PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 28, 1998)
[CITY CITY CAPITAL HOME LOAN TRUST 1998-4
NATIONAL
LOGO] $168,173,000 Class A 7.04% Asset Backed Notes, Series 1998-4
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-6 IN THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 14 IN THE PROSPECTUS.
THE NOTES REPRESENT OBLIGATIONS OF THE TRUST ONLY AND DO NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF ANY OTHER ENTITY.
THIS PROSPECTUS SUPPLEMENT MAY BE USED TO OFFER AND SELL THE NOTES ONLY IF
ACCOMPANIED BY THE PROSPECTUS.
CITY NATIONAL BANK OF WEST VIRGINIA
SELLER
----------------------
FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
----------------------
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
MASTER SERVICER
----------------------
CITY MORTGAGE SERVICES
SERVICER
----------------------
The trust will issue a single class of notes. The notes identified above are
being offered by this prospectus supplement and the accompanying prospectus.
THE NOTES
o The notes represent non-recourse obligations of the trust.
o Payments on the notes are secured by the proceeds of the home loans
in the trust.
o The notes will accrue interest at the rate specified above.
[MBIA LOGO]
CREDIT ENHANCEMENT
o The note insurance policy issued by MBIA Insurance Corporation will
guarantee receipt of interest and principal by Noteholders at the times
and to the extent described in this prospectus supplement.
o Excess interest received from the home loans in the trust will be applied
as payments of principal on the notes to establish and maintain a
required level of overcollateralization.
Neither the SEC nor any state securities commission has approved these notes
or determined that this prospectus supplement or the prospectus is accurate or
complete. Any representation to the contrary is a criminal offense.
The notes 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
notes are expected to be approximately $167,500,308, before deducting issuance
expenses payable by the depositor, estimated to be $400,000. See "Method of
Distribution" in this prospectus supplement.
We expect that delivery of the notes will be made in book-entry form through
the facilities of The Depository Trust Company, Cedelbank, SOCIETE ANONYME,
and the Euroclear System on or about November 30, 1998.
-------------------
[GREENWICH LOGO]
November 23, 1998
<PAGE>
CONTENT OF PROSPECTUS SUPPLEMENT AND PROSPECTUS
You should rely only on the information contained in this document. We
have not authorized anyone to provide you with different information. You
should not assume that the information in the prospectus supplement or the
prospectus is accurate as of any date other than the date on the front of this
document.
We provide information to you about the notes in two separate documents
that progressively provide more detail: (a) the prospectus, which provides
general information, some of which may not apply to the notes, and (b) this
prospectus supplement, which describes the specific terms of the notes.
If the terms vary between this prospectus supplement and the accompanying
prospectus, you should rely on the information in this prospectus supplement.
We include cross-references in this prospectus supplement and the
prospectus to captions in these materials where you can find further related
discussions. The table of contents on the back cover of this document provides
the pages on which these captions are located.
You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under the caption "Index of Defined Terms"
on page S-54 in this prospectus supplement.
LIMITATIONS ON OFFERS OR SOLICITATIONS
We do not intend this document to be an offer or solicitation:
(A) if used in a jurisdiction in which such offer or solicitation is not
authorized;
(B) if the person making such offer or solicitation is not qualified to
do so; or
(C) if such offer or solicitation is made to anyone to whom it is
unlawful to make such offer or solicitation.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page
PROSPECTUS SUPPLEMENT PROSPECTUS
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<S> <C>
Summary ...............................S-4 Prospectus Supplement.................. 2
Risk Factors...........................S-6 Incorporation of Certain Information
The Trust..............................S-10 by Reference....................... 2
The Depositor..........................S-10 Available Information.................. 3
The Transferor.........................S-10 Reports to Securityholders............. 3
The Seller.............................S-11 Summary of Terms....................... 4
The Home Loan Pool.....................S-12 Risk Factors...........................14
The Servicer...........................S-21 The Trust Fund.........................21
The Master Servicer, the Custodian Use of Proceeds........................22
and the Note Administrator...........S-23 The Depositor..........................28
Servicing of the Home Loans............S-24 Loan Program...........................28
Description of the Notes...............S-30 Description of the
Note Insurance.........................S-41 Securities .........................31
Prepayment and Yield Considerations....S-45 Credit Enhancement.....................43
Use of Proceeds........................S-50 Yield and Prepayment
Certain Federal Income Considerations......................50
Tax Consequences.....................S-50 The Agreements.........................54
State Tax Consequences.................S-50 Certain Legal Aspects
ERISA Considerations...................S-50 of the Home Loans...................70
Experts................................S-51 Certain Material Federal Income
Method of Distribution.................S-52 Tax Considerations..................86
Legal Investment Matters...............S-52 FASIT Securities.......................110
Legal Matters..........................S-52 State Tax Considerations...............114
Ratings................................S-52 ERISA Considerations...................115
Index of Defined Terms.................S-54 Legal Investment.......................120
Method of Distribution.................121
Legal Matters..........................123
Financial Information..................123
Rating.................................123
</TABLE>
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS A SHORT, CONCISE DESCRIPTION OF THE MAIN
TERMS OF THE NOTES. FOR THIS REASON, THE SUMMARY DOES NOT CONTAIN ALL THE
INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU WILL FIND A DETAILED DESCRIPTION
OF THE TERMS OF THE NOTES FOLLOWING THIS SUMMARY AND IN THE PROSPECTUS.
THE NOTES
On the closing date, the trust will issue a single class of notes pursuant to
the indenture. The notes will be secured principally by certain assets of the
trust. The assets pledged to secure the notes under the indenture and the
payments under the insurance policy will be the only sources of payments on
the notes. The notes will be available in book-entry form through the clearing
facilities of DTC (in the United States) or Cedelbank or Euroclear (in Europe)
in minimum denominations of $50,000.
TRUST
City Capital Home Loan Trust 1998-4
CUT-OFF DATE
November 1, 1998
CLOSING DATE
On or about November 30, 1998
DEPOSITOR
Financial Asset Securities Corp.
600 Steamboat Road
Greenwich, Connecticut 06830
(203) 625-2700
TRANSFEROR
City Capital Markets Corporation
SELLER
City National Bank of West Virginia
SERVICER
City Mortgage Services,
a division of City National Bank of West Virginia
MASTER SERVICER, INDENTURE TRUSTEE, NOTE ADMINISTRATOR AND CUSTODIAN
Norwest Bank Minnesota, National Association
OWNER TRUSTEE
Wilmington Trust Company
NOTE INSURER
MBIA Insurance Corporation
THE HOME LOANS
The trust's main source of funds for making payments on the notes will consist
of a pool of fixed rate home loans made to finance debt consolidation,
property improvements and/or cash out or other consumer purposes. Most of the
home loans are secured by junior liens on single family residences in which
the borrowers have little or no equity. As of November 1, 1998, the home loans
consist of approximately 4,975 home loans with an aggregate principal balance
of approximately $182,598,310 and original terms to maturity ranging from 60
to 360 months.
SEE "DESCRIPTION OF THE LOANS."
PAYMENT DATES
The 25th day of each month, or if the 25th day is not a business day, then
next business day, beginning in December 1998.
INTEREST AND PRINCIPAL PAYMENTS
The interest rate for the notes is set forth on the cover.
Interest payable on the notes on any payment date will accrue during the
calendar month preceding the month in which such payment date occurs.
Calculations of interest on the notes will be computed on the basis of a
360-day year consisting of twelve 30-day months.
On each payment date available funds remaining after the payment of certain
trust expenses will be applied to pay interest on the notes and then to pay
principal on the notes.
SEE "DESCRIPTION OF THE NOTES -- PAYMENTS ON THE NOTES."
STATED MATURITY DATE
The stated maturity date of the notes is October 25, 2029.
The actual final payment date for the notes is likely to occur earlier, and
occur significantly earlier, than the stated maturity date.
SEE "PREPAYMENT AND YIELD CONSIDERATIONS".
CREDIT ENHANCEMENT
The credit enhancements include a note insurance policy and
overcollateralization. The credit enhancements are designed to increase the
likelihood that noteholders will receive regular payments of interest and
principal.
NOTE INSURANCE POLICY
The note insurer will issue the note insurance policy which will guarantee
principal and interest payments on the notes at the times and in the amounts
described in this prospectus supplement.
In the absence of payments under the note insurance policy, noteholders will
directly bear the credit risk and other risks associated with the home loans.
On each payment date, the indenture trustee will determine whether funds
available to make the payments of principal and interest are sufficient. If an
insufficiency exists and is covered by the note insurance policy, then the
trustee will make a claim under the note insurance policy.
SEE "THE INSURANCE POLICY."
OVERCOLLATERALIZATION
It is anticipated that the home loans owned by the trust will pay interest
each month in an aggregate amount greater than the amount needed to pay fees
and monthly interest on the notes. A portion of this excess interest will be
applied to pay principal on the notes, which will reduce the principal balance
of the notes at a faster rate than the principal balance of the home loans is
being reduced. As a result, the principal balance of the home loans is
expected to exceed the principal balance of the notes. 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 home loans to maintain
overcollateralization.
SEE "DESCRIPTION OF THE NOTES."
OPTIONAL REDEMPTION
The holders of the trust certificates or the note insurer may redeem the
outstanding notes once the aggregate balance of the notes has declined to 5%
or less of their initial aggregate balance.
SEE "DESCRIPTION OF THE NOTES - REDEMPTION OF THE NOTES."
RATINGS
It is a condition of the issuance of the notes that they be assigned a rating
of "AAA" by Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. and "Aaa" by Moody's Investors Service, Inc.
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."
TAX STATUS
In the opinion of Brown & Wood LLP, for federal income tax purposes, the notes
will be characterized as debt, and the trust will not be characterized as an
association (or publicly traded partnership) taxable as a corporation or as a
taxable mortgage pool.
SEE "CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES" IN THIS PROSPECTUS
SUPPLEMENT AND "CERTAIN MATERIAL FEDERAL INCOME TAX CONSIDERATIONS" IN THE
PROSPECTUS.
ERISA CONSIDERATIONS
If you are a fiduciary of any employee benefit plan or other retirement
arrangement subject to the Employee Retirement Income Security Act of 1974, as
amended, or Section 4975 of the Internal Revenue Code, you should review
carefully with your lawyer whether you can buy or hold a note.
SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE
PROSPECTUS.
LEGAL INVESTMENT
You should consult with your lawyer to see if you are permitted to buy the
notes since the legal investment rules vary depending on what kind of entity
you are and who regulates you. The notes will not be "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984.
SEE "LEGAL INVESTMENT MATTERS" 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 NOTES. 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 home loans in
whole or in part at any time. We cannot
predict the rate at which borrowers will
repay their home loans. A prepayment of a
home loan generally will result in a
prepayment on the notes.
o If you purchase your notes at a discount
and principal is repaid slower than you
expect, then your yield may be lower than
you expect.
o If you purchase your notes at a premium
and principal is repaid faster than you
expect, then your yield may be lower than
you expect.
o The rate of prepayments on the home loans
will be sensitive to prevailing interest
rates. Generally, if prevailing interest
rates fall significantly below the
interest rates on the home loans, the home
loans are more likely to prepay.
Conversely, if prevailing interest rates
rise significantly, the rate of
prepayments is likely to decrease.
o The seller may be required to repurchase
home loans from the trust as a result of
certain breaches of representations and
warranties or certain defects in the home
loan files that have not been cured. These
repurchases will have the same effect on
noteholders as a prepayment of the home
loans.
o Approximately 42.0% of the home loans
require the borrower to pay a penalty if
the borrower prepays the home loan during
periods ranging from six months to five
years after origination. A prepayment
penalty may discourage a borrower from
prepaying the home loan during the
applicable penalty period.
o The amount of overcollateralization
required under the indenture may vary over
time. Any increase in this amount may
result in an accelerated principal payment
on the notes. Conversely, any decrease in
this amount may lead to a reduced
principal payment on the notes.
o In most circumstances, liquidations of
defaulted home loans will have the same
effect on the yield of the holders of the
notes as a prepayment of the home loans.
See"--Default Risks" for a discussion of
the default risks presented by the home
loans.
o If the notes are prepaid, you have no
assurance that similar investments
offering comparable yields will be
available.
SEE "PREPAYMENT AND YIELD CONSIDERATIONS" IN
THIS PROSPECTUS SUPPLEMENT FOR A DESCRIPTION
OF FACTORS THAT MAY INFLUENCE THE RATE AND
TIMING OF PREPAYMENTS ON THE NOTES.
POTENTIAL INADEQUACY
OF CREDIT ENHANCEMENT The home loans are expected to generate
more interest than is needed to pay interest
on the notes since the weighted average
interest rate on the home loans is expected
to be higher than the weighted average
interest rate on the notes. If the home
loans generate more interest than is needed
to pay interest owed on the notes and pay
certain fees and expenses of the trust, the
remaining interest will be applied as
described herein to make payments of
principal on the notes. The application of
remaining interest collections as principal
on the notes may offset, at least in part,
losses which occur on the home loans. After
these financial obligations have been
satisfied, any 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 required level of
overcollateralization.
The excess interest available on any payment
date will be affected by the actual amount
of interest received, collected or recovered
in respect of the home loans during the
preceding month. Such amount will be
influenced by changes in the weighted
average of the home loan interest rates
resulting from prepayments and liquidations
of the home loans.
If the protection afforded by
overcollateralization is insufficient and if
the note insurer is unable to meet its
obligations under the note insurance policy,
then the holders of the notes could
experience a loss on their investment.
HOME LOAN DEFAULT RISKS......... Noteholders are protected by the available
forms of credit enhancement against the risk
of loss realized on the home loans. In most
circumstances, liquidations of home loans
will have the same effect on holders of the
notes as a home loan prepayment. However, in
the unlikely event that the credit
enhancements are no longer available to
provide protection to noteholders, any
losses on the home loans would be borne by
such holders. The risks presented by the
home loans include the following:
o Underwriting Standards. Under the seller's
underwriting guidelines, the
creditworthiness of the borrower is the
primary, but not the only, consideration
in underwriting a home loan. The credit
quality of some of the borrowers under the
home loans is lower than that of borrowers
under mortgage loans conforming to the
FNMA or FHLMC underwriting guidelines for
first lien, single family mortgage loans.
