 $266,650,873.74 100.00%
=================== ======================== =======================
- ------------------
(1) The weighted average Loan Rate of the Mortgage Loans as of the Cut-off Date
was 9.837%.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS(1)
ORIGINAL LOAN-TO-VALUE RATIO(%) NUMBER PRINCIPAL BALANCE % OF AGGREGATE
OF MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OUTSTANDING AS OF
THE CUT-OFF DATE
<S> <C> <C> <C>
8.41 - 10.00...................... 1 $ 17,467.43 0.01%
10.01 - 15.00............. 2 33,612.28 0.01
15.01 - 20.00............. 3 60,658.85 0.02
20.01 - 25.00............. 3 248,136.20 0.09
25.01 - 30.00............. 8 319,361.89 0.12
30.01 - 35.00............. 9 416,541.14 0.16
35.01 - 40.00............. 18 882,106.03 0.33
40.01 - 45.00............. 20 1,182,867.02 0.44
45.01 - 50.00............. 39 2,295,998.85 0.86
50.01 - 55.00............. 49 3,859,936.67 1.45
55.01 - 60.00............. 83 6,397,863.20 2.40
60.01 - 65.00............. 177 16,016,122.66 6.01
65.01 - 70.00............. 234 21,102,623.51 7.91
70.01 - 75.00............... 348 34,369,953.45 12.89
75.01 - 80.00....................... 673 74,377,113.14 27.89
80.01 - 85.00....................... 407 45,293,048.77 16.99
85.01 - 90.00....................... 448 52,715,827.31 19.77
90.01 - 95.00...................... 30 4,013,890.91 1.51
95.01 - 100.00.............. 27 2,897,807.33 1.09
100.01 - 100.06................ 1 149,937.10 0.06
================== ====================== ====================
Total....................... 2,580 $266,650,873.74 100.00%
================== ====================== ====================
- ------------------
(1) The weighted average original Loan-to-Value Ratio of the Mortgage Loans as
of the Cut-Off Date was 78.71%.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES(1)
LOCATION NUMBER PRINCIPAL BALANCE % OF AGGREGATE
OF MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OUTSTANDING AS OF
THE CUT-OFF DATE
<S> <C> <C> <C>
Alabama................................. 35 $ 2,079,393.39 0.78%
Alaska.................................. 9 801,930.76 0.30
Arizona................................. 82 8,171,554.45 3.06
Arkansas................................ 11 638,363.12 0.24
California.............................. 378 66,229,253.79 24.84
Colorado................................ 59 6,133,328.30 2.30
Connecticut............................. 23 3,695,517.71 1.39
Delaware................................ 5 467,535.79 0.18
District of Columbia.................... 7 570,746.43 0.21
Florida................................. 94 7,369,308.87 2.76
Georgia................................. 155 17,524,155.08 6.57
Hawaii.................................. 23 3,727,738.16 1.40
Idaho................................... 11 932,759.35 0.35
Illinois................................ 167 18,066,907.79 6.78
Indiana................................. 36 3,215,239.81 1.21
Iowa.................................... 13 763,203.21 0.29
Kansas.................................. 27 1,965,518.23 0.74
Kentucky................................ 14 900,876.48 0.34
Louisiana............................... 42 1,818,182.42 0.68
Maine................................... 9 463,965.21 0.17
Maryland................................ 34 3,905,180.51 1.46
Massachusetts........................... 22 2,258,709.68 0.85
Michigan................................ 114 9,699,911.77 3.64
Minnesota............................... 50 5,363,052.77 2.01
Mississippi............................. 28 1,231,171.95 0.46
Missouri................................ 62 4,438,823.20 1.66
Montana................................. 7 667,492.41 0.25
Nebraska................................ 7 517,269.25 0.19
Nevada.................................. 42 5,722,656.46 2.15
New Hampshire........................... 4 342,850.93 0.13
New Jersey.............................. 36 4,779,345.41 1.79
New Mexico.............................. 40 3,953,258.89 1.48
New York................................ 107 11,708,229.18 4.39
North Carolina.......................... 38 3,546,840.55 1.33
North Dakota............................ 1 44,357.02 0.02
Ohio.................................... 172 12,254,916.73 4.60
Oklahoma................................ 37 2,069,957.59 0.78
Oregon.................................. 64 7,418,188.42 2.78
Pennsylvania............................ 86 5,239,200.68 1.96
Rhode Island............................ 3 237,051.27 0.09
South Carolina.......................... 30 2,157,771.26 0.81
South Dakota............................ 2 100,657.33 0.04
Tennessee............................... 52 3,854,860.12 1.45
Texas................................... 163 11,136,066.74 4.18
Utah.................................... 48 5,620,429.95 2.11
Vermont................................. 2 194,805.32 0.07
Virginia................................ 16 1,778,381.50 0.67
Washington.............................. 56 7,325,051.61 2.75
West Virginia........................... 13 716,456.46 0.27
Wisconsin............................... 40 2,519,405.91 0.94
Wyoming................................. 4 313,044.52 0.12
------------------ ---------------------- --------------------
Total................................... 2,580 $266,650,873.74 100.00%
================== ====================== ====================
- -------------------
</TABLE>
(1)The greatest ZIP Code geographic concentration of Mortgage Loans, by
aggregate principal balance as of the Cut-off Date, was approximately
$1,163,760.25 in the 94590 zip code in Vallejo, CA.
<PAGE>
<TABLE>
<CAPTION>
DOCUMENTATION LEVEL OF THE MORTGAGE LOANS
DOCUMENTATION LEVEL NUMBER PRINCIPAL BALANCE % OF AGGREGATE
OF MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OUTSTANDING AS OF
THE CUT-OFF DATE
<S> <C> <C> <C>
Full Documentation....................... 1,815 $183,532,789.98 68.83%
Stated Documentation..................... 464 52,904,380.36 19.84
Full/ALT Documentation................... 156 17,742,481.66 6.65
Lite Documentation....................... 39 4,607,905.08 1.73
Simple Documentation..................... 59 2,600,968.08 0.98
Unknown.................................. 10 1,942,284.17 0.73
No Income Verification................... 13 1,643,146.85 0.62
Reduced Documentation.................... 22 1,557,492.05 0.58
No Ratio Verification.................... 2 119,425.51 0.04
================== ====================== ====================
Total............................... 2,580 $266,650,873.74 100.00 %
================== ====================== ====================
</TABLE>
<TABLE>
<CAPTION>
PREPAYMENT CHARGES(1)
MONTHS NUMBER PRINCIPAL BALANCE % OF AGGREGATE
OF MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OUTSTANDING AS OF
THE CUT-OFF DATE
<S> <C> <C> <C>
0....................................... 837 $ 78,881,043.14 29.58%
12....................................... 404 43,046,052.94 16.14
24....................................... 399 53,932,547.08 20.23
36....................................... 591 54,710,816.08 20.52
42....................................... 14 1,241,018.79 0.47
48....................................... 2 263,543.94 0.10
60....................................... 331 34,469,742.75 12.93
72....................................... 2 106,109.02 0.04
------------------ ---------------------- --------------------
Total............................... 2,580 $266,650,873.74 100.00%
================== ====================== ====================
- --------------------
(1) Prepayment charges are assessed on any Mortgage Loans prepaid in full or in part within the specified number of months.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LOAN RATES OF THE FIXED RATE MORTGAGE LOANS(1)
LOAN RATE (%) NUMBER PRINCIPAL BALANCE % OF AGGREGATE
OF MORTGAGE OUTSTANDING AS OF PRINCIPAL BALANCE
LOANS THE CUT-OFF DATE OF FIXED RATE
MORTGAGE LOANS
OUTSTANDING AS OF
THE CUT-OFF DATE
<S> <C> <C> <C> <C>
6.750 - 7.000............... 7. $ 782,934.71 0.84%
7.001 - 8.000............... 41. 4,923,766.84 5.29
8.001 - 9.000............... 137. 16,051,529.28 17.25
9.001 - 10.000.............. 262. 25,635,389.12 27.55
10.001 - 11.000............... 343. 25,740,499.87 27.66
11.001 - 12.000............... 199. 13,339,892.02 14.33
12.001 - 13.000............... 115. 5,729,680.80 6.16
13.001 - 14.000............... 18. 622,311.47 0.67
14.001 - 14.990............... 6. 234,944.84 0.25
================= =========================== =========================
Total......................... 1,128. $93,060,948.95 100.00%
================= =========================== =========================
================================================================================================================================
(1)The weighted average Loan Rate of the Fixed Rate Mortgage Loans as of the Cut-off Date was 10.115% per annum.
</TABLE>
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 two years, in the case
of 73.33% of the Adjustable Rate Mortgage Loans, three years in the case of
5.06% of the Adjustable Rate Mortgage Loans, and five years in the case of
0.71% 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 1.37% 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 6.700% per annum and not more than 15.000% per annum and the
weighted average Loan Rate was approximately 9.688% per annum. As of the
Cut-off Date, the Adjustable Rate Mortgage Loans had Gross Margins ranging from
2.375% to 10.000%, Minimum Loan Rates ranging from 6.700% per annum to 15.000%
per annum and Maximum Loan Rates ranging from 12.700% per annum to 21.000% per
annum. As of the Cut-off Date, the weighted average Gross Margin was
approximately 6.089%, the weighted average Minimum Loan Rate was approximately
9.592% per annum (exclusive of the Mortgage Loans that do not have a Minimum
Loan Rate) and the weighted average Maximum Loan Rate was approximately 16.120%
per annum. The latest next Adjustment Date following the Cut-off Date on any
Adjustable Rate Mortgage Loan occurs in May 2003 and the weighted average next
Adjustment Date for all of the Adjustable Rate Mortgage Loans following the
Cut-off Date is March 2000.
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) and the percentages set forth in the tables
are percentages of the Adjustable Rate Mortgage Loans as of the Cut-off Date.