Consequently, the home loans in the trust
may experience substantially higher rates
of delinquency, foreclosure and bankruptcy
than home loans underwritten in a more
traditional manner. In addition, no
assurance can be given that the
creditworthiness of the borrowers will not
deteriorate as a result of future economic
and social factors, which may result in
delinquency or default by such borrower on
the related home loans. Furthermore, the
losses sustained from defaulted home loans
may be more severe (and may frequently be
total losses) because the costs incurred
in the collection and liquidation of
defaulted home loans in relation to the
smaller principal balances are
disproportionately higher than for first
lien, single family mortgage loans, and
because substantially all of the home
loans are secured by junior liens on
mortgaged properties in which the
borrowers had little or no equity at the
time of origination.
o Early Default. Defaults on home loans are
generally expected to occur more
frequently in the early years of the terms
of home loans. The weighted average number
of months since origination of the home
loans as of the cut-off date is
approximately three months, which is not a
sufficiently long period of time to
develop reliable performance data
regarding the home loans. Delinquencies
may increase as the home loans become more
seasoned.
o High LTV Ratios. Substantially all of the
home loans are secured by liens on the
mortgaged properties in which the
borrowers have little or no equity.
Approximately 83% of the home loans have
original combined loan-to-value ratios in
excess of 100%. Home loans with high
original combined loan-to-value ratios
will be more sensitive to declining
property values than would those with
lower original combined loan-to-value
ratios and therefore may experience a
higher incidence of default. In addition,
with respect to home loans with original
combined loan-to-value ratios near or in
excess of 100%, if the related borrowers
relocate, such borrowers may be unable to
repay the home loans in full from the sale
proceeds of the financed properties and
other funds available. Accordingly such
home loans likely may experience higher
rates of delinquencies, defaults and
losses. With respect to home loans the
proceeds of which were used in whole or in
part for debt consolidation, the related
borrower may incur further consumer debt.
This reloading of debt could impair the
ability of such borrowers to repay the
home loans.
o Junior Liens. Approximately 99.5% of the
home loans are secured by liens junior to
one or more senior liens on the related
mortgaged properties. In general, a junior
lienholder may not foreclose on the
related mortgaged property unless it
forecloses subject to the senior lien(s),
in which case it must either pay the
entire amount due under the senior
mortgage or agree to make payments under
the senior mortgage if the borrower is in
default thereunder. As a result, in
general, the servicer does not expect to
foreclose on home loans secured by junior
liens.
o Geographic Concentration. Mortgaged
properties located in the states of
California, Maryland, Virginia and
Pennsylvania secure approximately 9.49%,
8.45%, 7.57% and 6.66%, respectively, of
the home loans. This geographic
concentration might magnify the effect on
the trust of adverse economic conditions
in these states and might increase the
rate of delinquencies, defaults and losses
on the home loans more than would be the
case if the mortgaged properties were more
geographically diversified. Additionally,
mortgaged properties in California may be
particularly susceptible to certain types
of uninsurable hazards, such as
earthquakes, floods, mudslides and other
natural disasters.
o Limitation on Repurchase of Defective Home
Loans by the Seller. No assurance can be
given that, at any particular time, the
seller will be capable, financially or
otherwise, of repurchasing home loans as a
result of certain breaches of
representations and warranties or certain
defects in the home loan files that have
not been cured. If the seller is not able
or otherwise does not make these
repurchases, the servicer, on behalf of
the trust, will make customary and
reasonable efforts to recover the maximum
amount possible with respect to the
defective home loan. However, there is no
assurance that such recoveries will be
adequate to fully cover principal and
interest amounts owing on such home loan.
None of the home loans were more than 30
days delinquent in payment as of the cut-off
date.
INSOLVENCY, RECEIVERSHIP OR
CONSERVATORSHIP OF THE SELLER
MAY INCREASE THE RISK OF LOSS
OR DELAY ON YOUR PAYMENTS....... The seller believes that the transfer of the
home loans to the transferor is an absolute
and unconditional sale. If a receiver or a
conservator is appointed for the seller,
however, the FDIC may attempt to
recharacterize the sale as a borrowing
secured by a pledge of the home loans. Such
an attempt, even if unsuccessful, could
result in delays on the note payments. If
the FDIC were successful, then it could
accelerate payment of the notes and sell the
assets pledged under the indenture. You
would then be entitled to no more than the
outstanding principal amount of the notes
together with interest to the date of
payment. There is no assurance that the
proceeds of any sale of trust assets would
be sufficient to pay such amounts.
YEAR 2000 SYSTEMS RISK.......... As is the case with most companies using
computers in their operations, the master
servicer and servicer are faced with the
task of completing their compliance goals in
connection with the year 2000 issue. In the
event that the master servicer, the
servicer, or any of their suppliers,
customers, brokers or agents do not
successfully and timely achieve year 2000
compliance, the performance of obligations
of the master servicer and servicer under
the relevant agreements could be materially
adversely affected.
SEE "THE SERVICER--YEAR 2000 COMPLIANCE" IN
THIS PROSPECTUS SUPPLEMENT.
NOTES MAy NOT BE
APPROPRIATE FOR CERTAIN
INVESTORS....................... The notes may not be an appropriate
investment for investors that do not have
sufficient resources or expertise to
evaluate the particular characteristics of
the notes. This may be the case because,
among other things:
o The yield to maturity of notes purchased
at a price other than par will be
sensitive to the uncertain rate and timing
of principal prepayments on the home
loans.
o The rate of principal payments on and the
weighted average life of the notes will be
sensitive to the uncertain rate and timing
of principal prepayments on the home
loans. Accordingly, the notes 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.
o You may be unable to reinvest amounts
distributed as principal on a note at a
rate comparable to the interest rate on
the note. In general, principal
prepayments are expected to be greater
during periods of relatively low interest
rates.
o A market for resale of the notes may not
develop or provide you 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.
THE TRUST
GENERAL
City Capital Home Loan Trust 1998-4 (the "Trust"), is a business
trust formed under the laws of the State of Delaware pursuant to the deposit
trust agreement dated as of November 1, 1998 (the "Trust Agreement") among
Financial Asset Securities Corp., as depositor (the "Depositor"), and
Wilmington Trust Company, as owner trustee (the "Owner Trustee"), Norwest Bank
Minnesota, National Association, as trust paying agent (the "Trust Paying
Agent") and note administrator (the "Note Administrator") and City Mortgage
Services, a division of City National Bank of West Virginia, as servicer (the
"Servicer"). After its formation, the Trust will not engage in any activity
other than (i) acquiring, holding and managing the home loans conveyed to it
pursuant to the Trust Agreement (the "Home Loans") and the other assets of the
Trust and proceeds therefrom, (ii) issuing the Asset-Backed Notes, Series
1998-4 (the "Notes") and a single class of trust certificates representing the
beneficial ownership interest in the assets of the Trust (the "Trust
Certificates"), (iii) making payments on the Notes and in respect of the Trust
Certificates, and (iv) engaging in other activities that are necessary,
suitable or convenient to accomplish the foregoing or are incidental thereto
or connected therewith. Pursuant to the Trust Agreement, the Trust will
acquire Home Loans having an aggregate principal balance of approximately
$182,598,310 (the "Cut-off Date Pool Principal Balance") as of November 1,
1998 (the "Cut-off Date") from the Depositor.
The assets of the Trust primarily will consist of the Home Loans,
each of which will be secured by a mortgage, deed of trust or other security
instrument (a "Mortgage"). See "The Home Loan Pool" herein. The assets of the
Trust also will include (i) payments of interest and principal in respect of
the Home Loans received on or after the Cut-off Date; (ii) security interests
in the related mortgaged properties (the "Mortgaged Properties"); (iii)
amounts on deposit in the Collection Account, the Note Account and the
Certificate Distribution Account (each as defined herein); (iv) the assignment
of the rights of the City Capital Markets Corporation (the "Transferor") under
the home loan sale agreement dated as of November 1, 1998 (the "Home Loan Sale
Agreement") among City National Bank of West Virginia, as seller (the
"Seller"), the Transferor and the Depositor; (v) the rights of the Indenture
Trustee under the Insurance Policy (each as defined herein); and (vi) certain
other ancillary or incidental funds, rights and properties related to the
foregoing. The unpaid principal balance of each Home Loan as of the Cut-off
Date is defined herein as the "Cut-off Date Principal Balance". The "Principal
Balance" of a Home Loan on any day subsequent to the Cut-off Date is equal to
its Cut-off Date Principal Balance, minus all principal reductions credited
against the Principal Balance of such Home Loan since the Cut-off Date;
provided, however, that the Principal Balance of a Liquidated Home Loan as
defined herein will be zero. With respect to any date, the "Pool Principal
Balance" will be equal to the aggregate Principal Balances of all Home Loans
as of such date.
The Trust's principal offices are located in Wilmington, Delaware, in
care of Wilmington Trust Company, as Owner Trustee, at the address set forth
below under "-- The Owner Trustee."
THE OWNER TRUSTEE
Wilmington Trust Company will act as the Owner Trustee under the
Trust Agreement. Wilmington Trust Company is a Delaware banking corporation
and its principal offices are located at 1100 North Market Street, Wilmington,
Delaware 19890-0001.
THE DEPOSITOR
Financial Asset Securities Corp., a Delaware corporation, is the
Depositor. The Depositor is an indirect limited purpose finance subsidiary of
National Westminster Bank Plc and an affiliate of Greenwich Capital Markets,
Inc. (the "Underwriter"). See "The Depositor" in the Prospectus and "Method of
Distribution" herein. None of the Depositor, National Westminster Bank Plc or
any of their affiliates or any other person or entity will insure or guarantee
or otherwise be obligated with respect to the Notes.
THE TRANSFEROR
City Capital Markets Corporation, a Delaware corporation, is a wholly
owned subsidiary of the Seller and will be the Transferor of the Home Loans.
The Transferor was formed as a limited purpose finance company to effect the
securitization of various types of home loans and financial assets. The
Transferor will acquire the Home Loans from the Seller immediately prior to
transferring the Home Loans to the Depositor. The Transferor's corporate
headquarters are located at 25 Gatewater Road, Charleston, West Virginia
25313.
THE SELLER
GENERAL
City National Bank of West Virginia, a national banking association
and the principal banking subsidiary of City Holding Company, will be the
Seller of the Home Loans. As of September 30, 1998, the Seller reported total
assets of approximately $1.5 billion, deposits of approximately $1.1 billion,
and stockholder's equity of approximately $164 million. The Seller is subject
to comprehensive regulation, examination and supervision by the OCC, the FDIC,
and other regulatory bodies. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Seller must meet
specific capital guidelines. To be categorized as "well capitalized", the
Seller must maintain certain total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as established by the regulatory bodies. As of September 30,
1998, the Seller reported total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios of 9.56%, 10.15%, and 8.05%, respectively. Based on these
ratios, the Seller is categorized as "well capitalized" under the regulatory
framework for prompt corrective action.
City Holding Company (NASDAQ:CHCO), a West Virginia corporation
headquartered in Charleston, West Virginia, commenced operations in November
1983. City Holding Company is a diversified financial services bank holding
company with total assets approximating $1.6 billion and stockholders' equity
approximating $124 million as of September 30, 1998. In addition to owning the
Seller, City Holding Company is the parent company of Del Amo Savings Bank, a
federally-chartered savings bank headquartered in Torrance, California, and
City Financial Corporation, a full service investment brokerage subsidiary
headquartered in Charleston, West Virginia.
In addition to its ten banking divisions, the Seller has the
following operating divisions: City Mortgage Services ("CMS" or the
"Servicer"), one wholesale and four retail home loan origination platforms, an
escrow services division, an insurance brokerage, a direct mail/marketing
division and an internet service provider division. City National Bank of West
Virginia and its banking divisions currently operate 43 retail and consumer
oriented community banking offices in West Virginia that emphasize personal
service. The executive offices of the Seller are located at 3601 MacCorkle
Avenue SE, Charleston, West Virginia, 25304.
On August 7, 1998, City Holding Company and Horizon Bancorp, Inc.
announced the signing of a definitive agreement to merge. The combined company
will have total assets in excess of $2.5 billion and will rank third in
deposit market share in West Virginia. The merger is subject to the approval
of both companies' shareholders and applicable regulatory authorities.
Management expects the transaction to close during the fourth quarter of 1998.
Subsequent to the completion of the merger, Horizon Bancorp's five bank
subsidiaries will be merged into the Seller.
UNDERWRITING CRITERIA
Substantially all of the Home Loans transferred to the Trust will
have been underwritten in accordance with the Seller's underwriting
requirements. Generally, the underwriting standards of the Seller place a
greater emphasis on the creditworthiness of the borrower than on the value of
the underlying collateral in evaluating the likelihood that a borrower will be
able to repay a Home Loan.
In many cases, Home Loans will have been made to borrowers that
typically have limited access to mortgage financing for a variety of reasons,
such as high ratios of debt-to-income and insufficient home equity value. Each
Home Loan is subject to various risks, including, without limitation, the risk
that the related borrower will not be able to make payments of interest and
principal on the Home Loan and that the realizable value of the related
Mortgaged Property will be insufficient to repay the outstanding interest and
principal owed on such home loan. The Seller uses its own credit evaluation
criteria to classify the home loans by risk class. These criteria include, as
a significant component, a credit score (the "Credit Score") derived based on
a methodology developed by Fair, Isaac and Company, a consulting firm
specializing in creating default predictive models through scoring mechanisms.
The Credit Scores, which are obtained from national credit reporting
organizations, are numerical representations of borrowers' estimated default
probability, and generally range from a low of 200 to a high of 800. A
borrower with a Credit Score of 700 or higher would be assigned the highest
classification for credit quality by the Seller. Additional criteria include
the borrower's debt-to-income ratio, mortgage credit history, consumer credit
history, prior bankruptcies, prior foreclosures, notices of default,
deeds-in-lieu of foreclosure and repossessions. The Seller believes that the
most important credit characteristics are the borrower's Credit Score and
debt-to-income ratio. The range of the Credit Scores and debt-to-income ratios
of the borrowers under the Home Loans is set forth under "The Home Loan Pool
- -- Characteristics of the Home Loans" herein.
Generally, the Seller requires a full appraisal of a Mortgaged
Property only for home loans in excess of $75,000. For home loans of more than
$55,000 to $75,000, a drive-by appraisal or comparable method is obtained. For
home loans of more than $35,000 to $55,000, a broker's price opinion,
statistical appraisal or comparable method is obtained, and for home loans of
$35,000 or less, the Seller relies on the property value stated by the
borrower in the home loan application.
The Seller's underwriting guidelines provide for the evaluation of a
home loan applicant's creditworthiness through the use of a consumer credit
report, verification of employment and a review of the debt-to-income ratio of
the applicant. The borrower's income is generally verified through various
means, including without limitation applicant interviews, written
verifications with employers and review of pay stubs or tax returns. A
borrower must generally demonstrate sufficient levels of disposable income to
satisfy debt repayment requirements.
Less than 2.0% of the Cut-off Date Pool Principal Balance consists of
Home Loans that were originated by the Seller pursuant to expanded
underwriting guidelines. These guidelines were established to conform to the
requirements of certain third party investors, and in certain instances may
result in more stringent and in other instances less stringent underwriting
requirements than under the Seller's general underwriting guidelines.
Accordingly, certain Home Loans included in the Home Loan Pool may be of a
different credit quality and have different home loan characteristics than
other Home Loans.
In certain cases, the Home Loans fall outside the Seller's
underwriting guidelines due to various documentation issues and/or credit
limitations. However, to the extent that the expanded underwriting guidelines
were followed, compensating factors associated with the Home Loan or the
borrower were noted which, in the Seller's judgment, outweighed the deviation
from the Seller's general underwriting guidelines. To the extent that certain
Home Loans were originated by the Seller under less stringent underwriting
guidelines, such Home Loans may be more likely to experience higher rates of
delinquencies, defaults and losses than those Home Loans originated pursuant
to more stringent underwriting guidelines.
The Seller's underwriting requirements for certain types of home
loans may change from time to time, which in certain instances may result in
more stringent and in other instances less stringent underwriting
requirements. Depending upon the date on which the Home Loans were originated
or purchased by the Seller, Home Loans included in the Home Loan Pool may have
been originated or purchased by the Seller under different underwriting
standards, and accordingly, some Home Loans included in the Home Loan Pool may
be of a different credit quality and have different characteristics than other
Home Loans. Furthermore, to the extent that certain Home Loans were originated
or purchased by the Seller under less stringent underwriting standards, such
Home Loans are more likely to experience higher rates of delinquencies,
defaults and losses than those Home Loans originated or purchased under more
stringent underwriting standards.
THE HOME LOAN POOL
GENERAL
The "Home Loan Pool" will consist of the home loans (the "Home Loans"
) conveyed to the Trust pursuant to the Trust Agreement. The Home Loans will
consist of home loans for which the related net proceeds were used to finance
(i) property improvements, (ii) debt consolidation, or (iii) a combination of
property improvements, debt consolidation, cash-out or other consumer
purposes. Substantially all of the Mortgages for the Home Loans will be junior
in priority to one or more senior liens on the related Mortgaged Properties,
which will consist primarily of owner-occupied single family residences.
Substantially all of the Home Loans will be secured by liens on Mortgaged
Properties in which the borrowers have little or no equity (I.E., the related
Original Combined Loan-to-Value Ratios approach or exceed 100%).
"Original Combined Loan-to-Value Ratio" means, with respect to any
Home Loan, the fraction, expressed as a percentage, the numerator of which is
the principal balance of such Home Loan at origination plus, in the case of a
Home Loan secured by a junior lien, the aggregate outstanding principal
balance of all other mortgage loans on such Mortgaged Property on the date of
origination of such Home Loan, and the denominator of which is the appraised
or stated value of the related Mortgaged Property at the time of origination
of such Home Loan.
Generally, the Home Loans will have been originated or acquired by
the Seller in one of three ways: (i) the wholesale purchase of home loans, on
a flow basis, originated by unaffiliated lenders, as correspondents
("correspondent originations"), including delegated underwriting
correspondents; (ii) the origination of home loans directly to consumers,
including but not limited to solicitations through advertising and
telemarketing and referrals from home improvement contractors ("direct
originations"); or (iii) the purchase, on a bulk basis, of home loan
portfolios originated by other unaffiliated lenders ("portfolio
acquisitions").
FOR A DESCRIPTION OF THE UNDERWRITING CRITERIA APPLICABLE TO THE HOME
LOANS, SEE "THE SELLER--UNDERWRITING CRITERIA" HEREIN. ALL OF THE HOME LOANs
WILL HAVE BEEN ORIGINATED OR ACQUIRED BY THE TRANSFEROR AND SOLD BY THE
TRANSFEROR TO THE DEPOSITOR AND, PURSUANT TO THE TRUST AGREEMENT, THE
DEPOSITOR WILL TRANSFER THE HOME LOANS TO THE TRUST. PURSUANT TO THE
INDENTURE, THE TRUST WILL PLEDGE AND ASSIGN THE HOME LOANS TO THE INDENTURE
TRUSTEE FOR THE BENEFIT OF THE NOTEHOLDERS. THE TRUST WILL BE ENTITLED TO ALL
PAYMENTS OF INTEREST AND PRINCIPAL AND ALL PROCEEDS RECEIVED IN RESPECT OF THE
HOME LOANS ON OR AFTER THE CUT-OFF DATE, SUBJECT TO THE LIEN OF THE INDENTURE.
ASSIGNMENT OF tHE HOME LOANS
On or prior to the date the Notes are issued, pursuant to the Home
Loan Sale Agreement, the Seller will sell each Home Loan (together with all
right, title and interest in and to all payments of principal and interest
received in respect of the Home Loans on and after the Cut-off Date) to the
Transferor, and the Transferor will in turn convey such Home Loans (together
with such rights to payments received in respect of such Home Loans) to the
Depositor. Pursuant to the Trust Agreement, the Depositor will then convey
such Home Loans (together with such rights to payments and its rights under
the Home Loan Sale Agreement) to the Trust.
At the time of issuance of the Notes, the Trust will pledge to the
Indenture Trustee for the benefit of the Noteholders and the Note Insurer all
of the Trust's right, title and interest in and to the Home Loans, including,
all principal and interest received on each such Home Loan on and after the
Cut-off Date, together with its right, title and interest in and to the
proceeds of any related insurance policies received after the issuance of the
Notes. The Indenture Trustee, concurrently with such assignment, will
authenticate and deliver the Notes at the direction of the Trust in exchange
for, among other things, the Home Loans.
The Indenture will require the Trust to deliver to the Custodian the
Mortgage Notes relating to the Home Loans, endorsed without recourse to the
Indenture Trustee, the related Mortgages with evidence of recording thereon,
the title policies with respect to the related Mortgaged Properties, all
intervening mortgage assignments, if applicable, and certain other documents
relating to the Home Loans (the "Mortgage Files"). The Seller will be required
to cause to be prepared and recorded, at the expense of the Seller and within
the time period specified in the Indenture (or, if original recording
information is unavailable, within such later period as is permitted by the
Indenture), assignments of the Mortgages from the Seller to the Indenture
Trustee.
The Custodian will review the Mortgage Files delivered to it and if
any document required to be included in any Mortgage File is found to be
missing or to be defective in any material respect and such defect is not
cured within 60 days following notification thereof to the Servicer, the
Indenture Trustee, the Note Insurer, the Transferor and the Seller by the
Custodian, the Seller will be required to remove the related Home Loan from
the Home Loan Pool in the manner described below.
In connection with the transfer of the Home Loans to the Transferor,
the Seller will make certain representations and warranties to the Transferor
and the Depositor in the Home Loan Sale Agreement as to the accuracy in all
material respects of the information set forth on a schedule identifying and
describing each Home Loan. In addition, the Seller will make certain other
representations and warranties to the Transferor and the Depositor in the Home
Loan Sale Agreement regarding the Home Loans, including, for instance, that
each Home Loan, at its origination, complied in all material respects with
applicable state and federal laws, that each mortgage is a valid lien on the
related Mortgaged Property, that, as of the Cut-off Date, no Home Loan was
more than 30 days past due, that each Mortgaged Property consists of a one- to
four-family residential property, manufactured housing, townhouse, unit in a
condominium or planned unit development, that the Seller had a good title to
each Home Loan prior to transfer and that the Seller was authorized to
originate each Home Loan. The rights to enforce remedies for breaches of such
representations and warranties in the Home Loan Sale Agreement against the
Seller will be assigned by the Depositor to the Trust pursuant to the Trust
Agreement, and then by the Trust to the Indenture Trustee pursuant to the
Indenture.
If with respect to any Home Loan (1) a defect in any document
constituting a part of the related Mortgage File remains uncured within the
period specified above and materially and adversely affects the value of any
such Home Loan or materially and adversely affects the interest of the
Indenture Trustee, the Noteholders or the Note Insurer therein or (2) a breach
of any representation or warranty made by the Seller relating to such Home
Loan occurs and such breach materially and adversely affects the value of any
such Home Loan or materially and adversely affects the interests of the
Indenture Trustee, the Noteholders or the Note Insurer therein, the Seller
will be required to remove the related Home Loan (any such Home Loan, a
"Defective Home Loan") from the Home Loan Pool by remitting to the Indenture
Trustee an amount equal to the Principal Balance of such Defective Home Loan
together with interest accruing at the Mortgage Rate (net of the applicable
Servicing Fee rate) on such Defective Home Loan from the date interest was
last paid by the related borrower to the end of the Collection Period
immediately preceding the related Deposit Date, less any payments received
during the related Collection Period in respect of such Defective Home Loan
(the "Release Price"). Upon deposit of the Release Price in the Note Account
(as hereinafter defined) and receipt by the Indenture Trustee and the Note
Insurer of written notification of any such removal, the Indenture Trustee
shall execute and deliver an instrument of transfer or assignment necessary to
vest legal and beneficial ownership of such Defective Home Loan (including any
property acquired in respect thereof or proceeds of any insurance policy with
respect thereto) in the Depositor and release such Defective Home Loan from
the lien of the Indenture.
The obligation of the Seller to cure or remove any Home Loan as
described above will constitute the sole remedy available to Noteholders, the
Note Insurer (with certain exceptions) or the Indenture Trustee for a
Defective Home Loan.
PAYMENTS ON THE HOME LOANS
The Home Loans provide for a schedule of payments that will be, if
timely paid, sufficient to amortize fully the principal balance of the Home
Loans on or before their maturity date. The Home Loans have scheduled monthly
payment dates that occur throughout each month. Each Home Loan bears interest
at a fixed rate (the "Home Loan Rate"). Interest on the Home Loans will accrue
under an "actuarial interest" method. No Home Loan provides for deferred
interest or negative amortization.
The actuarial interest method provides that interest is charged and
payments are due as of a scheduled day each month that is fixed at the time of
origination, and payments received after a grace period following such
scheduled day are subject to late charges. A scheduled payment on such a Home
Loan received either earlier or later than the scheduled due date thereof will
not affect the amortization schedule or the relative application of such
payment to principal and interest in respect of such Home Loan.
CHARACTERISTICS OF HOME LOANS
Set forth below is certain statistical information regarding
characteristics of the Home Loans expected to be included in the Home Loan
Pool as of the date of this Prospects Supplement. Prior to the Closing Date,
the Transferor may remove any of the Home Loans intended for inclusion in the
Home Loan Pool, substitute comparable home loans therefor, or add comparable
home loans thereto; provided, however, that the aggregate Principal Balances
of Home Loans so removed, replaced or added will not exceed 5% of the Cut-off
Date Pool Principal Balance. As a result, the statistical information
presented below regarding the characteristics of the Home Loans expected to be
included in the Home Loan Pool may vary in certain respects from comparable
information based on the actual composition of the Home Loan Pool at the
Closing Date. A schedule of the Home Loans included in the Home Loan Pool as
of the Closing Date will be attached to the Trust Agreement.
The Home Loans expected to be included in the Home Loan Pool will
consist of approximately 4,975 home loans having a Cut-off Date Pool Principal
Balance of approximately $182,598,310. Except as provided above, the Home
Loans are expected to have the approximate characteristics set forth in the
tables below. The sums of the amounts and percentages in the following tables
may not equal the totals shown due to rounding.
Wherever reference is made in this Prospectus Supplement to an amount
or a percentage of the Home Loans, such amount or percentage is determined
(unless otherwise specified) on the basis of the Cut-off Date Pool Principal
Balance. Numerical entries in the following tables may not sum to the
indicated totals due to rounding.
<TABLE>
<CAPTION>
HOME LOAN RATES(1)
Percent of
Number of Home Aggregate Cut-off Date Cut-off Date
Range of Home Loan Rates (%) Loans Principal Balances Pool Principal Balance
- ---------------------------------------- -------------- ---------------------- ----------------------
<S> <C> <C> <C>
9.500 - 10.000......................... 12 $ 407,910.34 0.22%
10.001 - 11.000......................... 79 3,030,622.51 1.66
11.001 - 12.000......................... 922 38,032,663.29 20.83
12.001 - 13.000......................... 1,460 55,767,319.86 30.54
13.001 - 14.000......................... 1,473 52,707,148.78 28.87
14.001 - 15.000......................... 662 21,970,132.43 12.03
15.001 - 16.000......................... 293 8,743,361.43 4.79
16.001 - 17.000......................... 66 1,734,566.36 0.95
17.001 - 18.000......................... 7 179,604.79 0.10
18.001 - 18.500......................... 1 24,979.74 0.01
- ---------------------------------------- -------------- ---------------------- ----------------------
TOTAL................................... 4,975 $ 182,598,309.53 100.00%
======================================== ============== ====================== ======================
</TABLE>
(1) The weighted average Home Loan Rate of the Home Loans as of the Cut-off
Date was approximately 13.174% per annum.