<TABLE>
<CAPTION>
LOAN RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS(1)
LOAN RATE (%) NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OF ADJUSTABLE RATE
MORTGAGE LOANS
OUTSTANDING AS OF
THE CUT-OFF DATE
<S> <C> <C> <C>
6.700-7.000..................... 6 $ 540,159.08 0.31%
7.001-8.000..................... 48 5,932,520.58 3.42
8.001-9.000..................... 355 46,915,212.43 27.03
9.001-10.000.................... 524 64,495,585.56 37.15
10.001-11.000..................... 367 42,518,735.25 24.49
11.001-12.000..................... 97 8,185,012.11 4.72
12.001-13.000..................... 44 4,224,743.55 2.43
13.001-14.000..................... 10 748,082.66 0.43
14.001-15.000..................... 1 29,873.57 0.02
=================== ======================== ==========================
Total....................... 1,452 $ 173,589,924.79 100.00%
=================== ======================== ==========================
- -------------------
(1)The weighted average Loan Rate of the Adjustable Rate Mortgage Loans as
of the Cut-off Date was 9.688% per annum.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MAXIMUM LOAN RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS(1)
MAXIMUM LOAN RATE (%) NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OF ADJUSTABLE RATE
MORTGAGE LOANS
OUTSTANDING AS OF
THE CUT-OFF DATE
<S> <C> <C> <C>
12.700 - 13.000.................... 8 $ 895,039.58 0.52%
13.001 - 14.000.................... 52 6,276,988.55 3.62
14.001 - 15.000.................... 213 27,628,058.03 15.92
15.001 - 16.000.................... 405 51,164,282.79 29.47
16.001 - 17.000.................... 431 51,987,871.90 29.95
17.001 - 18.000.................... 253 29,119,761.89 16.78
18.001 - 19.000.................... 59 4,309,742.46 2.48
19.001 - 20.000.................... 28 2,106,717.48 1.21
20.001 - 21.000.................... 3 101,462.11 0.06
Total........................... 1,452 $173,589,924.79 100.00%
==================================================================================================================================
(1)The weighted average Maximum Loan Rate of the Adjustable Rate Mortgage Loans
as of the Cut-off Date was approximately 16.120% per annum.
</TABLE>
<TABLE>
<CAPTION>
MINIMUM LOAN RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS(1)
MINIMUM LOAN RATE (%) NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OF ADJUSTABLE RATE
MORTGAGE LOANS
OUTSTANDING AS OF
THE CUT-OFF DATE
<S> <C> <C> <C>
6.700 - 7.000................... 8 $ 777,591.64 0.45%
7.001 - 8.000................... 71 8,353,892.46 4.81
8.001 - 9.000.................. 375 49,824,403.01 28.70
9.001 - 10.000.................. 512 62,469,552.99 35.99
10.001 - 11.000................... 356 41,780,415.74 24.07
11.001 - 12.000................... 89 7,210,304.73 4.15
12.001 - 13.000................... 35 2,850,198.86 1.64
13.001 - 14.000................... 5 293,691.79 0.17
14.001 - 15.000................... 1 29,873.57 0.02
----------------- ------------------------- ----------------------
================= ========================= ======================
Total.......................... 1,452 $173,589,924.79 100.00 %
================= ========================= ======================
- --------------------
(1)The weighted average Minimum Loan Rate of the Adjustable Rate Mortgage Loans
as of the Cut-off Date was approximately 9.592% per annum.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROSS MARGINS OF THE ADJUSTABLE RATE MORTGAGE LOANS(1)
GROSS MARGINS (%) NUMBER PRINCIPAL BALANCE % OF AGGREGATE
OF MORTGAGE OUTSTANDING AS OF PRINCIPAL BALANCE
LOANS THE CUT-OFF DATE OF ADJUSTABLE RATE
MORTGAGE LOANS
OUTSTANDING AS OF
THE CUT-OFF DATE
<S> <C> <C> <C>
2.375 - 2.500........... 1 $ 218,836.14 0.13%
2.751 - 3.000........... 2 152,626.22 0.09
3.001 - 3.250........... 3 285,678.46 0.16
3.251 - 3.500........... 10 1,503,216.81 0.87
3.501 - 3.750........... 3 242,071.87 0.14
3.751 - 4.000........... 10 1,066,368.12 0.61
4.001 - 4.250............ 19 2,036,378.84 1.17
4.251 - 4.500........... 3 252,636.80 0.15
4.501 - 4.750........... 28 3,508,090.28 2.02
4.751 - 5.000........... 40 5,222,098.26 3.01
5.001 - 5.250........... 88 10,323,364.35 5.95
5.251 - 5.500........... 121 15,810,590.54 9.11
5.501 - 5.750........... 194 23,824,266.18 13.72
5.751 - 6.000........... 130 16,562,016.22 9.54
6.001 - 6.250........... 209 24,913,403.93 14.35
6.251 - 6.500........... 341 37,364,760.22 21.52
6.501 - 6.750........... 65 8,110,308.77 4.67
6.751 - 7.000........... 60 7,156,620.01 4.12
7.001 - 7.250........... 50 6,557,703.77 3.78
7.251 - 7.500........... 34 4,442,072.44 2.56
7.501 - 7.750........... 12 1,317,834.50 0.76
7.751 - 8.000........... 10 882,556.28 0.51
8.001 - 8.250........... 5 257,285.10 0.15
8.251 - 8.500........... 4 724,379.93 0.42
8.501 - 8.750........... 1 189,143.25 0.11
8.751 - 9.000........... 5 275,632.58 0.16
9.001 - 9.250........... 2 150,794.77 0.09
9.251 - 9.500........... 1 89,470.44 0.05
9.751 - 10.000........... 1 149,719.71 0.09
================= ======================== ========================
Total.................. 1,452 $ 173,589,924.79 100.00 %
================= ======================== ========================
- ------------------
(1)The weighted average Gross Margin of the Adjustable Rate Mortgage Loans as
of the Cut-off Date was approximately 6.089%.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NEXT ADJUSTMENT DATE FOR THE ADJUSTABLE RATE MORTGAGE LOANS
NEXT ADJUSTMENT DATE NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OF ADJUSTABLE RATE
MORTGAGE LOANS
OUTSTANDING AS OF
THE CUT-OFF DATE
<S> <C> <C> <C>
10/13/98.................. 1 $ 109,877.27 0.06%
11/01/98.................. 123 15,053,582.27 8.67
11/13/98.................. 1 61,319.22 0.04
11/21/98.................. 1 187,383.39 0.11
12/01/98.................. 18 1,675,565.69 0.97
12/23/98.................. 1 212,213.96 0.12
01/01/99.................. 47 5,789,452.10 3.34
01/06/99.................. 1 158,647.01 0.09
01/15/99.................. 1 54,686.30 0.03
02/01/99.................. 51 5,385,804.88 3.10
02/04/99.................. 1 99,707.22 0.06
02/27/99.................. 1 120,777.87 0.07
03/01/99.................. 43 4,694,731.32 2.70
04/01/99.................. 49 5,858,117.23 3.37
05/01/99.................. 1 272,281.46 0.16
06/01/99.................. 1 99,328.60 0.06
07/01/99.................. 2 77,044.61 0.04
08/01/99.................. 2 161,901.78 0.09
09/01/99.................. 1 29,095.73 0.02
11/01/99.................. 1 92,945.78 0.05
11/21/99.................. 1 32,324.74 0.02
12/01/99.................. 4 808,056.18 0.47
12/18/99.................. 1 119,842.20 0.07
01/01/00.................. 9 1,109,341.70 0.64
01/15/00.................. 1 102,663.39 0.06
02/01/00.................. 29 2,632,370.48 1.52
02/15/00.................. 2 180,332.81 0.10
03/01/00.................. 36 3,564,235.08 2.05
04/01/00.................. 86 10,588,240.38 6.10
05/01/00.................. 503 60,813,836.11 35.03
05/11/00.................. 1 114,849.90 0.07
06/01/00.................. 237 27,582,662.65 15.89
06/19/00.................. 1 162,180.35 0.09
06/24/00.................. 1 115,901.24 0.07
07/01/00.................. 105 13,115,638.37 7.56
08/01/00.................. 19 2,342.729.25 1.35
01/01/01.................. 1 69,270.52 0.04
04/01/01.................. 1 80,737.74 0.05
05/01/01.................. 46 6,187,019.94 3.56
06/01/01.................. 17 2,438,564.59 1.40
04/01/03.................. 1 778,031.69 0.45
05/01/03.................. 3 456,631.79 0.26
================= ======================= ========================
Total.................. 1,452 $ 173,589,924.79 100.00%
================= ======================= ========================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INITIAL FIXED TERM/SUBSEQUENT ADJUSTABLE RATE TERM OF THE ADJUSTABLE RATE MORTGAGE LOANS
INITIAL FIXED TERM/SUBSEQUENT NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
ADJUSTABLE RATE TERM MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OF ADJUSTABLE RATE
MORTGAGE LOANS
OUTSTANDING AS OF
THE CUT-OFF DATE
<S> <C> <C> <C>
Two Years/Twenty-Eight Years............... 1,075 $127,285,446.96 73.33%
Three Years/Twenty-Seven Years............. 65 8,775,592.79 5.06
Five Years/Twenty-Five Years............... 4 1,234,663.48 0.71
Six Month LIBOR............................ 308 36,294,221.56 20.91
================= ======================= =========================
Total................................... 1,452 $173,589,924.79 100.00 %
================= ======================= =========================
</TABLE>
<TABLE>
<CAPTION>
INITIAL ADJUSTMENT RATE CAPS OF THE ADJUSTABLE RATE MORTGAGE LOANS(1)
INITIAL PERIODIC RATE CAP (%) NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OF ADJUSTABLE RATE
MORTGAGE LOANS
OUTSTANDING AS OF
THE CUT-OFF DATE
<S> <C> <C> <C>
1.00................................... 281 $ 32,353,900.83 18.64%
1.50................................... 721 85,419,384.01 49.21
2.00................................... 11 1,294,321.06 0.75
3.00................................... 439 54,522,318.89 31.41
=============== ========================= =========================
Total............................... 1,452 $ 173,589,924.79 100.00 %
=============== ========================= =========================
- ------------------
(1)Relates solely to initial rate adjustments.
</TABLE>
<TABLE>
<CAPTION>
SUBSEQUENT PERIODIC RATE CAPS OF THE ADJUSTABLE RATE MORTGAGE LOANS(1)
PERIODIC RATE CAP (%) NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OF ADJUSTABLE RATE
MORTGAGE LOANS
OUTSTANDING AS OF
THE CUT-OFF DATE
<S> <C> <C> <C>
1.00 ................................ 601 $ 67,881,185.55 39.10 %
1.50................................. 851 105,708,739.24 60.90
=============== ========================= =========================
Total............................. 1,452 $173,589,924.79 100.00 %
=============== ========================= =========================
- ------------------
(1)Relates to all rate adjustments subsequent to initial rate adjustments.