<TABLE>
<CAPTION>
CUT-OFF DATE PRINCIPAL BALANCES(1)
Percent of
Range of Cut-off Date Number of Home Aggregate Cut-off Date Cut-off Date
Principal Balances ($) Loans Principal Balances Pool Principal Balance
- ---------------------------------------- -------------- ---------------------- ----------------------
<S> <C> <C> <C>
Up to 10,000............................ 18 $ 169,666.63 0.09%
10,001 - 20,000......................... 481 8,201,420.18 4.49
20,001 - 30,000......................... 1,319 34,472,088.37 18.88
30,001 - 40,000......................... 1,656 58,379,404.98 31.97
40,001 - 50,000......................... 768 35,154,478.02 19.25
50,001 - 60,000......................... 389 21,701,465.84 11.88
60,001 - 70,000......................... 193 12,646,120.27 6.93
70,001 - 80,000......................... 111 8,245,204.22 4.52
80,001 - 90,000......................... 22 1,864,563.86 1.02
90,001 - 99,953......................... 18 1,763,897.16 0.97
- ---------------------------------------- -------------- ---------------------- ----------------------
TOTAL................................... 4,975 $ 182,598,309.53 100.00%
======================================== ============== ====================== ======================
</TABLE>
(1) The average principal balance of the Home Loans as of the Cut-off Date
was $36,703.18.
<TABLE>
<CAPTION>
ORIGINAL HOME LOAN PRINCIPAL BALANCES(1)
Percent of
Range of Principal Balances Number of Home Aggregate Cut-off Date Cut-off Date
at Origination ($) Loans Principal Balances Principal Balance
- ---------------------------------------- -------------- ---------------------- ----------------------
<S> <C> <C> <C>
Up to 10,000............................ 16 $ 156,611.29 0.09%
10,001 - 20,000....................... 477 8,097,096.11 4.43
20,001 - 30,000....................... 1,314 34,270,734.39 18.77
30,001 - 40,000....................... 1,661 58,461,227.48 32.02
40,001 - 50,000....................... 770 35,194,759.63 19.27
50,001 - 60,000....................... 390 21,719,637.13 11.89
60,001 - 70,000....................... 196 12,824,578.26 7.02
70,001 - 80,000....................... 111 8,245,204.22 4.52
80,001 - 90,000....................... 22 1,864,563.86 1.02
90,001 - 100,000........................ 18 1,763,897.16 0.97
- ---------------------------------------- -------------- ---------------------- ----------------------
TOTAL................................... 4,975 $ 182,598,309.53 100.00%
======================================== ============== ====================== ======================
</TABLE>
(1) The average principal balance of the Home Loans at origination was
approximately $36,912.32.
<TABLE>
<CAPTION>
ORIGINAL HOME LOAN TERMS(1)
Percent of
Number of Home Aggregate Cut-off Date Cut-off Date
Original Terms in Months Loans Principal Balances Pool Principal Balance
- ---------------------------------------- -------------- ---------------------- ----------------------
<S> <C> <C> <C>
60..................................... 12 $ 362,060.36 0.20%
72..................................... 5 146,269.00 0.08
84..................................... 6 173,781.86 0.10
96..................................... 3 62,300.93 0.03
120..................................... 214 6,430,537.31 3.52
132..................................... 2 64,949.72 0.04
144..................................... 5 110,143.49 0.06
167..................................... 1 28,301.97 0.02
173..................................... 1 22,658.33 0.01
174..................................... 1 34,871.13 0.02
178..................................... 1 39,866.83 0.02
180..................................... 1,761 58,510,302.74 32.04
192..................................... 1 21,806.99 0.01
204..................................... 1 61,280.02 0.03
216..................................... 1 18,581.86 0.01
228..................................... 1 44,924.63 0.02
240..................................... 855 31,706,268.36 17.36
300..................................... 2,102 84,659,613.46 46.36
360 2 99,790.54 0.05
- ---------------------------------------- -------------- ---------------------- ----------------------
TOTAL..................................... 4,975 $ 182,598,309.53 100.00%
======================================== ============== ====================== ======================
</TABLE>
(1) The weighted average original term of the Home Loans was approximately
244 months.
<PAGE>
<TABLE>
<CAPTION>
REMAINING TERMS TO STATED MATURITY(1)
Percent of
Range of Remaining Terms to Stated Number of Home Aggregate Cut-off Date Cut-off Date
Maturity (Months) Loans Principal Balances Pool Principal Balance
- ------------------------------------------ -------------- ---------------------- ----------------------
<S> <C> <C> <C>
53 - 60 months.......................... 12 $ 362,060.36 0.20%
61 - 90.........................,....... 11 320,050.86 0.18
91 - 120................................. 217 6,492,838.24 3.56
121 - 150................................. 7 175,093.21 0.10
151 - 180................................. 1,765 58,636,001.00 32.11
181 - 210................................. 2 83,087.01 0.05
211 - 240................................. 857 31,769,774.85 17.40
271 - 300................................. 2,102 84,659,613.46 46.36
331 - 354................................. 2 99,790.54 0.05
- ------------------------------------------ -------------- ---------------------- ----------------------
TOTAL .................................... 4,975 $ 182,598,309.53 100.00%
========================================== ============== ====================== ======================
</TABLE>
(1) The weighted average term to stated maturity of the Home Loans as of
the Cut-off Date was approximately 240 months
<TABLE>
<CAPTION>
MONTHS SINCE ORIGINATION(1)
Percent of
Number of Home Aggregate Cut-off Date Cut-off Date
Months Since Origination Loans Principal Balances Pool Principal Balance
- ------------------------------------------ -------------- ---------------------- ----------------------
<S> <C> <C> <C>
0 months................................. 110 $ 4,451,216.04 2.44%
1........................................ 637 24,019,980.46 13.15
2........................................ 1,333 46,613,588.14 25.53
3........................................ 1,123 40,499,615.66 22.18
4........................................ 654 24,617,118.53 13.48
5........................................ 508 19,934,712.38 10.92
6........................................ 180 7,055,348.88 3.86
7........................................ 205 7,775,245.91 4.26
8........................................ 81 2,629,335.84 1.44
9........................................ 62 2,147,965.96 1.18
10........................................ 46 1,615,369.74 0.88
11........................................ 17 606,674.42 0.33
12........................................ 7 326,164.06 0.18
13........................................ 5 137,967.82 0.08
14........................................ 1 23,323.58 0.01
16........................................ 2 56,059.84 0.03
17........................................ 1 6,898.19 0.00
19........................................ 2 52,064.01 0.03
24........................................ 1 29,660.07 0.02
- ------------------------------------------ -------------- ---------------------- ----------------------
TOTAL..................................... 4,975 $ 182,598,309.53 100.00%
========================================== ============== ====================== ======================
</TABLE>
(1) The weighted average number of months since origination of the Home
Loans as of the Cut-off Date was approximately 3 months.
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC CONCENTRATION(1)
Percent of
Number of Home Aggregate Cut-off Date Cut-off Date
Jurisdiction Loans Principal Balances Pool Principal Balance
- ------------------------------------------ -------------- ---------------------- ----------------------
<S> <C> <C> <C>
Alabama.................................. 190 $ 5,901,388.23 3.23%
Alaska................................... 3 131,294.81 0.07
Arizona.................................. 71 2,374,487.03 1.30
Arkansas................................. 44 1,515,570.87 0.83
California............................... 455 17,320,571.44 9.49
Colorado................................. 105 3,725,470.11 2.04
Connecticut.............................. 45 1,764,427.11 0.97
Delaware................................. 33 1,377,189.11 0.75
District of Columbia..................... 12 458,543.95 0.25
Florida.................................. 292 9,652,268.38 5.29
Georgia.................................. 191 6,716,912.78 3.68
Hawaii................................... 17 831,905.98 0.46
Idaho.................................... 37 1,208,076.92 0.66
Illinois................................. 185 7,633,003.62 4.18
Indiana.................................. 105 3,575,849.06 1.96
Iowa..................................... 24 931,615.33 0.51
Kansas................................... 56 1,707,138.13 0.93
Kentucky................................. 47 1,560,229.31 0.85
Louisiana................................ 44 1,476,955.00 0.81
Maine.................................... 5 144,706.96 0.08
Maryland................................. 395 15,431,802.86 8.45
Massachusetts............................ 96 3,893,265.01 2.13
Michigan................................. 86 3,177,819.80 1.74
Minnesota................................ 79 2,999,898.40 1.64
Mississippi.............................. 19 627,356.37 0.34
Missouri................................. 79 2,601,810.12 1.42
Montana.................................. 10 287,298.94 0.16
Nebraska................................. 23 741,123.68 0.41
Nevada................................... 45 1,468,420.93 0.80
New Hampshire............................ 12 526,761.39 0.29
New Jersey............................... 168 7,042,446.62 3.86
New Mexico............................... 15 526,089.42 0.29
New York................................. 198 7,628,179.23 4.18
North Carolina........................... 198 6,879,884.31 3.77
North Dakota............................. 3 109,098.59 0.06
Ohio..................................... 209 7,563,079.75 4.14
Oklahoma................................. 110 3,378,733.88 1.85
Oregon................................... 48 1,782,083.56 0.98
Pennsylvania............................. 311 12,157,490.56 6.66
Rhode Island............................. 34 1,223,254.28 0.67
South Carolina........................... 130 4,643,872.02 2.54
South Dakota............................. 4 134,982.68 0.07
Tennessee................................ 65 2,213,058.03 1.21
Utah..................................... 61 2,133,654.80 1.17
Vermont.................................. 8 292,200.39 0.16
Virginia................................. 382 13,815,315.55 7.57
Washington............................... 132 5,580,444.96 3.06
West Virginia............................ 23 735,339.72 0.40
Wisconsin................................ 64 2,765,721.46 1.51
Wyoming ................................. 7 230,218.09 0.13
- ----------------------------------------- -------------- ---------------------- ----------------------
TOTAL.................................... 4,975 $ 182,598,309.53 100.00%
========================================= ============== ====================== ======================
</TABLE>
(1) Based on the residence of the borrower as of the Cut-off Date.
CREDIT SCORES(1)
<TABLE>
<CAPTION>
Percent of
Number of Home Aggregate Cut-off Date Cut-off Date
Range of Credit Scores Loans Principal Balances Pool Principal Balance
- ----------------------------------------- -------------- ---------------------- ----------------------
<S> <C> <C> <C>
620 to 620........................ 16 $ 504,427.24 0.28%
621 to 640........................ 469 14,082,637.25 7.71
641 to 660........................ 1,124 37,630,738.24 20.61
661 to 680........................ 1,084 41,900,437.75 22.95
681 to 700........................ 937 38,066,714.19 20.85
701 to 720........................ 710 26,555,748.96 14.54
721 to 740........................ 374 14,276,727.43 7.82
741 to 760........................ 160 6,217,765.39 3.41
761 to 780........................ 84 2,672,945.23 1.46
781 to 800........................ 15 593,093.02 0.32
greater than 800 2 97,074.83 0.05
- ----------------------------------------- -------------- ---------------------- ----------------------
TOTAL ................................. $4,975 $ 182,598,309.53 100.00%
========================================= ============== ====================== ======================
</TABLE>
(1) The weighted average Credit Score of the Home Loans as of the Cut-off
Date was approximately 682.
<TABLE>
PROPERTY TYPE
<CAPTION>
Percent of
Number of Home Aggregate Cut-off Date Cut-off Date
Property Type Loans Principal Balances Pool Principal Balance
- ----------------------------------------- -------------- ---------------------- ----------------------
<S> <C> <C> <C>
Condominium.............................. 251 $ 8,624,281.75 4.72%
Duplex................................... 29 1,162,581.98 0.64
Manufactured Housing..................... 19 728,172.00 0.40
Multi-Family............................. 5 167,183.57 0.09
Planned Unit Development................. 17 631,038.68 0.35
Single Family Residence.................. 4,653 171,230,051.55 93.77
Townhouse................................ 1 55,000.00 0.03
- ----------------------------------------- -------------- ---------------------- ----------------------
TOTAL 4,975 $ 182,598,309.53 100.00%
========================================= ============== ====================== ======================
</TABLE>
<TABLE>
DEBT-TO-INCOME RATIOS(1)
<CAPTION>
Percent of
Range of Number of Home Aggregate Cut-off Date Cut-off Date
Debt-to-Income Ratios (%) Loans Principal Balances Pool Principal Balance
- ----------------------------------------- -------------- ---------------------- ----------------------
<S> <C> <C> <C>
Up to 20.00.............................. 50 $ 1,729,455.87 0.95%
20.01 to 25.00........................... 184 6,163,832.96 3.38
25.01 to 30.00........................... 463 15,623,557.21 8.56
30.01 to 35.00........................... 861 30,887,852.49 16.92
35.01 to 40.00........................... 1,265 45,262,822.87 24.79
40.01 to 45.00........................... 1,421 54,038,982.72 29.59
45.01 to 50.00........................... 728 28,787,969.48 15.77
50.01 to 55.00........................... 1 29,133.64 0.02
55.01 to 60.00........................... 1 22,794.69 0.01
60.01 to 62.00........................... 1 51,907.60 0.03
- ----------------------------------------- -------------- ---------------------- ----------------------
TOTAL.................................... 4,975 $ 182,598,309.53 100.00%
========================================= ============== ====================== ======================
</TABLE>
(1) The weighted average debt-to-income ratio of the Home Loans as of the
Cut-off Date was approximately 38.49%. Debt-to-income ratios are
computed based on information contained in the borrower's home loan
application, and are not updated to the Cut-off Date.
ORIGINAL COMBINED LOAN TO VALUE RATIOS(1)
<TABLE>
<CAPTION>
Percent of
Range of Original Number of Home Aggregate Cut-off Date Cut-off Date
Combined Loan to Value Ratios (%) Loans Principal Balances Pool Principal Balance
- ----------------------------------------- -------------- ---------------------- ----------------------
<S> <C> <C> <C>
Up to 60.00.............................. 20 $ 602,401.20 0.33%
60.01 - 70.00.......................... 5 136,257.89 0.07
70.01 - 80.00.......................... 64 2,122,360.71 1.16
80.01 - 90.00.......................... 154 4,627,266.44 2.53
90.01 - 100.00.......................... 751 23,960,441.38 13.12
100.01 - 105.00.......................... 297 9,601,250.41 5.26
105.01 - 110.00.......................... 476 16,454,332.62 9.01
110.01 - 115.00.......................... 630 23,392,539.20 12.81
115.01 - 120.00.......................... 785 29,802,473.46 16.32
120.01 - 125.00.......................... 1,618 63,916,815.68 35.00
125.01 - 130.00.......................... 163 7,312,492.93 4.00
130.01 - 135.00.......................... 12 669,677.61 0.37
- ----------------------------------------- -------------- ---------------------- ----------------------
TOTAL.................................... 4,975 $ 182,598,309.53 100.00%
========================================= ============== ====================== ======================
</TABLE>
(1) The weighted average Original Combined Loan-To-Value Ratio of the Home
Loans as of the Cut-off Date was approximately 113.45%
<PAGE>
THE SERVICER
GENERAL
City Mortgage Services ("CMS" or the "Servicer"), a division of City
National Bank of West Virginia, located at 25 Gatewater Road, Charleston, West
Virginia 25313, is a specialty servicing company with operations in
Charleston, West Virginia, Costa Mesa, California and Dallas, Texas. CMS
focuses on servicing, niche home loan products and related secondary market
activities. CMS' servicing systems are designed to the specific requirements
of sub-prime mortgage loans and non-conforming mortgage loans, home
improvement and home equity home loans, manufactured housing, installment home
loans and other related products. CMS services home loans nationwide for
multiple investors in public and privately placed securitizations.
SERVICING EXPERIENCE
As of September 30, 1998, the Servicer had a total mortgage loan
servicing, portfolio of 81,000 accounts approximating $1.9 billion in
principal balance. The Servicer's servicing portfolio includes both home loans
serviced for the account of City Holding Company and its affiliates and home
loans serviced for the accounts of others. Less than 5% of the Servicer's
servicing portfolio represents first lien residential mortgage loans. The
balance of the Servicer's servicing portfolio is composed of junior lien
mortgage loans, including FHA Title I loans, home improvement loans, home
equity loans, and debt consolidation loans. In connection with a strategic
investment by the Seller in Mego Mortgage Corporation ("Mego") that closed in
June 1998, the Servicer also purchased the right to service substantially all
of Mego's existing consumer mortgage loan portfolio and the exclusive right to
service up to an additional $1 billion of mortgage loans originated or
acquired by Mego in the future. Transfer of the servicing of the existing Mego
portfolio to the Servicer occurred on August 1, 1998. The Servicer delinquency
experience table set forth below, reflecting its Total Servicing Portfolio (as
defined below) for the period ended September 30, 1998, includes the Mego
portfolio.
DELINQUENCY EXPERIENCE
The tables that follow present the delinquency experience of the
Servicer's servicing portfolio (the "Total Servicing Portfolio"), and the
delinquency experience to date with respect to the four previous private
securitizations sponsored by the Seller of home loans originated or
underwritten by the Seller since December 1997 under its City 125 underwriting
guidelines (the "High LTV Home Loan Servicing Portfolio").
The home loans included in the High LTV Loan Servicing Portfolio
generally represent home loans with characteristics similar to the Home Loans
included in the Home Loan Pool and have been generally underwritten by the
Seller according to the Seller's underwriting guidelines. Substantially all of
the home loans in the High LTV Loan Servicing Portfolio were originated within
the past eighteen months and, therefore, the statistics shown in the following
tables generally represent the delinquency experience of such portfolio for
that period. The aggregate delinquency experience for the home loans in the
High LTV Loan Servicing Portfolio may increase as the home loans become more
seasoned and may vary significantly over the life of the portfolio.
The delinquency experience of the Servicer set forth in the following
tables may not be indicative of the expected performance of the Home Loans,
and the information in the tables below is not intended to predict the
expected delinquency experience of the Home Loans or of past, current or
future pools of home loans serviced by the Servicer.
CITY MORTGAGE SERVICES SERVICER DELINQUENCY EXPERIENCE
TOTAL SERVICING PORTFOLIO
December 31, 1997 September 30, 1998
------------------------- ---------------------------
Percent Percent
Delinquency Outstanding of Total Outstanding of Total
Status Balance Balance Balance Balance
- ----------- -------------- --------- --------------- ---------
Current $1,074,692,233 85.74% $1,612,050,289 85.34%
30 Days 47,338,502 3.78% 72,790,765 3.85%
60 Days 18,950,723 1.51% 27,060,732 1.43%
90 Days 14,545,849 1.16% 16,194,821 0.86%
120 Days 46,031,515 3.67% 64,406,423 3.41%
Home Loans
in
Liquidation
Foreclosure,
Litigation
and Claims
Processing 51,896,492 4.14% 96,499,008 5.11%
-------------- --------- --------------- ---------
TOTAL $1,253,455,314 100.00% $1,889,002,038 100.00%
============== ========= =============== =========
HIGH LTV LOAN SERVICING PORTFOLIO
December 31, 1997 September 30, 1998
------------------------- ---------------------------
Percent Percent
Delinquency Outstanding of Total Outstanding of Total
Status Balance Balance Balance Balance
- ----------- -------------- --------- --------------- ---------
Current $35,014,998 100.00% $302,753,138 98.58%
30 Days 0.00% 2,465,562 0.80%
60 Days 0.00% 455,594 0.15%
90 Days 0.00% 438,261 0.15%
120 Days 0.00% 427,160 0.14%
Home Loans
in
Liquidation
Foreclosure,
Litigation
and Claims
Processing 0.00% 561,890 0.18%
-------------- --------- --------------- ---------
TOTAL $35,014,998 100.00% $307,101,605 100.00
============== ========= =============== =========
YEAR 2000 COMPLIANCE
City National Bank of West Virginia and Norwest Bank Minnesota,
National Association is each heavily dependent upon complex computer systems
for all phases of its operations. The "Year 2000" issue -- common to most
corporations -- concerns the inability of certain software and databases to
properly recognize date sensitive information beginning January 1, 2000. This
problem could result in a disruption to either company's operations, if not
corrected. Financial service institutions are particularly sensitive to such
disruptions. City National Bank of West Virginia and Norwest Bank Minnesota,
National Association each use third party vendors for certain of its systems.
As a result, much of each company's remediation efforts relate to monitoring
and communicating with those vendors. Each of City National Bank of West
Virginia and Norwest Bank Minnesota, National Association has assessed and
developed a detailed strategy to prevent or at least minimize problems related
to the Year 2000 issue. Resources have been committed and implementation has
begun to modify the affected information systems of each company. The Office
of the Comptroller of the Currency and the Federal Financial Institutions
Examination Council have recommended that all systems reprogramming efforts of
financial institutions such as City National Bank of West Virginia and Norwest
Bank Minnesota, National Association be completed by December 31, 1998 to
allow for sufficient testing and implementation. Both companies intend to meet
or exceed this recommendation. However, no assurance can be given that any or
all of the systems discussed above, including the systems of City National
Bank of West Virginia and Norwest Bank Minnesota, National Association and
their respective third party vendors, are or will be Year 2000 compliant or
that the costs required to address Year 2000 issues will not adversely affect
the business, financial condition or results of operations of the respective
companies or the performance of their respective obligations under the various
transaction documents
THE MASTER SERVICER, CUSTODIAN AND NOTE ADMINISTRATOR
The information set forth in the following paragraph has been
provided by Norwest Bank Minnesota, National Association ("Norwest") and
neither the Trust, the Depositor nor the Underwriter makes any representations
or warranties as to the accuracy or completeness of such information.
Norwest is a national banking association, with executive offices
located at Sixth Street and Marquette Avenue, Minneapolis, Minnesota 55479 and
master servicing offices located at 11000 Broken Land Parkway, Columbia,
Maryland 21044. If the Servicer is terminated as a result of a Servicer Event
of Default, the Master Servicer (or the Indenture Trustee, in limited
circumstances) shall be obligated to succeed to the obligations of the
Servicer or to appoint a successor Servicer. If the Master Servicer is
terminated pursuant to the Servicing Agreement as a result of a failure to
perform its obligations thereunder, the Indenture Trustee shall be obligated
to succeed to the obligations of the Master Servicer or to appoint a successor
Master Servicer with the prior consent of the Note Insurer.
<PAGE>
SERVICING OF THE HOME LOANS
GENERAL
The Servicer will service and administer the Home Loans in accordance
with the policies, procedures and practices customarily employed by the
Servicer in servicing other comparable home loans and pursuant to the
provisions of the servicing agreement dated as of November 1, 1998 (the
"Servicing Agreement") among the Trust, the Servicer, the Indenture Trustee
and the Master Servicer. The Servicer will not amend or modify in any material
respect its policies, procedures and practices with respect to the Home Loans
(other than as required by applicable laws and regulations) without the prior
consent of the Note Insurer.
Generally, servicing includes, but is not limited to,
post-origination home loan processing, customer service, remittance handling,
collections and liquidations. Consistent with the servicing standard described
in the foregoing paragraph, the Servicer, in its discretion, may (a) waive any
assumption fees, late payment charges, charges for checks returned for
insufficient funds or other fees that may be collected in the ordinary course
of servicing a Home Loan, (b) arrange a schedule for the payment of delinquent
payments on the related Home Loan, subject to conditions set forth in the
Servicing Agreement, if a borrower is in default or about to be in default
because of such borrower's financial condition or (c) modify monthly payments
on Home Loans in accordance with limitations imposed by the Servicing
Agreement and subject to the Relief Act (as defined herein); provided,
however, the Servicer may not, without the prior consent of the Note Insurer,
permit any waiver, modification or variance of a Home Loan which would (i)
change the Mortgage Rate, (ii) forgive the payment of any principal or
interest, (iii) lessen the lien priority, (iv) extend the final maturity date
on a Home Loan past eighteen months prior to the maturity date of the Notes,
in any case except to the extent required under the Relief Act, or (v) modify
any monthly payment to an amount less than the monthly interest accrual for
such Home Loan, and provided, further, that the Servicer may not modify, waive
or amend any provisions of any Home Loans if the aggregate Principal Balances
of modified Home Loans would exceed 3% of the Cut-off Date Pool Principal
Balance without the consent of the Note Insurer. The Servicer, acting as agent
for the Indenture Trustee, will not consent to the subsequent placement of a
deed of trust or mortgage, as applicable, on any Mortgaged Property that is of
equal or higher priority to that of the lien securing the related Home Loan
unless such Home Loan is prepaid in full and thereby removed from the Home
Loan Pool.
CUSTOMARY SERVICING PROCEDURES
The procedures of the Servicer with respect to day to day servicing
of the Home Loans may vary considerably depending on the particular Home Loan,
the Mortgaged Property, the borrower, the availability of an acceptable party
to assume a Home Loan and the laws of the jurisdiction in which the Mortgaged
Property is located. Generally, it is the current practice of the Servicer to
send borrowers coupon books periodically or monthly statements reflecting
their monthly payments and the due dates therefor. Although borrowers
generally make home loan payments within ten to fifteen days after the due
date, if a borrower fails to pay the monthly payment within such time period,
the Servicer will commence collection efforts by notifying the borrower of the
delinquency through telephonic and written communications methods. Under the
terms of each Home Loan, the borrower agrees to pay a late charge (which the
Servicer is entitled to retain as additional servicing compensation under the
Servicing Agreement) if a monthly payment on a Home Loan is not received
within the number of days specified in the Mortgage Note after its due date.
If the Home Loan remains delinquent, the Servicer will attempt to contact the
borrower to determine the cause of the delinquency and to obtain a commitment
to cure the delinquency at the earliest possible time.
As a general matter, if efforts to obtain payment have not been
successful shortly after the due date of the next subsequently scheduled
installment, an established collection procedure using telephonic and a series
of written communications is followed. The status of the delinquency
determines the level of collection effort and methodology followed. However,
if no substantial progress has been made in obtaining delinquent monies from
the borrower, legal procedures, including foreclosure and garnishment
proceedings, will be evaluated and commenced where appropriate.
Regulations and practices regarding foreclosure vary greatly from
state to state. Generally, the Servicer will have commenced foreclosure,
collection or enforcement proceedings prior to the time when a home loan is
150 days delinquent. If the Servicer determines that purchasing a property
securing a mortgage loan will minimize the loss associated with such defaulted
home loan, the Servicer may bid at the foreclosure sale for such property or
accept a deed in lieu of foreclosure. After the Servicer converts title to a
mortgaged property into the name of the Indenture Trustee on behalf of the
Noteholders and the Note Insurer by foreclosure or deed in lieu of
foreclosure, a real estate broker is selected to market the property. Where
appropriate, the Servicer also will seek garnishment of wages once the
Servicer obtains judgment in enforcement proceedings.
THE SERVICING AGREEMENT
GENERAL
The summaries of certain provisions of the Servicing Agreement set
forth below, while complete in material respects, do not purport to be
exhaustive. For more details regarding the terms of the Servicing Agreement,
prospective investors in the Notes are advised to review the Servicing
Agreement.