</TABLE>
<PAGE>
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
All of the Mortgage Loans have been purchased in the secondary market by
Greenwich Capital Financial Products ("GCFP") in the ordinary course of its
business. GCFP is a wholly-owned subsidiary of Greenwich Capital Holdings, Inc.
and an affiliate of the Depositor and the Underwriter. The Mortgage Loans were
purchased from New Century Mortgage Corporation, Weyerhauser Mortgage Company,
WMC Mortgage Corp., Cityscape Corp., Source One Mortgage Services Corporation,
Provident Funding Associates L.P., and First Town Mortgage Corp., representing
33.76%, 24.77%, 2.47%, 17.56%, 8.39%, 7.52%, and 5.53%, respectively, of the
Pool Principal Balance as of the Cut-Off Date. Each entity from which GCFP
purchased the Mortgage Loans has represented and warranted that each of the
Mortgage Loans sold by such entity was underwritten in accordance with
standards utilized by it or the applicable originator in originating mortgage
loans generally comparable to such Mortgage Loans during the period of
origination. As described herein under "The Pooling and Servicing
Agreement--Assignment of the Mortgage Loans," GCFP, as Seller, will make
certain representations and warranties to the Trustee regarding the Mortgage
Loans. In the event of a breach that materially and adversely affects the
Certificateholders, GCFP will be obligated either to cure such breach or
repurchase or replace each affected Mortgage Loan.
Cityscape Financial Corp. has filed, along with Cityscape Corp., a
wholly-owned subsidiary, a joint prepackaged plan of reorganization under
Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court.
Certain of the Mortgage Loans may have been originated while the financial
condition of Cityscape was declining. While GCFP is not aware of any actual
adverse impact on the related Mortgage Loans as a result of such financial
decline, there can be no assurance that such financial decline did not affect
the operations of Cityscape, including the underwriting, origination and
servicing process relating to the Mortgage Loans.
Underwriting standards are applied by or on behalf of a lender to evaluate
a borrower's credit standing and repayment ability, and the value and adequacy
of the related mortgaged property as collateral. In general, a prospective
borrower applying for a loan is required to fill out a detailed application
designed to provide the underwriting officer pertinent credit information. 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 expense, 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.
When GCFP acquires a mortgage loan, the borrower's credit report is
reviewed. Generally, each credit report provides a credit score for the
borrower. The credit score is based upon the credit evaluation methodology
developed by Fair, Isaac and Company ("FICO"), a consulting firm specializing
in creating evaluation predictive models through a high number of variables
components. FICO scores generally range from 350 to 850 and are available from
three major credit bureaus: Experian (formerly TRW), Equifax and Trans Union.
These scores estimate, on a relative basis, which loans are most likely to
default in the future. Lower scores imply higher default risk relative to a
higher score. FICO scores are empirically derived from historical credit bureau
data and represent a numerical weighing of a borrower's credit characteristics
over a two-year period. A FICO score is generated through the statistical
analysis of a number of credit-related characteristics or variables. Common
characteristics include number of credit lines (trade lines), payment history,
past delinquencies, severity of delinquencies, current levels of indebtedness,
types of credit and length of credit history. Attributes are specific values of
each characteristic. A scorecard (the model) is created with weights or points
assigned to each attribute. An individual loan applicant's credit score is
derived by adding together the attribute weights for the applicant. With
respect to the Mortgage Loans, 87.65% have credit scores for the borrowers and
their weighted average FICO score was 599 at the time of scoring.
THE MASTER SERVICER
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 Master
Servicer for the Mortgage Loans (in such capacity, the "Master Servicer").
Ocwen is a wholly-owned subsidiary of Ocwen Financial Corporation, a public
financial services holding company. As of June 30, 1998, Ocwen had
approximately $2.6 billion in assets, approximately $2.4 billion in liabilities
and approximately $257 million in equity. As of June 30, 1998, Ocwen's tangible
and leveraged capital ratio was approximately 9.64% and its risk-based capital
ratio was approximately 16.11%. For the four quarters ended June 30, 1998,
Ocwen's income from continuing operations was approximately $65.1 million.
The major business of the Master 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 Ocwen's subprime loans (the "BCD
Mortgage Loans") servicing portfolio serviced by the Master Servicer as of
December 31, 1996, as of December 31, 1997 and as of June 30, 1998, certain
information relating to the delinquency experience (including loans in
foreclosure included in the Master 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.
<PAGE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
---------------------------------- DECEMBER 31, 1997 ------------------------------------
DECEMBER 31, 1996 JUNE 30, 1998
BY NO. BY PERCENT PERCENT BY NO. BY DOLLAR PERCENT PERCENT BY NO. BY DOLLAR PERCENT PERCENT
OF DOLLAR BY NO. BY OF AMOUNT BY NO. BY OF AMOUNT BY NO. BY
LOANS AMOUNT OF LOANS DOLLAR LOANS OF DOLLAR LOANS OF LOANS DOLLAR
AMOUNT LOANS AMOUNT AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio... 2,834 $305,085 100.00% 100.00% 21,827 $2,318,261 100.00% 100.00% 49,838 $4,279,751 100.00% 100.00%
Period of
Delinquency:
30-59 Days.... 107 10,554 3.78% 3.46% 437 41,429 2.00% 1.79% 1,043 89,423 2.09% 2.09%
60-89 Days.... 38 4,321 1.34% 1.42% 171 17,803 0.78% 0.77% 609 58,255 1.22% 1.36%
90 Days or 138 17,969 4.87% 5.89% 302 36,878 1.38% 1.59% 1,324 128,226 2.66% 3.00%
more..............
Total Delinquent 283 32,844 9.99% 10.77% 2,976 275,904 5.97% 6.45%
Loans........... 910 96,110 4.17% 4.15%
Loans in 136 17,805 4.80% 5.84% 1,091 113,505 2.19% 2.65%
Foreclosure(1).. 281 34,663 1.29% 1.50%
</TABLE>
(1) Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
<PAGE>
The following tables set forth, for the BCD Mortgage Loan servicing
portfolio derived from the Master Servicer as of December 31, 1996, as of
December 31, 1997 and as of June 30, 1998, certain information relating to the
foreclosure, REO and loan loss experience of BCD Mortgage Loans included in the
Master 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>
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
AS OF AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1997 JUNE 30, 1998
BY NO. BY BY NO. BY BY NO. BY
OF DOLLAR OF DOLLAR OF DOLLAR
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio........... 2,834 $305,085 21,827 $2,318,261 49,838 $4,279,751
Foreclosed Loans(1)....... 34 3,329 66 7,387 115 13,092
Foreclosed Ratio(2)....... 1.20% 1.09% 0.30% 0.32% 0.23% 0.31%
(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 Master 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.
</TABLE>
<TABLE>
<CAPTION>
LOAN GAIN/(LOSS) EXPERIENCE
(DOLLARS IN THOUSANDS)
AS OF AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1997 JUNE 30, 1998
<S> <C> <C> <C>
Total Portfolio (1).................... $305,085 $2,318,261 $4,279,751
Net Gains/(Losses) (2)................. 24 (1,209) (2,103)
Net Gains/(Losses) as a Percentage of 0.01% (0.05)% (0.05)%
Total Portfolio.........................
</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 Master Servicer's mortgage portfolio set forth in the foregoing tables. The
statistics shown above represent the delinquency experience for the Master
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 Master Servicer commenced receiving applications for mortgage loans
under its BCD Mortgage Loan program in December 1994. Accordingly, the Master
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 Master 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.
The Master Servicer is in the process of completing its compliance goals
in connection with the year 2000 issue. The year 2000 issue is the result of
prior computer programs being written using two digits, rather than four
digits, to define the applicable year. Any of the Master Servicer's computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. Any such occurrence could result in
major computer system failure or miscalculations. The Master Servicer is
presently engaged in various procedures to ensure that their computer systems
and software will be year 2000 compliant.
However, in the event that the Master Servicer, or any of its suppliers,
customers, brokers or agents do not successfully and timely achieve year 2000
compliance, the performance of obligations of the Master Servicer under the
Pooling and Servicing Agreement could be materially adversely affected.
THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement, dated as of October 1, 1998 (the "Pooling and Servicing Agreement"),
among the Depositor, the Seller, the Master Servicer and the Trustee. 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 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 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. 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 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, ,the
Excess Servicing Fee, the Trustee 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,
the Trustee Fee and the Excess Servicing Fee, 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
Bankers Trust Company of California, N.A., 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 0.01% 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 the 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 at
the "Servicing Fee Rate" of up to 0.50% per annum on the Principal Balance of
each Mortgage Loan. The amount resulting from the difference, if any, between
the Servicing Fee Rate for any Mortgage Loan and 0.50% per annum (the "Excess
Servicing Fee") will be retained by the Seller. 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. 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.
The "Determination Date" with respect to any Distribution Date will 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. 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 Certificate Principal
Balance of all the Certificates 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 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 holder of the majority interest in the Residual Certificate (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 and any real estate owned by the Trust is less than or equal to
10% of the Pool Principal Balance as of the Cut-off Date. The initial holder of
the majority interest in the Residual Certificates is expected to be an
affiliate of the Seller. 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. 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 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; (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 or (v) cumulative Realized Losses as of any Distribution Date
exceed the amount specified in the Pooling and Servicing Agreement.
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. 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.
Residential Mortgage Loan Trust 1998-1 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, the Class M-1, the Class M-2 and the 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 $266,650,773.
The Class OC Certificates will not have an Original Certificate Principal
Balance. The Class R Certificates will have an Original Certificate Principal
Balance of $100 and will not bear interest.
The Offered Certificates will be issued in book-entry form as described
below. The Offered Certificates will be issued in minimum dollar denominations
of $50,000 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 date for each Class of
Offered Certificates is the Distribution Date occurring in September 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 November 25, 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 such 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 Financial Intermediaries, the ability of a
beneficial owner to pledge Book-Entry Certificates to persons or entities that
do not participate in the Depository system, or otherwise take actions in
respect of 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 Depositor 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 Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, 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 Depositor, the Master 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 principal
distributions to the Class R Certificates on the first Distribution Date 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 "--Allocations 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, 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 Excess Servicing Fee 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, excluding 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 (provided, however, on the first
Distribution Date, the Trustee will first distribute all principal due to the
Class R Certificates):
(i) on account of interest to the holders of each Class of Offered
Certificates in the following order of priority:
(a) to the Class A 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; or
(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) above, the amount distributed to the Class M-1
Certificateholders in clause (ii)(b)(2) above 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; and
(e) 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; and
(iv) to the holders of the Class R Certificates, the remaining amount.
On each Distribution Date, all amounts representing prepayment penalties
received during the related Due Period will be distributed to the holders of
the Class OC 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 the current 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 November 24, 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 Pool Principal Balance as
of the Cut-off Date.
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
67.50% 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
approximately $1,333,254.
"Class M-1 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 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 79.50% 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 approximately $1,333,254.
"Class M-2 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 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 87.50% 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 approximately $1,333,254.
"Class B 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 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 93.50% 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 approximately $1,333,254.
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 (other than the Extra Principal Distribution Amount).
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 "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, from 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 on or 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 Overcollateralized 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
3.25% of the Pool Principal Balance as of the Cut-off Date; and (b) with
respect to any Distribution Date on or after the Stepdown Date and (A) as long
as an Overcollateralization Stepdown Trigger Event is not in effect, an amount
equal to the greater of (x) 6.50% of the Pool Principal Balance as of the end
of the related Due Period and (y) approximately $1,333,254 or (B) for so long
as an Overcollateralization Stepdown Trigger Event is in effect, the
Overcollateralization Target Amount for the preceding Distribution Date.
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 or advanced
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 for related Advances, Servicing Advances and Servicing Fees
(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 32.50%.
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 November 2001 and
(y) the first Distribution Date on which the Senior Credit Enhancement
Percentage (calculated for this purpose only using the Pool Principal Balance
as of the end of the related Due Period but prior to any application of
Principal Distribution Amount to the Certificates) 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 35% of the Senior Credit Enhancement Percentage
for such Distribution Date.
An "Overcollateralization Stepdown Trigger Event" means the occurrence on
any Distribution Date of either of the following: (i) the Cumulative Loss
Trigger has occurred or (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 Pool Principal Balance as of the Cut-off Date set forth below with
respect to such Distribution Date.
PERCENTAGE OF
THE POOL PRINCIPAL
BALANCE AS OF THE
DISTRIBUTION DATE CUT-OFF DATE
November 1998 to October 2001................................... 1.25%
November 2001 to October 2002................................... 2.00%
November 2002 to October 2003................................... 2.45%
November 2003 to October 2004................................... 2.90%
November 2004 to October 2005................................... 3.25%
November 2005 and thereafter.................................... 3.50%
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 of Offered Certificates 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 the Class A, the Class M-1, the Class M-2 and
the Class B 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, the
Class M-1, Class M-2 and Class B Certificates will be equal to 0.75% (75 basis
points), 0.95% (95 basis points), 1.40% (140 basis points) and 3.00% (300 basis
points), respectively, until the first Distribution Date following the Call
Option Date, and 1.50% (150 basis points), 1.425% (142.5 basis points), 2.10%
(210 basis points) and 4.50% (450 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 Servicing Fee, the Trustee Fee and the Excess Fee.
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 15.00% per annum.
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 (except for the first
Accrual Period) 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. On the Closing Date, the
One-Month LIBOR for the initial Accrual Period will be determined on the second
LIBOR Business Day preceding the Closing Date.
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 Overcollateralized 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 Class A Certificates will not be reduced
by any application of Allocable Loss Amounts. However, if the Subordinate and
Mezzanine Certificates are reduced to zero, such losses may reduce the amount
of principal ultimately paid to the holders of the Class A Certificates. 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 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 does not exceed One-Month LIBOR by at least 0.25%, the amount to be
held in the Excess Reserve Fund Account (the "Required Reserve Amount") on any
Distribution Date thereafter will 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 will be funded from amounts otherwise to
be paid to the Class OC Certificates. Thereafter, if the Available Funds Cap
for any Distribution Date exceeds One-Month LIBOR by 0.25% or more, the
Required Reserve Amount for such Distribution Date will be $5,000. 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
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 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 the Excess Servicing Fee, if any, paid
to the Seller;
(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 the Class A, the Class M-1, Class
M-2 and Class B 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 the 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 two 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 equal to the excess of
(x) interest collected or advanced on the Mortgage Loans over (y) the sum of
required interest on the Offered Certificates plus the Trustee Fee, the
Servicing Fee and, if applicable, the Excess Servicing 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 November 12, 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
Distribution Date in the 13th month following the latest maturity date of any
Mortgage Loan. 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 Fixed Rate Mortgage Loans, a 100% Prepayment Assumption assumes
constant prepayment rates of 4% per annum of the then outstanding principal
balance of the Fixed Rate Mortgage Loans in the first month of the life of the
mortgage loans and an approximate 1.455% per annum in each month thereafter
until the twelfth month. Beginning in the twelfth month and in each month
thereafter during the life of such Fixed Rate Mortgage Loans, 100% Prepayment
Assumption assumes a constant prepayment rate of 20% per annum each month. As
used in the table below, 0% Prepayment Assumption assumes prepayment rates
equal to 0% of the 100% Prepayment Assumption i.e., no prepayments.
Correspondingly, 125% Prepayment Assumption assumes prepayment rates equal to
125% of the 100% Prepayment Assumption, and so forth.
With respect to the Adjustable Rate Mortgage Loans, a 100% Prepayment
Assumption assumes constant prepayment rates of 5% per annum of the then
outstanding principal balance of the Adjustable Rate Mortgage Loans in the
first month of the life of the mortgage loans and an approximate 1.765% per
annum in each month thereafter until the eighteenth month. Beginning in the
eighteenth month and in each month thereafter during the life of such
Adjustable Rate Mortgage Loans, 100% Prepayment Assumption assumes a constant
prepayment rate of 35% 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, 125% Prepayment Assumption
assumes prepayment rates equal to 125% of the 100% Prepayment Assumption, and
so forth
Each of the Prepayment Scenarios in the table on page S-56 assumes the
respective percentages of the applicable 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 14 sub-pools of loans with the characteristics
set forth in the table below, (ii) the Closing Date for the Offered
Certificates occurs on November 12, 1998 and the Offered Certificates were sold
to investors by the Underwriter on the Closing Date, (iii) distributions on the
Certificates are made on the 25th day of each month regardless of the day on
which the Distribution Date actually occurs, commencing in November 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 be the period from the
immediately preceding Distribution Date (or the Closing Date in the case of the
November 1998 Distribution Date) to and including the day immediately preceding
the current Distribution Date, based on an assumed 360-day year, (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 herein and thereafter decreases as
described in the definition thereof, (ix) scheduled payments for all Mortgage
Loans are received on the first day of each month commencing in November 1998,
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 equal to 5.28406%,
(xiii) the Pass-Through Rates for the Offered Certificates are as set forth
herein, (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), and (xv) with respect to the
Adjustable Mortgage Loans, the Index is equal to 5.18844%. Nothing contained in
the foregoing assumptions should be construed as a representation that the
Mortgage Loans will not experience delinquencies or losses.
<PAGE>
<TABLE>
<CAPTION>
PREPAYMENT SCENARIOS
Prepayment Scenario Scenario I Scenario II Scenario III Scenario IV Scenario V
<S> <C> <C> <C> <C> <C>
Fixed Rate Mortgage Loans 0% 65% 125% 150% 200%
Adjustable Rate Mortgage Loans 0% 50% 100% 125% 175%
</TABLE>
<TABLE>
<CAPTION>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
DESCRIPTION PRINCIPAL CURRENT LOAN MONTHS TO GROSS LIFETIME INITIAL PERIODIC ORIGINAL REMAINING
BALANCE ($) RATE (%) NEXT MARGIN (%) CAP (%) PERIODIC CAP (%) MONTHS TO MONTHS TO
ADJUSTMENT RATE CAP MATURITY MATURITY
DATE (%)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FIXED 15 YR 9,892,006.47 9.92561 N/A N/A N/A N/A N/A 179 174
FIXED 30 YR 78,595,973.87 10.08819 N/A N/A N/A N/A N/A 359 354
FIXED 4,572,968.61 10.97802 N/A N/A N/A N/A N/A 180 174(1)
BALLOON
6 MO ARM 12,113,823.40 9.63338 1 5.88606 15.85890 1.12330 1.12330 360 352
6 MO ARM 1,924,268.30 9.80592 2 5.94439 15.60469 1.05188 1.05188 360 354
6 MO ARM 6,001,666.06 9.16482 3 5.83437 14.79023 1.00000 1.00000 360 355
6 MO ARM 5,599,138.19 9.73092 4 5.36040 14.72191 1.00000 1.00000 360 352
6 MO ARM 4,433,485.26 9.47036 5 5.64972 14.60955 1.01234 1.01234 360 353
6 MO ARM 6,221,840.35 9.05195 6 5.36777 14.99084 1.05613 1.05613 360 352
2 YR FIX/6 3,807,296.35 10.76482 2 6.90816 17.07848 2.97142 1.00000 360 338
MO
2 YR FIX/6 19,230,352.74 9.74891 17 6.20847 15.94893 2.79354 1.19075 360 353
MO
2 YR FIX/6 104,247,797.87 9.72690 20 6.18272 16.39628 1.99711 1.40498 359 355
MO
3 YR FIX/6 8,775,592.79 9.52265 31 6.05719 16.51476 1.51184 1.49605 360 355
MO
5 YR FIX/6 1,234,663.48 10.00193 54 6.00691 17.00193 1.50000 1.50000 360 354
MO
(1) The remaining amortizing term is 354 months.
</TABLE>
<PAGE>
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of each Class of Offered Certificates, and set
forth the percentages of the Original Certificate Principal Balance of each
such Class that would be outstanding after each of the dates shown, at various
Prepayment Scenarios.
<TABLE>
<CAPTION>
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING*
CLASS A
PREPAYMENT SCENARIO
Distribution Date Scenario I Scenario Scenario Scenario Scenario V
II III IV
<S> <C> <C> <C> <C> <C>
Initial Percentage................ 100% 100% 100% 100% 100%
October, 1999..................... 95 82 69 63 50
October, 2000..................... 95 65 41 31 13
October, 2001..................... 94 52 22 12 0
October, 2002..................... 93 40 19 12 0
October, 2003..................... 92 33 13 8 0
October, 2004..................... 91 27 9 5 0
October, 2005..................... 89 23 6 3 0
October, 2006..................... 88 19 4 2 0
October, 2007..................... 86 16 3 1 0
October, 2008..................... 85 13 2 1 0
October, 2009..................... 83 11 1 0 0
October, 2010..................... 80 9 1 0 0
October, 2011..................... 78 7 0 0 0
October, 2012..................... 75 6 0 0 0
October, 2013..................... 71 5 0 0 0
October, 2014..................... 68 4 0 0 0
October, 2015..................... 65 3 0 0 0
October, 2016..................... 62 3 0 0 0
October, 2017..................... 58 2 0 0 0
October, 2018..................... 54 2 0 0 0
October, 2019..................... 49 1 0 0 0
October, 2020..................... 44 1 0 0 0
October, 2021..................... 39 1 0 0 0
October, 2022..................... 34 0 0 0 0
October, 2023..................... 29 0 0 0 0
October, 2024..................... 24 0 0 0 0
October, 2025..................... 18 0 0 0 0
October, 2026..................... 11 0 0 0 0
October, 2027..................... 4 0 0 0 0
October, 2028..................... 0 0 0 0 0
Weighted Average Life (years) 19.05 4.74 2.41 1.86 1.09
to maturity (1)
Weighted Average Life (years) 19.01 4.41 2.21 1.70 1.09
to Optional Termination(1)......
</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.