Generally, the Servicer will be authorized and empowered pursuant to
the Servicing Agreement (i) to execute and deliver (or procure the execution
and delivery by the Indenture Trustee of) any and all instruments of
satisfaction or cancellation or of partial or full release or discharge and
all other comparable instruments with respect to the Home Loans and with
respect to the Mortgaged Properties and (ii) to institute foreclosure
proceedings or obtain deeds in lieu of foreclosure so as to convert title to
any Mortgaged Property in the name of the Indenture Trustee on behalf of the
Noteholders and the Note Insurer.
PAYMENTS ON HOME LOANS AND ESTAbLISHMENT OF COLLECTION ACCOUNT
The Servicer shall establish and maintain one or more accounts
(collectively, the "Collection Account") at one or more institutions meeting
the requirements set forth in the Servicing Agreement. The Collection Account,
and all amounts deposited therein from time to time, shall be part of the
Trust Estate. The Servicer will deposit into the Collection Account not later
than two business days after receipt, all payments on or in respect of the
Home Loans received from or on behalf of borrowers and all proceeds of the
Home Loans, net of Servicing Fees, certain other items of servicing
compensation, and reimbursable outstanding Servicing Advances, to the extent
the Servicer's automated system deducts such amounts prior to deposit to the
Collection Account. On or prior to each Deposit Date, funds to be remitted to
the Note Account will be remitted from the Collection Account to the Indenture
Trustee for deposit into the Note Account. Notwithstanding the foregoing,
payments and collections that do not constitute Available Funds (e.g., amounts
representing interest accrued on Home Loans in respect of any period prior to
the Cut-off Date, fees, late payment charges, prepayment charges, charges for
checks returned for insufficient funds, extension or other administrative
charges or other amounts received for application towards the payment of
taxes, insurance premiums, assessments and similar items) will not be required
to be deposited into the Collection Account. The Servicer may make withdrawals
from the Collection Account only for the following purposes: (a) to make
deposits into the Note Account as described above; (b) to pay itself any
monthly Servicing Fees and other items of servicing compensation and
investment income on Permitted Investments to the extent permitted by the
Servicing Agreement; (c) to make any Servicing Advance to the extent permitted
by the Servicing Agreement or to reimburse itself for any Servicing Advance
previously made to the extent permitted by the Servicing Agreement; (d) to
withdraw amounts that have been deposited to the Collection Account in error;
and (e) to clear and terminate the Collection Account.
INVESTMENT OF COlLECTION ACCOUNT
All or a portion of the Collection Account may be invested and
reinvested in one or more Permitted Investments bearing interest or sold at a
discount, at the Servicer's direction. The Indenture Trustee or any affiliate
thereof may be the obligor on any investment in any Collection Account which
otherwise qualifies as a Permitted Investment. No investment in the Collection
Account may mature later than the Deposit Date next succeeding the date of
investment.
The Indenture Trustee will not in any way be held liable by reason of
any insufficiency in the Collection Account resulting from any loss on any
Permitted Investment included therein (except to the extent the Indenture
Trustee is the obligor thereon).
All income or other gain from investments in the Collection Account
will be held in the Collection Account for the benefit of the Servicer and
will be subject to withdrawal from time to time as permitted by the Servicing
Agreement. Any loss resulting from such investments will be for the account of
the Servicer. The Servicer will be required to deposit the amount of any such
loss immediately upon the realization of such loss to the extent such loss
will not be offset by other income or gain from investments in the Collection
Account and then available for such application.
REALIZATION UPON DEFAULTED HOME LOANS
The Servicing Agreement will require the Servicer, acting as the
agent of the Indenture Trustee, to foreclose upon or otherwise comparably
convert to ownership in the name of the Indenture Trustee, on behalf of the
Noteholders and the Note Insurer, Mortgaged Properties securing such of the
Home Loans as come into default, as to which no satisfactory arrangements can
be made for the collection of delinquent payments and which the Servicer has
not reacquired pursuant to the option described below; provided, however, that
if the Servicer has actual knowledge or reasonably believes that any Mortgaged
Property is contaminated by hazardous or toxic wastes or substances, the
Servicer will cause an environmental inspection of the Mortgaged Property that
complies with Fannie Mae's selling and servicing guide applicable to single
family homes and its servicing procedures to be conducted. If the
environmental inspection reveals any potentially hazardous substances, the
Servicer will notify the Indenture Trustee and the Note Insurer, and the
Servicer will not foreclose or accept a deed in lieu of foreclosure on the
Mortgaged Property without the consent of the Indenture Trustee and the Note
Insurer. In connection with such foreclosure or other conversion, the Servicer
will follow such practices as it deems necessary or advisable and as are in
keeping with its general mortgage loan servicing activities; provided,
however, that the Servicer will not be required to expend its own funds in
connection with foreclosure or other conversion, correction of a default on a
senior deed of trust or restoration of any Mortgaged Property unless the
Servicer determines that such foreclosure, correction or restoration will
increase Net Liquidation Proceeds.
In servicing the Home Loans, the Servicer will be required to
determine, with respect to each defaulted Home Loan, when it has recovered,
whether through trustee's sale, foreclosure sale, collection and enforcement
actions, or otherwise, all amounts, if any, it expects to recover from or on
account of such defaulted Home Loan, whereupon such Home Loan will be charged
off and will become a Liquidated Home Loan.
ASSUMPTION Of HOME LOANS
In any case in which the Servicer becomes aware that a Mortgaged
Property has been or is about to be voluntarily conveyed by the related
borrower, the Servicer may enter into an assumption agreement with the person
to whom such property has been or is about to be conveyed, pursuant to which
such person becomes liable under the related promissory note and, to the
extent permitted by applicable law or the mortgage documents, the borrower
remains liable thereon. The Servicer may not enter into any assumption
agreement that modifies the mortgage interest rate or payment terms of the
Mortgage Note without the consent of the Note Insurer. The Servicing Agreement
will prohibit the Servicer from entering into an assumption or substitution of
liability agreement unless permitted by applicable law and unless the Servicer
determines that the assuming party would not fall within a significantly lower
credit risk category than the original borrower and such assumption or
substitution of liability agreement would not materially increase the risk of
default or delinquency on, or materially decrease the security for, such Home
Loan. Notwithstanding any of the foregoing, the Servicer will not enter into
any assumption agreement unless such assumption agreement is pursuant to its
standard servicing procedure and the Servicer would enter into such assumption
agreement with respect to a home loan in its own portfolio. Any fees collected
by the Servicer for entering into an assumption or substitution of liability
agreement will be retained by the Servicer as additional servicing
compensation.
EVIDENCE AS TO COMPLIANCE
The Servicing Agreement provides that on or before a specified date
in each year, a firm of independent public accountants will furnish a report
to the Trust, the Indenture Trustee, the Master Servicer, the Rating Agencies
and the Note Insurer to the effect that on the basis of certain procedures
substantially in conformance with the Uniform Single Attestation Program for
Mortgage Bankers ("USAP") (to the extent the procedures are applicable to the
servicing obligations set forth in the Servicing Agreement), the servicing by
or on behalf of the Servicer of home loans, and such procedures have disclosed
no exceptions or errors in records relating to the home loans serviced by the
Servicer for others which, in the opinion of such firm, such firm's required
to report under USAP, except for such exceptions as will be referred to in the
report. The Servicing Agreement will provide that the Servicer will be
required to deliver to the Trust, the Indenture Trustee, the Master Servicer,
the Rating Agencies and the Note Insurer, on or before a specified date in
each year, an annual statement signed by an officer of the Servicer to the
effect that the Servicer has fulfilled its material obligations under the
Servicing Agreement throughout the preceding year.
CERTAIN MATTERS REGARDING SERVICER'S SERVICING OBLIGATIONS
The Servicing Agreement will provide that the Servicer may not resign
from its obligations and duties as the Servicer thereunder, except upon (i)
determination that the performance of its duties or obligations under the
Servicing Agreement is no longer permissible under applicable law or
regulation or is in material conflict by reason of applicable law or
regulation with any other activities carried on by the Servicer at the date of
the Servicing Agreement and (ii) the delivery, at the Servicer's expense, of
an opinion of counsel addressed to the Trust, the Indenture Trustee, the
Master Servicer and the Note Insurer and in form and substance acceptable to
the Indenture Trustee and the Note Insurer to the effect that its duties
thereunder are no longer permissible under applicable law or regulation or are
in material conflict by reason of applicable law or regulation with any other
of its activities carried on as of the date of the Servicing Agreement. No
such resignation will become effective until the Master Servicer has appointed
a successor Servicer which has assumed the responsibilities and obligations of
the Servicer in accordance with the Servicing Agreement or the Master Servicer
has assumed the servicing obligations and duties of the Servicer under the
Servicing Agreement. In addition, the Servicing Agreement also will provide
that, notwithstanding the foregoing, the Servicer may resign upon appointment
of a successor servicer approved by the Master Servicer, the Note Insurer and
the Indenture Trustee if the rating agencies confirm such appointment will not
result in a downgrading of the ratings on the Notes.
The Servicing Agreement will also provide that neither the Servicer,
nor any of its directors, officers, employees or agents, will be liable to the
Indenture Trustee, the Trust, or the Noteholders for any action taken or for
refraining from the taking of any action by the Servicer pursuant to the
Servicing Agreement, or for errors in judgment; provided, however, that
neither the Servicer nor any such person will be protected against any
liability which would otherwise be imposed by reason of willful misfeasance,
bad faith or negligence in the performance of duties of the Servicer, or by
reason of reckless disregard of obligations and duties of the Servicer,
thereunder.
In addition, the Servicing Agreement will provide that the Servicer
will not be under any obligation to appear in, prosecute or defend any legal
action which is not incidental to its duties to service the Home Loans under
the Servicing Agreement and which in its opinion may involve it in any expense
or liability.
The Servicing Agreement will provide that any corporation or other
entity (a) into which the Servicer may be merged or consolidated, (b) that may
result from any merger, conversion or consolidation to which the Servicer
shall be a party or (c) that may succeed to all or substantially all of the
business of the Servicer, will, in any case where an assumption is not
effected by operation of law, execute an agreement of assumption to perform
every obligation of the Servicer under the Servicing Agreement, and will be
the successor to the Servicer thereunder without the execution or filing of
any document or any further act by any of the parties to the Servicing
Agreement; provided, however, that if the Servicer in any of the foregoing
cases is not the surviving entity, the surviving entity shall execute an
agreement of assumption to perform every obligation of the Servicer thereunder
and the corporation or other entity satisfies the eligibility requirements for
a successor Servicer.
SERVICER EVENTS OF DEFAULT
Events of Default under the Servicing Agreement (each, a "Servicer
Event of Default") will include (a) any failure by the Servicer to deposit in
the Collection Account or transfer to the Indenture Trustee for deposit in the
Note Account any amount required to be so deposited under the Servicing
Agreement; (b) any failure by the Servicer to duly observe or perform in any
material respect any other of its covenants or agreements in the Servicing
Agreement or so long as the Servicer and the Seller under the Home Loan Sale
Agreement are the same, the failure of the Seller to duly observe or perform
in any material respect any other of its covenants or agreements in the Home
Loan Sale Agreement, in each case which materially and adversely affects the
rights of Noteholders and continues unremedied for the applicable cure period,
if any, after the earlier of (i) the date on which the Servicer (in its
capacity as Servicer or Seller) obtains knowledge of such failure, and (ii)
the date on which written notice of such failure is given to the Servicer (in
its capacity as Servicer or Seller) by the Master Servicer or the Indenture
Trustee; (c) certain events of insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings regarding the Servicer and
certain actions by the Servicer indicating its insolvency or inability to pay
its obligations; (d) any representation or warranty made by the Servicer in
the Servicing Agreement or by the Seller in the Home Loan Sale Agreement
(other than with respect to the Home Loans) or certificate delivered by the
Seller pursuant thereto having been incorrect in any material respect as of
the time made and the circumstance in respect of which such representation and
warranty is incorrect, if capable of being cured, not having been cured within
30 days after the earlier of (i) the date on which the Servicer (in its
capacity as Servicer or Seller) obtains knowledge of such incorrectness, and
(ii) the date on which notice is given to the Servicer (in its capacity as
Servicer or Seller) by the Trust, the Indenture Trustee, the Master Servicer,
or the Note Insurer; and (e) the occurrence of delinquencies and/or losses in
respect of the Home Loans in excess of a level, and for a period of time, as
specified in the Servicing Agreement.
RIGHTS UPON SERVICER EVENTS OF DEFAULT
Upon the occurrence of a Servicer Event of Default, the Master
Servicer will be obligated to enforce the Servicing Agreement or to terminate
the Servicer at the direction of the Note Insurer (so long as no Note Insurer
Default exists and is continuing) and appoint a successor Servicer, or if it
does not, succeed to all the responsibilities, duties and liabilities of the
Servicer under the Servicing Agreement and, if it succeeds to such
responsibilities, will be entitled to such compensation as the Servicer would
have been entitled to under the Servicing Agreement. In the event that the
Master Servicer fails to appoint a successor Servicer and it is unwilling or
legally unable to act as Servicer, it may petition a court of competent
jurisdiction for the appointment of a successor Servicer. Any such successor
Servicer (other than the Master Servicer or the Indenture Trustee) must be an
established housing and home finance institution or any institution that
regularly services nonconforming residential mortgage loans, that is currently
servicing a nonconforming residential mortgage loan portfolio, that has all
licenses, permits and approvals required by applicable law and a net worth of
at least $10,000,000. The appointment of any such successor Servicer (other
than the Master Servicer or the Indenture Trustee) shall be acceptable to the
Note Insurer and shall not result in the qualification, reduction or
withdrawal of the implied rating assigned to the Notes by the Rating Agencies
(without taking into account the Insurance Policy). Pending appointment of a
successor Servicer, unless the Master Servicer is prohibited by law from so
acting, the Master Servicer shall be obligated to act as Servicer. The Master
Servicer and such successor Servicer may agree upon the servicing compensation
to be paid, which in no event may be greater than the compensation described
above.