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING*
CLASS M-1
PREPAYMENT SCENARIO
Distribution Date Scenario I Scenario Scenario Scenario Scenario V
II III IV
<S> <C> <C> <C> <C> <C>
Initial Percentage................ 100% 100% 100% 100% 100%
October, 1999..................... 100 100 100 100 100
October , 2000.................... 100 100 100 100 100
October , 2001.................... 100 100 100 100 96
October , 2002.................... 100 100 49 48 90
October, 2003..................... 100 85 33 21 48
October, 2004..................... 100 71 23 13 24
October, 2005..................... 100 59 16 8 10
October, 2006..................... 100 49 11 5 2
October, 2007..................... 100 41 8 1 0
October, 2008..................... 100 34 5 0 0
October, 2009..................... 100 28 2 0 0
October, 2010..................... 100 23 0 0 0
October, 2011..................... 100 19 0 0 0
October, 2012..................... 100 16 0 0 0
October, 2013..................... 100 12 0 0 0
October, 2014..................... 100 10 0 0 0
October, 2015..................... 100 8 0 0 0
October, 2016..................... 100 7 0 0 0
October, 2017..................... 100 6 0 0 0
October, 2018..................... 100 4 0 0 0
October, 2019..................... 100 1 0 0 0
October, 2020..................... 100 0 0 0 0
October, 2021..................... 100 0 0 0 0
October, 2022..................... 88 0 0 0 0
October, 2023..................... 76 0 0 0 0
October, 2024..................... 62 0 0 0 0
October, 2025..................... 47 0 0 0 0
October, 2026..................... 29 0 0 0 0
October, 2027..................... 11 0 0 0 0
October, 2028..................... 0 0 0 0 0
Weighted Average Life (years) 26.60 9.21 4.95 4.52 5.18
to maturity (1)
Weighted Average Life (years) 26.51 8.44 4.50 4.16 3.42
to Optional Termination(1)......
</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.
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING*
CLASS M-2
PREPAYMENT SCENARIO
Distribution Date Scenario I Scenario Scenario Scenario Scenario V
II III IV
<S> <C> <C> <C> <C> <C>
Iitial Percentage................ 100% 100% 100% 100% 100%
October, 1999..................... 100 100 100 100 100
October, 2000..................... 100 100 100 100 100
October , 2001.................... 100 100 100 100 100
October, 2002..................... 100 100 49 33 14
October, 2003..................... 100 85 33 21 6
October, 2004..................... 100 71 23 13 0
October, 2005..................... 100 59 16 8 0
October, 2006..................... 100 49 11 1 0
October, 2007..................... 100 41 7 0 0
October, 2008..................... 100 34 1 0 0
October, 2009..................... 100 28 0 0 0
October, 2010..................... 100 23 0 0 0
October, 2011..................... 100 19 0 0 0
October, 2012..................... 100 16 0 0 0
October, 2013..................... 100 12 0 0 0
October, 2014..................... 100 10 0 0 0
October, 2015..................... 100 8 0 0 0
October, 2016..................... 100 5 0 0 0
October, 2017..................... 100 2 0 0 0
October, 2018..................... 100 0 0 0 0
October, 2019..................... 100 0 0 0 0
October, 2020..................... 100 0 0 0 0
October, 2021..................... 100 0 0 0 0
October, 2022..................... 88 0 0 0 0
October, 2023..................... 76 0 0 0 0
October, 2024..................... 62 0 0 0 0
October, 2025..................... 47 0 0 0 0
October, 2026..................... 29 0 0 0 0
October, 2027..................... 11 0 0 0 0
October, 2028..................... 0 0 0 0 0
Weighted Average Life (years) 26.60 9.11 4.81 4.21 3.74
to maturity (1)
Weighted Average Life (years) 26.51 8.44 4.42 3.90 3.42
to Optional Termination(1)......
</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.
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING*
CLASS B
PREPAYMENT SCENARIO
Distribution Date Scenario I Scenario Scenario Scenario Scenario V
II III IV
<S> <C> <C> <C> <C> <C>
Initial Percentage................ 100% 100% 100% 100% 100%
October, 1999..................... 100 100 100 100 100
October , 2000.................... 100 100 100 100 100
October, 2001..................... 100 100 100 100 93
October, 2002..................... 100 100 49 33 12
October, 2003..................... 100 85 33 21 0
October, 2004..................... 100 71 23 10 0
October, 2005..................... 100 59 16 1 0
October, 2006..................... 100 49 6 0 0
October, 2007..................... 100 41 0 0 0
October, 2008..................... 100 34 0 0 0
October, 2009..................... 100 28 0 0 0
October, 2010..................... 100 23 0 0 0
October, 2011..................... 100 19 0 0 0
October, 2012..................... 100 16 0 0 0
October, 2013..................... 100 9 0 0 0
October, 2014..................... 100 5 0 0 0
October, 2015..................... 100 1 0 0 0
October, 2016..................... 100 0 0 0 0
October, 2017..................... 100 0 0 0 0
October, 2018..................... 100 0 0 0 0
October, 2019..................... 100 0 0 0 0
October, 2020..................... 100 0 0 0 0
October, 2021..................... 100 0 0 0 0
October, 2022..................... 88 0 0 0 0
October, 2023..................... 76 0 0 0 0
October, 2024..................... 62 0 0 0 0
October, 2025..................... 47 0 0 0 0
October, 2026..................... 29 0 0 0 0
October, 2027..................... 5 0 0 0 0
October, 2028..................... 0 0 0 0 0
Weighted Average Life (years) 26.58 8.88 4.64 3.99 3.31
to maturity (1)
Weighted Average Life (years) 26.51 8.44 4.39 3.79 3.18
to Optional Termination(1)......
</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.
<PAGE>
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 "real estate
mortgage investment conduit" ("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.
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 equal the rate described above under
"Yield, Prepayment and Maturity Considerations--Weighted Average Lives" for
Scenario III. 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 Senior 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 the 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. See "Legal Investment" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, between the Depositor and the Underwriter (an affiliate of the
Depositor), the Depositor has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase from the Depositor, the Offered
Certificates.
Distribution of the Offered Certificates will be made by the Underwriter
from time to time in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. The Underwriter may effect such transactions
by selling Offered Certificates to or through dealers and such dealers may
receive from the Underwriter, for which they act as agent, compensation in the
form of underwriting discounts, concessions or commissions. The Underwriter and
any dealers that participate with the Underwriter in the distribution of such
Offered Certificates may be deemed to be underwriters, and any discounts,
commissions or concessions received by them, and any profits on resale of the
Certificates purchased by them, may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933, as amended (the "Act").
The Depositor has been advised by the Underwriter that it intends to make
a market in the Offered Certificates but has no obligation to do so. There can
be no assurance that a secondary market for the Offered Certificates will
develop or, if it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities,
including liabilities under the Act.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Offered
Certificates will be passed upon for the Seller, the Depositor and the
Underwriter by Brown & Wood 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 Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("S&P") and by Duff & Phelps Credit Rating Company
("DCR" and, together with S&P the "Rating Agencies"), (ii) the M-1 Certificates
be rated "AA" by S&P, (iii) the M-2 Certificates be rated "A" by S&P and (iv)
the Class B Certificates be rated "BBB-" by S&P.
The ratings assigned by S&P 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. S&P'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. S&P'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.
<PAGE>
INDEX OF DEFINED TERMS
<PAGE>
Accrual Period ......................................................S-43
Act..................................................................S-65
Adjustable Rate Mortgage Loans ......................................S-15
Adjustment Date......................................................S-23
Advance .............................................................S-34
Allocable Loss Amount ...............................................S-44
Assumed Final Maturity Date .........................................S-53
Available Funds .....................................................S-42
Available Funds Cap .................................................S-48
Balloon Loan ........................................................S-16
Balloon Payment .....................................................S-16
Basic Principal Distribution Amount .................................S-44
Basis Risk Shortfall Amount .........................................S-48
BCD Mortgage Loans ..................................................S-30
Beneficial Owner ....................................................S-38
Book-Entry Certificates .............................................S-38
Call Option Date ....................................................S-44
Cap Contract ........................................................S-60
Cedel Participants ..................................................S-40
Certificate Owners ..................................................S-38
Certificate Principal Balance .......................................S-44
Certificateholder ...................................................S-38
Certificates ........................................................S-38
Class A Principal Distribution Amount ...............................S-44
Class B Principal Distribution Amount ...............................S-44
Class M-1 Principal Distribution Amount .............................S-44
Class M-2 Principal Distribution Amount .............................S-44
Closing Date ........................................................S-53
Code ................................................................S-60
Collection Account ..................................................S-34
Compensating Interest ...............................................S-36
Contributions Tax ...................................................S-62
Cooperative .........................................................S-40
Cumulative Loss Trigger .............................................S-47
Cut-off Date ........................................................S-15
Cut-off Date Principal Balance ......................................S-15
DCR ...........................................................S-64, S-66
Defective Mortgage Loans ............................................S-33
Definitions .........................................................S-43
Definitive Certificate ..............................................S-38
Delayed First Adjustment Mortgage Loan ..............................S-15
Delinquency Percentage ..............................................S-45
Delinquent ..........................................................S-45
Depositor ...........................................................S-15
Determination Date ..................................................S-36
Distribution Account ................................................S-34
Distribution Date ...................................................S-38
DOL .................................................................S-63
DTC .................................................................S-70
Due Date ............................................................S-15
Due Period ..........................................................S-45
Eligible Account ....................................................S-34
Eligible Substitute Mortgage Loan ...................................S-33
ERISA ...............................................................S-63
Euroclear Operator ..................................................S-40
Euroclear Participants ..............................................S-40
European Depositaries ...............................................S-38
Excess Reserve Fund Account .........................................S-49
Exemption ...........................................................S-63
Exemption Rating Agencies ...........................................S-64
Extra Principal Distribution Amount .................................S-45
FICO ................................................................S-29
Financial Intermediary ..............................................S-38
Fitch ...............................................................S-64
Fixed Rate Mortgage Loans ...........................................S-15
Foreclosure Ratio ...................................................S-31
GCFP ................................................................S-29
General Excess Available Amount .....................................S-45
Global Securities ...................................................S-70
Gross Margin ........................................................S-23
HUD .................................................................S-30
IML .................................................................S-40
Index ...............................................................S-15
Interest Distributable Amount .......................................S-45
IRS .................................................................S-62
LIBOR Business Day ..................................................S-48
LIBOR Determination Date ............................................S-48
Liquidated Mortgage Loan ............................................S-46
Loss Reimbursement Entitlement ......................................S-45
Master Servicer .....................................................S-30
Maximum Cap .........................................................S-48
Maximum Loan Rate ...................................................S-23
Mezzanine Certificates ..............................................S-37
Minimum Loan Rate ...................................................S-23
Monthly Interest Distributable Amount ...............................S-45
Moody's .............................................................S-64
Mortgage ............................................................S-15
Mortgage Loan Schedule ..............................................S-32
Mortgage Loans ......................................................S-15
Mortgage Pool .......................................................S-15
Mortgage Rates ......................................................S-15
Mortgaged Property ..................................................S-15
Net Gains/(Losses) ..................................................S-31
Net income from foreclosure property ................................S-62
Net Liquidation Proceeds ............................................S-46
Non-U.S. Person .....................................................S-62
Ocwen ...............................................................S-30
Offered Certificates ................................................S-37
OID .................................................................S-60
One-Month LIBOR .....................................................S-48
Original Certificate Principal Balance ..............................S-44
Overcollateralization Deficiency Amount .............................S-46
Overcollateralization Release Amount ................................S-46
Overcollateralization Stepdown Trigger Event ........................S-47
Overcollateralization Target Amount .................................S-46
Overcollateralized Amount ...........................................S-46
Pass-Through Margin .................................................S-48
Pass-Through Rate ...................................................S-48
Periodic Rate Cap ...................................................S-23
Plan ................................................................S-63
Pooling and Servicing Agreement .....................................S-32
Prepayment Assumption ...............................................S-53
Prepayment Interest Shortfall .......................................S-36
Prepayment Period ...................................................S-42
Principal Distribution Amount .......................................S-46
Principal Prepayment ................................................S-46
Principal Remittance Amount .........................................S-46
Prohibited Transactions Tax .........................................S-62
PTCE 95-60 ..........................................................S-65
Purchase Price.......................................................S-33
Rating Agencies .....................................................S-66
Realized Loss .......................................................S-46
Record Date .........................................................S-38
Reference Banks .....................................................S-48
Related Documents ...................................................S-32
Relevant Depositary .................................................S-38
Relief Act ..........................................................S-35
REMIC ...............................................................S-60
Required Reserve Amount .............................................S-49
Reserve Interest Rate ...............................................S-49
Residual Certificates ...............................................S-37
Restricted Group ....................................................S-64
Rolling Delinquency Percentage ......................................S-47
Rules ...............................................................S-38
S&P ...........................................................S-64, S-66
Senior Certificates .................................................S-37
Senior Credit Enhancement Percentage ................................S-47
Senior Specified Enhancement Percentage .............................S-47
Servicing Advance ...................................................S-35
Servicing Fee .......................................................S-35
Servicing Fee Rate ..................................................S-35
SMMEA ...............................................................S-65
Stepdown Date .......................................................S-47
Structuring Assumptions .............................................S-54
Subordinate Certificates ............................................S-37
Substitution Adjustment .............................................S-33
Tax Counsel .........................................................S-60
Telerate Page 3750 ..................................................S-48
Terms and Conditions ................................................S-40
Total Portfolio .....................................................S-31
Trigger Event .......................................................S-47
Trust Fund ..........................................................S-15
Trustee Fee .........................................................S-35
Trustee Fee Rate ....................................................S-35
U.S. Person .........................................................S-72
Unpaid Interest Shortfall Amount ....................................S-47
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Residential
Mortgage Loan Trust 1998-1 Certificates (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.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not RESIDENTIAL MORTGAGE
authorized anyone to provide you with different information. We are not LOAN TRUST 1998-1 CERTIFICATES
offering the Residential Mortgage Loan Trust 1998-1 Certificates in any state
where the offer is not permitted.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Residential Mortgage Loan Trust 1998-1 Certificates and $231,986,000 Class A
with respect to their unsold allotments or subscriptions. In addition, all Variable Pass-Through Rate
dealers selling the Residential Mortgage Loan Trust 1998-1 Certificates will be
required to deliver a prospectus supplement and prospectus until February 9, $16,000,000 Class M-1
1999. Variable Pass-Through Rate
</TABLE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
<S> <C>
Summary Of Terms............................................S-3
Risk Factors................................................S-9
The Mortgage Pool...........................................S-17
Underwriting Standards......................................S-31
The Master Servicer.........................................S-32
The Pooling And Servicing Agreement.........................S-34 FINANCIAL ASSET SECURITIES CORP.
Description of the Certificates.............................S-39 (DEPOSITOR)
Yield, Prepayment And Maturity Considerations...............S-52
Use Of Proceeds.............................................S-61 -----------------------------
Certain Material Federal Income Tax Consequences............S-61
State Taxes.................................................S-64 PROSPECTUS SUPPLEMENT
ERISA Considerations........................................S-64
Legal Investment Considerations.............................S-66 -----------------------------
Method Of Distribution......................................S-66
Legal Matters...............................................S-67 [GREENWICH CAPITAL MARKETS, INC.]
Ratings.....................................................S-67
Index Of Defined Terms......................................S-68 IN LOGO
PROSPECTUS
Prospectus Supplement or Current Report on Form 8-K........ 2
Incorporation of Certain Information by Reference.......... 2
Available Information...................................... 3 -----------------------------
Reports to Securityholders................................. 3
Summary of Terms........................................... 4 November 10, 1998
Risk Factors............................................... 14
The Trust Fund..............................................21
Use of Proceeds.............................................28
The Depositor.............................................. 28
Loan Program .............................................. 28
Description of the Securities.............................. 31
Credit Enhancement......................................... 43
Yield and Prepayment Considerations ...................... 50
The Agreements............................................ 54
Certain Legal Aspects of the Loans........................ 70
Certain Material Federal Income Tax Considerations........ 86
Fasit Securities......................................... 110
State Tax Considerations................................. 114
ERISA Considerations..................................... 115
Legal Investment ........................................ 120
Method of Distribution.................................... 121
Legal Matters............................................. 122
Financial Information ................................... 122
Rating................................................... 122
</TABLE>
==============================================================================
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 14.
THE CERTIFICATES OF A GIVEN SERIES REPRESENT BENEFICIAL INTERESTS IN, AND THE
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, THE RELATED TRUST FUND
ONLY AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR,
ANY SELLER OR ANY AFFILIATES THEREOF, EXCEPT TO THE EXTENT DESCRIBED
IN THE RELATED PROSPECTUS SUPPLEMENT. NEITHER THE SECURITIES NOR
THE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY,
EXCEPT TO THE EXTENT DESCRIBED IN THE RELATED PROSPECTUS
SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prior to issuance there will have been no market for the Securities
of any Series and there can be no assurance that a secondary market for any
Securities will develop, or if it does develop, that it will continue. This
Prospectus may not be used to consummate sales of Securities of any Series
unless accompanied by a Prospectus Supplement. Offers of the Securities may be
made through one or more different methods, including offerings through
underwriters, as more fully described under "Method of Distribution" herein and
in the related Prospectus Supplement. All Securities will be distributed by, or
sold by underwriters managed by:
GREENWICH CAPITAL MARKETS, INC.
September 28, 1998
<PAGE>
Until 90 days after the date of each Prospectus Supplement, all
dealers effecting transactions in the securities covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus and Prospectus
Supplement when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PROSPECTUS SUPPLEMENT OR CURRENT REPORT ON FORM 8-K
The Prospectus Supplement or Current Report on Form 8-K relating to
the Securities of each Series to be offered hereunder will, among other things,
set forth with respect to such Securities, as appropriate: (i) a description of
the class or classes of Securities and the Pass-Through Rate or method of
determining the rate or the amount of interest, if any, to be passed through to
each such class; (ii) the aggregate principal amount and Distribution Dates
relating to such Series and, if applicable, the initial and final scheduled
Distribution Dates for each class; (iii) information as to the assets
comprising the Trust Fund, including the general characteristics of the Trust
Fund Assets included therein and, if applicable, the insurance policies, surety
bonds, guaranties, letters of credit or other instruments or agreements
included in the Trust Fund or otherwise, and the amount and source of any
reserve account; (iv) the circumstances, if any, under which the Trust Fund may
be subject to early termination; (v) the method used to calculate the amount of
principal to be distributed with respect to each class of Securities; (vi) the
order of application of distributions to each of the classes within such
Series, whether sequential, pro rata, or otherwise; (vii) the Distribution
Dates with respect to such Series; (viii) additional information with respect
to the method of distribution of such Securities; (ix) whether one or more
REMIC elections will be made and designation of the regular interests and
residual interests; (x) the aggregate original percentage ownership interest in
the Trust Fund to be evidenced by each class of Securities; (xi) information as
to the Trustee; (xii) information as to the nature and extent of subordination
with respect to any class of Securities that is subordinate in right of payment
to any other class; and (xiii) information as to the Master Servicer.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports
filed or caused to be filed by the Depositor with respect to a Trust Fund
pursuant to Section 13(a), 14 or 15(d) of the Securities and Exchange Act of
1934, as amended (the "Exchange Act") prior to the termination of the offering
of Securities evidencing interests therein. Upon request by any person to whom
this Prospectus is delivered in connection with the offering of one or more
classes of Securities, the Depositor will provide or cause to be provided
without charge a copy of any such documents and/or reports incorporated herein
by reference, in each case to the extent such documents or reports relate to
such classes of Securities, other than the exhibits to such documents (unless
such exhibits are specifically incorporated by reference in such documents).
Requests to the Depositor should be directed in writing to: Paul D. Stevelman,
Assistant Secretary, Financial Asset Securities Corp., 600 Steamboat Road,
Greenwich, Connecticut 06830, telephone number (203) 625-2756. The Depositor
has determined that its financial statements are not material to the offering
of any Securities.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement under the Securities Act of 1933,
as amended, with respect to the Securities. This Prospectus, which forms a part
of the Registration Statement, and the Prospectus Supplement relating to each
Series of Securities contain summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the Rules and Regulations of
the Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits
can be inspected and copied at prescribed rates at the public reference
facilities maintained by the Commission at its Public Reference Section, 450
Fifth Street, N.W., Washington, 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".
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and in the related
Prospectus Supplement with respect to the Series offered thereby and to the
related Agreement (as such term is defined below) which will be prepared in
connection with each Series of Securities. Unless otherwise specified,
capitalized terms used and not defined in this Summary of Terms have the
meanings given to them in this Prospectus and in the related Prospectus
Supplement.
Title of Securities................. Asset Backed Certificates (the
"Certificates") and Asset Backed Notes
(the "Notes" and, together with the
Certificates, the "Securities"), which
are issuable in Series.
Depositor........................... Financial Asset Securities Corp., a
Delaware corporation, an indirect
limited purpose finance subsidiary of
National Westminster Bank Plc and an
affiliate of Greenwich Capital Markets,
Inc. See "The Depositor" herein.
Trustee............................. The trustee (the "Trustee") for each
Series of Securities will be specified
in the related Prospectus Supplement.
See "The Agreements" herein for a
description of the Trustee's rights and
obligations.