MASTER SERVICER DEFAULT
Master Servicer Defaults will be set forth in the Servicing
Agreement. Upon the occurrence of a Master Servicer Default, the Indenture
Trustee shall, at the direction of the Note Insurer (so long as no Note
Insurer Default exists and is continuing), terminate the Master Servicer's
rights and obligations under the Servicing Agreement. Upon a termination of
the Master Servicer, the Indenture Trustee shall be obligated to succeed to
the obligations of the Master Servicer or to appoint a successor Master
Servicer with the consent of the Note Insurer.
AMENDMENTS
Subject to the prior written consent of the Note Insurer, at any time
and from time to time, without the consent of the Noteholders, the Indenture
Trustee, the Trust, the Master Servicer and the Servicer may amend the
Servicing Agreement for the purposes of (a) curing any ambiguity or affecting
or supplementing any provision of such agreement that may be inconsistent with
any other provision of such agreement, (b) complying with the requirements of
the Code or (c) amending any other provision of the Servicing Agreement with
respect to matters or questions arising under the Servicing Agreement which
shall not be inconsistent with any provisions of the Servicing Agreement;
provided, however, that such action shall not materially and adversely affect
the interests of any Noteholder, as evidenced by an opinion of counsel
delivered to the Indenture Trustee to such effect (which opinion shall not be
at the expense of the Indenture Trustee) and written confirmation from each of
the Rating Agencies that such action will not result in a qualification,
reduction or withdrawal of the implied ratings on the Notes (without taking
into account the Insurance Policy).
The Servicing Agreement may also be amended by the Indenture Trustee,
the Trust, the Master Servicer and the Servicer, at any time and from time to
time, with the prior written approval of the Rating Agencies, the Note Insurer
and the holders of Notes, representing not less than 50% of the Note Balance
then outstanding, for the purpose of adding any provisions or changing in any
manner or eliminating any of the provisions thereof or of modifying in any
manner the rights of the Noteholders; provided, however, that no such
amendment shall (a) reduce in any manner the amount of, or delay the timing
of, payments which are required to be paid to the Note Account without the
consent of all Noteholders or (b) reduce the aforesaid percentage of
Noteholders which are required to consent to any such amendments, without the
consent of all Noteholders.
SERVICING AND OTHER COMPENSATION; PAYMENT OF EXPENSES
The Servicing Fee will be the primary compensation to be paid to or
retained by the Servicer in respect of its servicing activities under the
Servicing Agreement and will be paid to the Servicer on each Deposit Date out
of collections of interest received on or in respect of the Home Loans for the
related Collection Period. The "Servicing Fee" will equal one-twelfth (1/12)
of the product of (a) 1.00% and (b) the Pool Principal Balance as of the first
day of the related Collection Period. The Servicer shall be entitled to retain
the Servicing Fee from amounts to be deposited in the Collection Account. In
addition, the Servicer will retain the benefit, if any, from any deposit,
maintenance or investment of funds in the Collection Account. Assumption fees,
late payment charges, prepayment charges, charges for checks returned for
insufficient funds, and extension and other administrative charges, to the
extent collected from borrowers, will be retained by the Servicer as
additional servicing compensation. To the extent the Servicer obtains any
collections on a Liquidated Home Loan subsequent to the date on which it
becomes a Liquidated Home Loan, the Servicer will be entitled to receive 20%
of such recovery as servicing compensation, provided that the Servicer's right
to receive such amounts shall be subordinated to the rights of the Noteholders
and of the Note Insurer to receive the amounts due to them.
The Servicer will be required to 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 payment of fees for
any sub-servicer. The Servicer will also be permitted (but not required) to
advance the cost of (i) any enforcement or judicial proceedings relating to
the borrowers, including foreclosures, and (ii) the management and liquidation
of Mortgaged Properties acquired in satisfaction of the related Home Loans.
Such expenditures (each, a "Servicing Advance") may include costs of
collection efforts, reappraisals, forced placement of hazard insurance if a
borrower allows his hazard policy to lapse, legal fees in connection with
foreclosure actions, advancing delinquent property taxes and upkeep and
maintenance of the Mortgaged Property if it is acquired through foreclosure
and similar types of expenses. The Servicer will not be required to make any
Servicing Advance that it determines would not be recoverable from subsequent
collections, Trust Insurance Proceeds, or Liquidation Proceeds on the related
Home Loan or otherwise.
The Servicing Agreement provides that the Servicer may pay all or a
portion of any Servicing Advance out of amounts on deposit in the Collection
Account which are being held for payment on a subsequent Payment Date relating
to such Collection Period; any such amounts so used are required to be
replaced by the Servicer by deposit to the Collection Account on or before the
Deposit Date relating to such subsequent Payment Date.
The Servicer may recover Servicing Advances, if not theretofore
recovered from the borrower on whose behalf such Servicing Advance was made,
from subsequent collections on the related Home Loan, including Liquidation
Proceeds, Trust Insurance Proceeds and such other amounts as may be collected
by the Servicer from the borrower or otherwise relating to the Home Loan, or
if such collections are insufficient, from the Note Account, subject to
certain limitations as described in the Servicing Agreement.
<PAGE>
DESCRIPTION OF THE NOTES
The Trust will issue the Asset Backed Notes, Series 1998-4 (the
"Notes") pursuant to the indenture, dated as of November 1, 1998 (the
"Indenture") among the Trust, Norwest Bank Minnesota, National Association, as
indenture trustee (in such capacity, the "Indenture Trustee"), note
administrator (in such capacity, the "Note Administrator"), and custodian (in
such capacity, the "Custodian"). The Notes will be secured by the pledge of
assets of the Trust pursuant to the Indenture. The Notes will not represent an
interest in or obligation of the Seller, the Servicer, the Master Servicer,
the Indenture Trustee, the Note Administrator, the Custodian, the Owner
Trustee, the Underwriter, the Note Insurer, any of their respective affiliates
or any other entity and will not represent an interest in or recourse
obligation of the Transferor or the Depositor. The summaries of certain
provisions of the Indenture set forth below, while complete in material
respects, do not purport to be exhaustive. For more details regarding the
terms of the Indenture, prospective investors in the Notes are advised to
review the Indenture.
GENERAL
The Notes will consist of one class of asset-backed Notes, the Class
A Notes (the "Notes"). The Notes represent the right to receive payments of
interest at the rate set forth on the cover hereof (the "Note Interest Rate"),
payable monthly, and payments of principal to the extent set forth below.
On each Payment Date, the Indenture Trustee or its designee will pay
to the persons in whose names the Notes are registered on the last business
day of the month immediately preceding the month of the related Payment Date
(the "Record Date"), the portion of the aggregate payment to be made to each
Noteholder as described below.
The Notes will be issued in minimum denominations of $50,000 and
integral multiples of $1 in excess thereof.
BOOK-ENTRY REGISTRATION
The Notes will be book-entry notes (the "Book-Entry Notes")
represented by one or more notes registered in the name of Cede & Co. or any
other nominee of The Depository Trust Company ("DTC"). DTC is a limited
purpose trust company organized under the laws of the State of New York, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York UCC and a "clearing agency" registered pursuant to
Section 17A of the Exchange Act. DTC was created to hold securities for
participating members in DTC ("Participants") and to facilitate the clearance
and settlement of securities transactions between Participants through
electronic book entries, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations. Indirect access to the DTC system
also is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants").
Investors that are not Participants or Indirect Participants but who
desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Notes may do so only through Participants and Indirect
Participants. In addition, Noteholders will receive all distributions of
principal and interest from the Indenture Trustee through Participants. Under
a book-entry format, Noteholders may experience some delay in their receipt of
payments, since such payments will be forwarded by the Indenture Trustee to
DTC's nominee. DTC's nominee will forward such payments to its Participants,
which thereafter will forward them to Indirect Participants or Noteholders.
The only "Noteholders" (as defined in the Indenture) will be DTC's nominee.
Noteholders will not be recognized by the Indenture Trustee as Noteholders, as
such term is used in the Indenture, and Noteholders will be permitted to
exercise the rights of Noteholders only indirectly through DTC and its
Participants. Accordingly, unless and until Definitive Notes are issued for
the Book-Entry Notes under the limited circumstances described herein, all
references to actions by Noteholders with respect to Book-Entry Notes refer to
actions taken by DTC upon instructions from its Participants, and all
references to distributions, notices, reports and statements to Noteholders
with respect to the Book-Entry Notes refer to distributions, notices, reports
and statements to DTC or DTC's nominee, as the registered holder of the
Book-Entry Notes, for distribution to Noteholders by DTC in accordance with
DTC procedures.
Under the rules, regulations and procedures creating and affecting
DTC and its operations (the "Rules"), DTC is required to make book-entry
transfers of Notes among Participants on whose behalf its acts with respect to
the Noteholders and to receive and transmit distributions of principal of, and
interest on, the Notes. Participants and Indirect Participants with which
Noteholders have accounts with respect to the Notes similarly are required to
make book-entry transfers and receive and transmit such payments on behalf of
their respective Noteholders. Accordingly, although Noteholders will not
possess Notes, the Rules provide a mechanism by which Participants will
receive payments and will be able to transfer their interests. See
"Description of the Securities - Book-Entry Registration of Securities" in the
Prospectus.
Because DTC can only act on behalf of Participants, who in turn act
on behalf of Indirect Participants and certain banks, the ability of a
Noteholder to pledge Notes to persons or entities that do not participate in
the DTC system, or otherwise to act with respect to the Notes, may be limited
due to the lack of a physical certificate for the Notes.
DTC has advised the Transferor and the Indenture Trustee that it will
take any action permitted to be taken by a Noteholder under the Indenture only
at the direction of one or more Participants to whose accounts with DTC the
applicable Notes are credited.
Except as required by law, none of the Master Servicer, the Indenture
Trustee, the Note Administrator, any paying agent or registrar acting on its
behalf or the Trust will have any liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests of
the Notes held by DTC's nominee, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
DEFINITIVE NOTES
The Notes will be issued in fully registered, certificated form
("Definitive Notes") to Noteholders or their respective nominees, rather than
to DTC or its nominee, only if (i) DTC advises the Indenture Trustee in
writing, that DTC is no longer willing or able to discharge properly its
responsibilities as depository with respect to the Notes and the Indenture
Trustee is unable to locate a qualified successor, (ii) the Transferor, at its
option, elects to terminate the book-entry system through DTC or (iii) after
the occurrence of an Event of Default with respect to the Notes, Noteholders
representing at least a majority of the outstanding principal amount of the
Notes advise the Indenture Trustee through DTC in writing that the
continuation of a book-entry system through DTC (or a successor thereto) with
respect to the Notes is no longer in the best interest of the Noteholders.
Upon the occurrence of any event described in the immediately
preceding paragraph, the Indenture Trustee will be required to notify DTC,
which in turn will notify all applicable Noteholders through Participants of
the availability of Definitive Notes. Upon surrender by DTC of the definitive
notes representing the corresponding Notes and receipt of instructions for
re-registration, the Indenture Trustee will reissue the Notes as Definitive
Notes to the Noteholders.
Distributions of principal of, and interest on, such Definitive Notes
will thereafter be made by the Indenture Trustee in accordance with the
procedures set forth in the Indenture, directly to Noteholders of Definitive
Notes in whose names the Definitive Notes were registered at the close of
business on the Record Date. Such distributions will be made by check mailed
to the address of each related Noteholder as it appears on the register
maintained by the Indenture Trustee. The final payment on any such Definitive
Notes, however, will be made only upon representation and surrender of such
Definitive Notes at the office or agency specified in the notice of final
distribution to the applicable Noteholders.
Definitive Notes will be transferable and exchangeable at the offices
of the Indenture Trustee or of a registrar named in a notice delivered to
Noteholders of Definitive Notes. No service charge will be imposed for any
registration of transfer or exchange, but the Indenture Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
PAYMENTS ON THE NOTES
Payments on the Notes will be made by the Indenture Trustee (in such
capacity, the "Trust Paying Agent") on each Payment Date, commencing with the
Payment Date in December 1998, to Noteholders as of the related Record Date in
an amount equal to the product of the Noteholders' respective Percentage
Interests in the Notes. The "Percentage Interest" represented by any Note will
be equal to the percentage obtained by dividing the initial principal balance
of such Note by the initial Note Balance. For so long as any Note is in
book-entry form with DTC, the only "Noteholder" of such Note will be Cede &
Co. See "Book-Entry Registration" herein.
On each Payment Date, the Trust Paying Agent will be required to pay
the following amounts, in the following order of priority, out of Available
Funds to the extent available:
(a) to the Note Insurer, the aggregate amount necessary to reimburse
the Note Insurer for any unreimbursed payments of Insured Payments
(together with interest thereon at the Late Payment Rate specified in the
Insurance Agreement) in respect of the Notes on prior Payment Dates and
the amount of any unpaid Note Insurer Premiums for prior Payment Dates
(together with interest thereon at the Late Payment Rate specified in the
Insurance Agreement); provided, however, that the Note Insurer shall be
paid unreimbursed Insured Payments and unpaid Note Insurer Premiums (and
any interest thereon) only after Noteholders have received Note Interest
and any Overcollateralization Deficit with respect to such Payment Date;
(b) to the Noteholders, the Note Interest with respect to such
Payment Date;
(c) to the Noteholders, the amount of Monthly Principal with respect
to such Payment Date, in reduction of the Note Balance until the Note
Balance is reduced to zero;
(d) to the Noteholders, in reduction of the Note Balance, the
amount, if any, equal to the lesser of (A) Excess Cash with respect to
such Payment Date, and (B) the lesser of (1) the amount necessary for the
Overcollateralization Amount to equal the Required Overcollateralization
Amount on such Payment Date (after giving effect to application of
Monthly Principal for such Payment Date) and (2) the amount necessary to
reduce the Note Balance to zero;
(e) to the Note Insurer, any amounts due and owing under the
Insurance Agreement that are not paid as described in clause (a) above;
and
(f) to the Servicer (i) any unreimbursed Servicing Advances
not otherwise recovered by the Servicer on a priority basis pursuant to
the Servicing Agreement (as reported in writing by the Servicer to the
Indenture Trustee) and (ii) 20% of any collections in respect of any
Liquidated Home Loan received subsequent to the date that such Home Loan
became a Liquidated Home Loan to the extent of any Realized Loss on such
Home Loan.