Master Servicer..................... The entity or entities named as Master
Servicer (the "Master Servicer") will
be specified in the related Prospectus
Supplement. See "The
Agreements--Certain Matters Regarding
the Master Servicer and the Depositor".
Trust Fund Assets................... Assets of the Trust Fund for a Series
of Securities will include certain
assets (the "Trust Fund Assets") which
will primarily consist of (a) Loans or
(b) Private Asset Backed Securities,
together with payments in respect of
such Trust Fund Assets and certain
other accounts, obligations or
agreements, in each case as specified
in the related Prospectus Supplement.
The Loans will be collected in a pool
(each, a "Pool") as of the first day of
the month of the issuance of the
related Series of Securities or such
other date specified in the Prospectus
Supplement (the "Cut-off Date"). Trust
Fund assets also may include insurance
policies, cash accounts, reinvestment
income, guaranties, letters of credit
or other assets to the extent described
in the related Prospectus Supplement.
See "Credit Enhancement". In addition,
if the related Prospectus Supplement so
provides, the related Trust Funds'
assets will include the funds on
deposit in an account (a "Pre-Funding
Account") which will be used to
purchase additional Loans during the
period specified in the related
Prospectus Supplement. See "The
Agreements--Pre-Funding Accounts".
A. Loans........................... The Loans will consist of (i)
closed-end loans (the "Closed-End
Loans") and/or revolving home equity
loans or certain balances therein (the
"Revolving Credit Line Loans", together
with the Closed-End Loans, the "Home
Equity Loans"), and (ii) home
improvement installment sales contracts
and installment loan agreements (the
"Home Improvement Contracts"). The Home
Equity Loans and the Home Improvement
Contracts are collectively referred to
herein as the "Loans". All Loans will
have been purchased by the Depositor,
either directly or through an
affiliate, from one or more Sellers.
As specified in the related Prospectus
Supplement, the Home Equity Loans will,
and the Home Improvement Contracts may,
be secured by mortgages or deeds of
trust or other similar security
instruments creating a lien on a
mortgaged property (the "Mortgaged
Property"), which may be subordinated
to one or more senior liens on the
Mortgaged Property, as described in the
related Prospectus Supplement. As
specified in the related Prospectus
Supplement, Home Improvement Contracts
may be unsecured or secured by purchase
money security interests in the Home
Improvements financed thereby. The
Mortgaged Properties and the Home
Improvements are collectively referred
to herein as the "Properties".
B. Private Asset-
Backed Securities............. Private Asset Backed Securities may
include (a) pass-through certificates
representing beneficial interests in
certain loans and/or (b) collateralized
obligations secured by such loans.
Private Asset Backed Securities may
include stripped securities
representing an undivided interest in
all or a part of either the principal
distributions (but not the interest
distributions) or the interest
distributions (but not the principal
distributions) or in some specified
portion of the principal and interest
distributions (but not all of such
distributions) on certain loans.
Although individual loans underlying a
Private Asset Backed Security may be
insured or guaranteed by the United
States or an agency or instrumentality
thereof, they need not be, and the
Private Asset Backed Securities
themselves will not be so insured or
guaranteed. Payments on the Private
Asset Backed Securities will be
distributed directly to the Trustee as
registered owner of such Private Asset
Backed Securities. See "The Trust
Fund--Private Asset Backed Securities".
Description of
the Securities.................... Each Security will represent a
beneficial ownership interest in, or
will be secured by the assets of, a
Trust Fund created by the Depositor
pursuant to an Agreement among the
Depositor, the Master Servicer and the
Trustee for the related Series. The
Securities of any Series may be issued
in one or more classes as specified in
the related Prospectus Supplement. A
Series of Securities may include one or
more classes of senior Securities
(collectively, the "Senior Securities")
and one or more classes of subordinate
Securities (collectively, the
"Subordinated Securities"). Certain
Series or classes of Securities may be
covered by insurance policies or other
forms of credit enhancement, in each
case as described herein and in the
related Prospectus Supplement.
One or more classes of Securities of
each Series (i) may be entitled to
receive distributions allocable only to
principal, only to interest or to any
combination thereof; (ii) may be
entitled to receive distributions only
of prepayments of principal throughout
the lives of the Securities or during
specified periods; (iii) may be
subordinated in the right to receive
distributions of scheduled payments of
principal, prepayments of principal,
interest or any combination thereof to
one or more other classes of Securities
of such Series throughout the lives of
the Securities or during specified
periods; (iv) may be entitled to
receive such distributions only after
the occurrence of events specified in
the related Prospectus Supplement; (v)
may be entitled to receive
distributions in accordance with a
schedule or formula or on the basis of
collections from designated portions of
the assets in the related Trust Fund;
(vi) as to Securities entitled to
distributions allocable to interest,
may be entitled to receive interest at
a fixed rate or a rate that is subject
to change from time to time; and (vii)
as to Securities entitled to
distributions allocable to interest,
may be entitled to distributions
allocable to interest only after the
occurrence of events specified in the
related Prospectus Supplement and may
accrue interest until such events
occur, in each case as specified in the
related Prospectus Supplement. The
timing and amounts of such
distributions may vary among classes,
over time, or otherwise as specified in
the related Prospectus Supplement.
Distributions on
the Securities.................... Distributions on the Securities
entitled thereto will be made monthly
or at such other intervals and on the
dates specified in the related
Prospectus Supplement (each, a
"Distribution Date") out of the
payments received in respect of the
assets of the related Trust Fund or
Funds or other assets pledged for the
benefit of the Securities as specified
in the related Prospectus Supplement.
The amount allocable to payments of
principal and interest on any
Distribution Date will be determined as
specified in the related Prospectus
Supplement. Allocations of
distributions among Securityholders of
a single class shall be set forth in
the related Prospectus Supplement.
Unless otherwise specified in the
related Prospectus Supplement, the
aggregate original principal balance of
the Securities will not exceed the
aggregate distributions allocable to
principal that such Securities will be
entitled to receive. If specified in
the related Prospectus Supplement, the
Securities will have an aggregate
original principal balance equal to the
aggregate unpaid principal balance of
the Trust Fund Assets as of the first
day of the month of creation of the
Trust Fund and will bear interest in
the aggregate at a rate equal to the
interest rate borne by the underlying
Loans (the "Loan Rate") and/or Private
Asset Backed Securities, net of the
aggregate servicing fees and any other
amounts specified in the related
Prospectus Supplement (the
"Pass-Through Rate"). If specified in
the related Prospectus Supplement, the
aggregate original principal balance of
the Securities and interest rates on
the classes of Securities will be
determined based on the cash flow on
the Trust Fund Assets.
The rate at which interest will be
passed through to holders of each class
of Securities entitled thereto may be a
fixed rate or a rate that is subject to
change from time to time from the time
and for the periods, in each case as
specified in the related Prospectus
Supplement. Any such rate may be
calculated on a loan-by-loan, weighted
average, notional amount or other
basis, in each case as described in the
related Prospectus Supplement.
Compensating
Interest.......................... If so specified in the related
Prospectus Supplement, the Master
Servicer will be required to remit to
the Trustee, with respect to each Loan
in the related Trust Fund as to which a
principal prepayment in full or a
principal payment which is in excess of
the scheduled monthly payment and is
not intended to cure a delinquency was
received during any Due Period, an
amount, from and to the extent of
amounts otherwise payable to the Master
Servicer as servicing compensation,
equal to (i) the excess, if any, of (a)
30 days' interest on the principal
balance of the related Loan at the Loan
Rate net of the per annum rate at which
the Master Servicer's servicing fee
accrues, over (b) the amount of
interest actually received on such Loan
during such Due Period, net of the
Master Servicer's servicing fee or (ii)
such other amount as described in the
related Prospectus Supplement. See
"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".
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors
in connection with the purchase of the Securities.
LIMITED LIQUIDITY
There will be no market for the Securities of any Series prior to the
issuance thereof, and there can be no assurance that a secondary market will
develop or, if it does develop, that it will provide Securityholders with
liquidity of investment or will continue for the life of the Securities of such
Series.
LIMITED ASSETS
The Depositor does not have, nor is it expected to have, any
significant assets. Unless otherwise specified in the related Prospectus
Supplement, the Securities of a Series will be payable solely from the Trust
Fund for such Securities and will not have any claim against or security
interest in the Trust Fund for any other Series. There will be no recourse to
the Depositor or any other person for any failure to receive distributions on
the Securities. Further, at the times set forth in the related Prospectus
Supplement, certain Trust Fund Assets and/or any balance remaining in the
Security Account immediately after making all payments due on the Securities of
such Series, after making adequate provision for future payments on certain
classes of Securities and after making any other payments specified in the
related Prospectus Supplement, may be promptly released or remitted to the
Depositor, the Servicer, any credit enhancement provider or any other person
entitled thereto and will no longer be available for making payments to
Securityholders. Consequently, holders of Securities of each Series must rely
solely upon payments with respect to the Trust Fund Assets and the other assets
constituting the Trust Fund for a Series of Securities, including, if
applicable, any amounts available pursuant to any credit enhancement for such
Series, for the payment of principal of and interest on the Securities of such
Series.
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer or any of their respective affiliates. The only
obligations, if any, of the Depositor with respect to the Trust Fund Assets or
the Securities of any Series will be pursuant to certain representations and
warranties. The Depositor does not have, and is not expected in the future to
have, any significant assets with which to meet any obligation to repurchase
Trust Fund Assets with respect to which there has been a breach of any
representation or warranty. If, for example, the Depositor were required to
repurchase a Loan, its only sources of funds to make such repurchase would be
from funds obtained (i) from the enforcement of a corresponding obligation, if
any, on the part of the Seller or originator of such Loan, or (ii) from a
Reserve Account or similar credit enhancement established to provide funds for
such repurchases. The Master Servicer's servicing obligations under the related
Agreement may include its limited obligation to make certain advances in the
event of delinquencies on the Loans, but only to the extent deemed recoverable.
To the extent described in the related Prospectus Supplement, the Depositor or
Master Servicer will be obligated under certain limited circumstances to
purchase or act as a remarketing agent with respect to a convertible Loan upon
conversion to a fixed rate.
CREDIT ENHANCEMENT
Although credit enhancement is intended to reduce the risk of
delinquent payments or losses to holders of Securities entitled to the benefit
thereof, the amount of such credit enhancement will be limited, as set forth in
the related Prospectus Supplement, and may decline and could be depleted under
certain circumstances prior to the payment in full of the related Series of
Securities, and as a result Securityholders may suffer losses. Moreover, such
credit enhancement may not cover all potential losses or risks. For example,
credit enhancement may or may not cover fraud or negligence by a loan
originator or other parties. See "Credit Enhancement".
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 "Ratings".
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.
THE TRUST FUND
The Certificates of each Series will represent interests in the
assets of the related Trust Fund, and the Notes of each Series will be secured
by the pledge of the assets of the related Trust Fund. The Trust Fund for each
Series will be held by the Trustee for the benefit of the related
Securityholders. Each Trust Fund will consist of certain assets (the "Trust
Fund Assets") consisting of a pool (each, a "Pool") comprised of Loans or
Private Asset Backed Securities, in each case as specified in the related
Prospectus Supplement, together with payments in respect of such Trust Fund
Assets and certain other accounts, obligations or agreements, in each case as
specified in the related Prospectus Supplement.1 The Pool will be created on
the first day of the month of the issuance of the related Series of Securities
or such other date specified in the Prospectus Supplement (the "Cut-off Date").
The Securities will be entitled to payment from the assets of the related Trust
Fund or Funds or other assets pledged for the benefit of the Securityholders as
specified in the related Prospectus Supplement and will not be entitled to
payments in respect of the assets of any other trust fund established by the
Depositor.
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.
1 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.
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 representations 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 a 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 & Co. 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 &
Co., as nominee of DTC, and may be made available by Cede & Co. 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 66K% 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 any 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 attorneys' fees, which may be recovered by a lender. After
the reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. If the
deed of trust is not reinstated, a notice of sale must be posted in a public
place and, in most states, published for a specific period of time in one or
more newspapers. In addition, some state laws require that a copy of the notice
of sale be posted on the property and sent to all parties having an interest in
the real property.
Foreclosure of a mortgage is generally accomplished by judicial
action. The action is initiated by the service of legal pleadings upon all
parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings are often not contested by any of the
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to
conduct the sale of the property. In some states, mortgages may also be
foreclosed by advertisement, pursuant to a power of sale provided in the
mortgage.
Although foreclosure sales are typically public sales, frequently no
third party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding
under the loan, accrued and unpaid interest and the expenses of foreclosure in
which event the mortgagor's debt will be extinguished or the lender may
purchase for a lesser amount in order to preserve its right against a borrower
to seek a deficiency judgment in states where such judgment is available.
Thereafter, subject to the right of the borrower in some states to remain in
possession during the redemption period, the lender will assume the burden of
ownership, including obtaining hazard insurance and making such repairs at its
own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of any mortgage guaranty insurance proceeds.
Courts have imposed general equitable principles upon foreclosure,
which are generally designed to mitigate the legal consequences to the borrower
of the borrower's defaults under the loan documents. Some courts have been
faced with the issue of whether federal or state constitutional provisions
reflecting due process concerns for fair notice require that borrowers under
deeds of trust receive notice longer than that prescribed by statute. For the
most part, these cases have upheld the notice provisions as being reasonable or
have found that the sale by a trustee under a deed of trust does not involve
sufficient state action to afford constitutional protection to the borrower.
When the beneficiary under a junior mortgage or deed of trust cures
the default and reinstates or redeems by paying the full amount of the senior
mortgage or deed of trust, the amount paid by the beneficiary so to cure or
redeem becomes a part of the indebtedness secured by the junior mortgage or
deed of trust. See "Junior Mortgages; Rights of Senior Mortgagees".
ENVIRONMENTAL RISKS
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and safety.
These include laws and regulations governing air pollutant emissions, hazardous
and toxic substances, impacts to wetlands, leaks from underground storage
tanks, and the management, removal and disposal of lead- and
asbestos-containing materials. In certain circumstances, these laws and
regulations impose obligations on the owners or operators of residential
properties such as those subject to the Loans. The failure to comply with such
laws and regulations may result in fines and penalties.
Moreover, under various federal, state and local laws and
regulations, an owner or operator of real estate may be liable for the costs of
addressing hazardous substances on, in or beneath such property and related
costs. Such liability may be imposed without regard to whether the owner or
operator knew of, or was responsible for, the presence of such substances, and
could exceed the value of the property and the aggregate assets of the owner or
operator. In addition, persons who transport or dispose of hazardous
substances, or arrange for the transportation, disposal or treatment of
hazardous substances, at off-site locations may also be held liable if there
are releases or threatened releases of hazardous substances at such off-site
locations.
In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), contamination of property may give rise to a lien on the property
to assure the payment of the costs of clean-up. In several states, such a lien
has priority over the lien of an existing mortgage against such property. Under
CERCLA, such a lien is subordinate to pre-existing, perfected security
interests.
Under the laws of some states, and under CERCLA, there is a
possibility that a lender may be held liable as an "owner or operator" for
costs of addressing releases or threatened releases of hazardous substances at
a property, regardless of whether or not the environmental damage or threat was
caused by a current or prior owner or operator. CERCLA and some state laws
provide an exemption from the definition of "owner or operator" for a secured
creditor who, without "participating in the management" of a facility, holds
indicia of ownership primarily to protect its security interest in the
facility. The Solid Waste Disposal Act ("SWDA") provides similar protection to
secured creditors in connection with liability for releases of petroleum from
certain underground storage tanks. However, if a lender "participates in the
management" of the facility in question or is found not to have held its
interest primarily to protect a security interest, the lender may forfeit its
secured creditor exemption status.
A regulation promulgated by the U.S. Environmental Protection Agency
("EPA") in April 1992 attempted to clarify the activities in which lenders
could engage both prior to and subsequent to foreclosure of a security interest
without forfeiting the secured creditor exemption under CERCLA. The rule was
struck down in 1994 by the United States Court of Appeals for the District of
Columbia Circuit in KELLEY EX REL STATE OF MICHIGAN V. ENVIRONMENTAL PROTECTION
AGENCY, 15 F.3d 1100 (D.C Cir. 1994), REH'G DENIED, 25 F.3d 1088, CERT. DENIED
SUB NOM. AM. BANKERS ASS'N V. KELLEY, 115 S.Ct. 900 (1995). Another EPA
regulation promulgated in 1995 clarifies the activities in which lenders may
engage without forfeiting the secured creditor exemption under the underground
storage tank provisions of the SWDA. That regulation has not been struck down.
On September 30, 1996, Congress amended both CERCLA and the SWDA to
provide additional clarification regarding the scope of the lender liability
exemptions under the two statutes. Among other things, the 1996 amendments
specify the circumstances under which a lender will be protected by the CERCLA
and SWDA exemptions, both while the borrower is still in possession of the
secured property and following foreclosure on the secured property.
Generally, the amendments state that a lender who holds indicia of
ownership primarily to protect a security interest in a facility will be
considered to participate in management only if, while the borrower is still in
possession of the facility encumbered by the security interest, the lender (i)
exercises decision-making control over environmental compliance related to the
facility such that the lender has undertaken responsibility for hazardous
substance handling or disposal practices related to the facility or (ii)
exercises control at a level comparable to that of a manager of the facility
such that the lender has assumed or manifested responsibility for (x) overall
management of the facility encompassing daily decision making with respect to
environmental compliance or (y) overall or substantially all of the operational
functions (as distinguished from financial or administrative functions) of the
facility other than the function of environmental compliance. The amendments
also specify certain activities that are not considered to be "participation in
management", including monitoring or enforcing the terms of the extension of
credit or security interest, inspecting the facility, and requiring a lawful
means of addressing the release or threatened release of a hazardous substance.
The 1996 amendments also specify that a lender who did not
participate in management of a facility prior to foreclosure will not be
considered an "owner or operator", even if the lender forecloses on the
facility and after foreclosure sells or liquidates the facility, maintains
business activities, winds up operations, undertakes an appropriate response
action, or takes any other measure to preserve, protect, or prepare the
facility prior to sale or disposition, if the lender seeks to sell or otherwise
divest the facility at the earliest practicable, commercially reasonable time,
on commercially reasonable terms, taking into account market conditions and
legal and regulatory requirements.
The CERCLA and SWDA lender liability amendments specifically address
the potential liability of lenders who hold mortgages or similar conventional
security interests in real property, such as the Trust Fund does in connection
with the Home Equity Loans and the Home Improvement Contracts. The amendments
do not clearly address the potential liability of lenders who retain legal
title to a property and enter into an agreement with the purchaser for the
payment of the purchase price and interest over the term of the contract, such
as the Trust Fund does in connection with the Installment Contracts.
If a lender (including a lender under an Installment Contract) is or
becomes liable under CERCLA, it may be authorized to bring a statutory action
for contribution against any other "responsible parties", including a previous
owner or operator. However, such persons or entities may be bankrupt or
otherwise judgment proof, and the costs associated with environmental cleanup
and related actions may be substantial. Moreover, some state laws imposing
liability for addressing hazardous substances do not contain exemptions from
liability for lenders. Whether the costs of addressing a release or threatened
release at a property pledged as collateral for one of the Loans (or at a
property subject to an Installment Contract), would be imposed on the Trust
Fund, and thus occasion a loss to the Securityholders, therefore depends on the
specific factual and legal circumstances at issue.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption would defeat the title
of any purchaser from the lender subsequent to foreclosure or sale under a deed
of trust. Consequently, the practical effect of the redemption right is to
force the lender to retain the property and pay the expenses of ownership until
the redemption period has run. In some states, there is no right to redeem
property after a trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have adopted statutory prohibitions restricting the
right of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or certain other foreclosure proceedings. A deficiency judgment
is a personal judgment against the borrower equal in most cases to the
difference between the amount due to the lender and the fair market value of
the real property sold at the foreclosure sale. Other statutes require the
beneficiary or mortgagee to exhaust the security afforded under a deed of trust
or mortgage by foreclosure in an attempt to satisfy the full debt before
bringing a personal action against the borrower. In certain other states, the
lender has the option of bringing a personal action against the borrower on the
debt without first exhausting such security; however, in some of these states,
the lender, following judgment on such personal action, may be deemed to have
elected a remedy and may be precluded from exercising remedies with respect to
the security. Consequently, the practical effect of the election requirement,
when applicable, is that lenders will usually proceed first against the
security rather than bringing a personal action against the borrower. Finally,
other statutory provisions limit any deficiency judgment against the former
borrower following a foreclosure sale to the excess of the outstanding debt
over the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the foreclosure sale.
In addition to anti-deficiency and related legislation, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws, the federal Soldiers' and Sailors' Civil Relief Act of 1940 (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, any state thereof or the
District of Columbia (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 Service (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)(4)(A), 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.
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 IRS 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 Loan's 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)(4)(A) 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. Non-corporate taxpayers are subject to reduced maximum rates on
long-term capital gains and are generally subject to tax at ordinary income
rates on short-term capital gains. The deductibility of capital losses is
subject to certain limitations. Prospective investors should consult their own
tax advisors concerning these tax law provisions.
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 advisors 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, 1999, 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 50
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, 1999, 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 (or 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 clause (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)(4)(A) 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 of 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 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.