Any Available Funds remaining after application in the manner specified above
will be released to the holders of the Trust Certificates on such Payment Date
pursuant to the Trust Agreement, free from the lien of the Indenture, and such
amounts will not be available to make payments on the Notes or payments to the
Note Insurer on any subsequent Payment Date.
In the event that, with respect to a particular Payment Date,
Available Funds on such date are not sufficient to pay any portion of Note
Interest, the Indenture Trustee will file a claim on the Insurance Policy,
pursuant to the terms thereof, in an amount equal to such deficiency and apply
the Insured Payment in respect of such claim to the payment of the deficiency
in such Note Interest. In addition, the Indenture Trustee will file a claim on
the Insurance Policy, pursuant to the terms thereof, in an amount equal to any
Overcollateralization Deficit on a Payment Date (after taking into account
payments in respect of Monthly Principal and Excess Cash on such Payment Date)
and apply the portion of the Insured Payment related to such
Overcollateralization Deficit to reduce the Note Balance on such Payment Date
by the amount of such Overcollateralization Deficit. Any Insured Payment paid
in respect of the Notes to make up any Overcollateralization Deficit shall be
paid to the Noteholders, in reduction of the Note Balance, until the Note
Balance is reduced to zero.
In no event will the aggregate payments of principal to Noteholders
exceed the original Note Balance.
The "Administrative Fee Amount" for any Payment Date will equal the
sum of the monthly Servicing Fee, the Master Servicing fee, the Indenture
Trustee's fee, the Custodian's fee and the Note Insurer Premium, each relating
to such Payment Date.
"Available Funds" with respect to any Payment Date will consist of
the sum of the amounts described in clauses (a) through (g) below, less (i)
the Administrative Fee Amount in respect of such Payment Date, (ii) Servicing
Advances previously made that are reimbursable to the Servicer (other than
those included in liquidation expenses for any Liquidated Home Loan and
already reimbursed from the related Liquidation Proceeds) in such Collection
Period to the extent permitted by the Servicing Agreement and (iii) the
aggregate amounts (A) deposited into the Collection Account or Note Account
that may not be withdrawn therefrom pursuant to a final and nonappealable
order of the United States bankruptcy court of competent jurisdiction imposing
a stay pursuant to Section 362 of the United States Bankruptcy Code and that
would otherwise have been included in Available Funds on such Payment Date and
(B) received by the Indenture Trustee that are recoverable and sought to be
recovered from the Trust as a voidable preference by a trustee in bankruptcy
pursuant to the United States Bankruptcy Code in accordance with a final
nonappealable order of a court of competent jurisdiction:
(a) all scheduled payments of interest received with respect to the
Home Loans and due during the related Collection Period and all other
interest payments on or in respect of the Home Loans received by or on
behalf of the Servicer during the related Collection Period (including
any such amounts received during the first Collection Period representing
interest accrued on such Home Loans prior to the Cut-off Date), plus any
net income from related REO Properties for such Collection Period;
(b) all scheduled payments of principal received with respect to the
Home Loans and due during the related Collection Period and all other
principal payments (including Principal Prepayments, but excluding
amounts described elsewhere in this definition) received during the
related Collection Period in respect of the Home Loans;
(c) the aggregate of any proceeds from or in respect of any policy
of insurance covering a Mortgaged Property that are received during the
related Collection Period and applied by the Servicer to reduce the
Principal Balance of the related Home Loan ("Trust Insurance Proceeds")
(which proceeds will not include any amounts applied to the restoration
or repair of the related Mortgaged Property or released to the related
borrower in accordance with applicable law, the Servicer's customary
servicing procedures or the terms of the related Home Loan);
(d) the aggregate of any other proceeds received by the Servicer
during the related Collection Period in connection with the liquidation
of any Mortgaged Property securing a Home Loan, whether through trustee's
sale, foreclosure, condemnation, taking by eminent domain or otherwise
(including any Trust Insurance Proceeds to the extent not duplicative of
amounts in clause (c) above) ("Liquidation Proceeds"), less expenses
incurred by the Servicer in connection with the liquidation of such Home
Loan ("Net Liquidation Proceeds");
(e) the aggregate of the amounts received in respect of any Home
Loans that are required or permitted to be repurchased, released or
removed by the Seller or Servicer during the related Collection Period as
described in "--Assignment of Home Loans" and "Servicing of the Home
Loans" herein, to the extent such amounts are received by the Indenture
Trustee on or before the related Deposit Date;
(f) the aggregate of amounts deposited in the Note Account by the
redeeming party during such Collection Period in connection with
redemption of the Notes as described under "--Redemption of the Notes"
herein; and
(g) subsequent Collections on any Liquidated Home Loan to the extent
of any Realized Loss incurred with respect to such Home Loan, after
payment of any additional compensation permitted to the Servicer under
the Servicing Agreement.
"Collection Period" means, as to any Payment Date, the period
beginning on the first day of the calendar month preceding the calendar month
in which such Payment Date occurs and ending on the last day of such preceding
calendar month.
"Deposit Date" means the 18th day of each calendar month, beginning
in December 1998 (or if such 18th day is not a business day, the next
succeeding business day).
"Determination Date" means, as to any Payment Date, the close of
business on the last day of the calendar month preceding the calendar month in
which such Payment Date occurs.
The "Interest Period" in respect of any Payment Date and the Notes
will be the period from the first day of the calendar month preceding the
month of such Payment Date through the last day of such preceding calendar
month. All calculations of interest on the Notes will be computed on the basis
of a 360-day year consisting of twelve 30-day months.
"Liquidated Home Loan" means, as to any Deposit Date, any Home Loan
as to which (i) the Servicer has determined during the related Collection
Period, in accordance with its customary servicing procedures, that all
Liquidation Proceeds which it expects to recover from or on account of such
Home Loan have been recovered or (ii) any portion of any monthly payment
thereof is 180 days or more past due.
"Monthly Principal" for any Payment Date will be an amount equal to
(A) the aggregate of (i) all scheduled payments of principal received with
respect to the Home Loans and due during the related Collection Period, and
all other amounts collected, received or otherwise recovered in respect of
principal of the Home Loans (including Principal Prepayments, but not
including Payments Ahead that are not allocable to principal for the related
Collection Period) during or in respect of the related Collection Period, and
(ii) the aggregate of the amounts allocable to principal deposited in the Note
Account on the related Deposit Date by the Seller, the Depositor, the
Transferor, the Servicer or the Note Insurer in connection with a repurchase,
purchase release or removal of any Home Loans pursuant to the Indenture,
reduced by (B) the amount of any Overcollateralization Surplus with respect to
such Payment Date.
The "Note Balance" will equal, as of any Payment Date, the original
Note Balance less all Monthly Principal and Excess Cash paid to the
Noteholders on previous Payment Dates in reduction of the Note Balance
(exclusive, for the sole purpose of effecting the Note Insurer's subrogation
rights, of payments made by the Note Insurer in respect of any
Overcollateralization Deficit under the Insurance Policy, except to the extent
reimbursed to the Note Insurer pursuant to the Indenture).
"Note Interest" on any Payment Date will be an amount equal to
interest accrued during the related Interest Period at the Note Interest Rate
on the Note Balance as of the preceding Payment Date (after giving effect to
the payment, if any, in reduction of principal made on the Notes on such
preceding Payment Date).
"Note Interest Rate" will be the per annum rate set forth on the cover
hereof.
"Payment Ahead" means any payment of one or more scheduled monthly
payments remitted by a borrower with respect to a Mortgage Note in excess of
the scheduled monthly payment due during the related Collection Period with
respect to such Mortgage Note, which sums the related borrower has instructed
the Servicer to apply to scheduled monthly payments due in one or more
subsequent Collection Periods. Payments Ahead will be deemed received in the
Collection Period in which they would have become due had they not been paid
in advance.
The "Principal Balance" of a Home Loan with respect to any
Determination Date is the actual outstanding principal balance thereof as of
the close of business on the Determination Date in the preceding month (or, in
the case of the first Payment Date, as of the Cut-off Date), less (i) all
scheduled payments of principal received with respect to the Home Loans and
due during the related Collection Period, all other amounts collected,
received or otherwise recovered in respect of principal on the Home Loans
(including Principal Prepayments, but not including Payments Ahead that are
not allocable to principal for the related Collection Period) during the
related Collection Period, and Net Liquidation Proceeds and Trust Insurance
Proceeds allocable to principal recovered or collected in respect of such Home
Loan during the related Collection Period, (ii) the portion of the Purchase
Price allocable to principal remitted by the Seller to the Indenture Trustee
on or prior to the next succeeding Deposit Date in connection with a release
and removal of such Home Loan pursuant to the Indenture to the extent such
amount is actually remitted on or prior to such Deposit Date and (iii) any
other reduction in the principal balance of the related Mortgage Note,
including a reduction as a result of any bankruptcy or other court order;
provided, however, that (x) a Home Loan that has become a Liquidated Home Loan
since the preceding Determination Date (or in the case of the first
Determination Date, since the Cut-off Date) will be deemed to have a Principal
Balance of zero with respect to the current Determination Date and (y) with
respect to any Determination Date on and after the Stated Maturity Date of the
Notes, the Principal Balance of any Home Loan shall be zero.
"Principal Prepayment" means any borrower payment or other recovery
in respect of principal of a Home Loan (including Net Liquidation Proceeds and
Trust Insurance Proceeds allocable to principal) which, in the case of a
borrower payment, is received in advance of its scheduled due date and is not
a Payment Ahead.
NOTE ACCOUNT
Pursuant to the Indenture, the Indenture Trustee shall establish and
maintain an account (the "Note Account") from which all payments with respect
to the Notes will be made. As described below, not later than the Deposit Date
preceding each Payment Date, the Servicer will be required pursuant to the
Servicing Agreement to remit to the Indenture Trustee for deposit in the Note
Account the sum (without duplication) of all amounts on deposit in the
Collection Account that constitute any portion of Available Funds for the
related Payment Date.
INVESTMENT OF NOTE ACCOUNT
All or a portion of the Note Account may be invested and reinvested
by the Indenture Trustee at the direction of the Transferor in one or more
Permitted Investments bearing interest or sold at a discount. The Indenture
Trustee, the Seller or any affiliate thereof may be the obligor on any
investment in the Note Account which otherwise qualifies as a Permitted
Investment. No investment in the Note Account may mature later than the
business day preceding the Payment Date; provided that any Permitted
Investment that is an obligation of the Indenture Trustee may mature on the
Payment Date.
All income or other gain from investments in the Note Account will
not be available to Noteholders or otherwise subject to any claims or rights
of the Noteholders and will be held in the Note Account for the benefit of the
Transferor subject to withdrawal from time to time as permitted by the
Indenture. Any loss resulting from such investments will be for the account of
the Transferor. The Transferor will be required to deposit the amount of any
such loss immediately upon the realization of such loss to the extent such
loss will not be offset by other income or gain from investments in the Note
Account and then available for such application.
PERMITTED INVESTMENTS
Permitted Investments include:
(a) direct obligations of, or obligations fully guaranteed by, the
United States of America, Freddie Mac, Fannie Mae, the Federal Home Loan
Banks or any agency or instrumentality of the United States of America
rated Aa3 or higher by Moody's, the obligations of which are backed by
the full faith and credit of the United States of America;
(b) (i) demand and time deposits in, certificates of deposit of,
banker's acceptances issued by or federal funds sold by any depository
institution or trust company (including the Indenture Trustee or its
agent acting in their respective commercial capacities) incorporated
under the laws of the United States of America or any state thereof and
subject to supervision and examination by federal and/or state
authorities, so long as, at the time of such investment or contractual
commitment providing for such investment, such depository institution or
trust company or its ultimate parent has a short-term unsecured debt
rating in one of the two highest available rating categories of S&P and
the highest available rating category of Moody's and provided that each
such investment has an original maturity of no more than 365 days, and
(ii) any other demand or time deposit or deposit which is fully insured
by the FDIC;
(c) repurchase obligations with a term not to exceed 30 days with
respect to any security described in clause (a) above and entered into
with a depository institution or trust company (acting as a principal)
rated "A" or higher by S&P and rated "A2" or higher by Moody's; provided,
however, that collateral transferred pursuant to such repurchase
obligation must be of the type described in clause (a) above and must (i)
be valued daily at current market price plus accrued interest, (ii)
pursuant to such valuation, be equal, at all times, to 105% of the cash
transferred by the Indenture Trustee in exchange for such collateral and
(iii) be delivered to the Indenture Trustee, or if the Indenture Trustee
is supplying the collateral, an agent for the Indenture Trustee, in such
manner as to accomplish perfection of a security interest in the
collateral by possession of certified securities;
(d) securities bearing interest or sold at a discount issued by any
corporation incorporated under the laws of the United States of America
or any state thereof which has a long-term unsecured debt rating in the
highest available rating category of each of the Rating Agencies at the
time of such investment;
(e) commercial paper having an original maturity of less than 365
days and issued by an institution having a short-term unsecured debt
rating in the highest available rating category of each of the Rating
Agencies at the time of such investment;
(f) a guaranteed investment contract approved by each of the Rating
Agencies and the Note Insurer and issued by an insurance company or other
corporation having a long-term unsecured debt rating in the highest
available rating category of each of the Rating Agencies at the time of
such investment;
(g) money market funds having ratings in the highest available
rating category of Moody's and one of the two highest available rating
categories of S&P at the time of such investment which invest only in
other Permitted Investments (any such money market funds which provide
for demand withdrawals being conclusively deemed to satisfy any maturity
requirements for Permitted Investments set forth herein), including money
market funds of the Indenture Trustee and any such funds that are managed
by the Indenture Trustee or its affiliates or for which the Indenture
Trustee or any affiliate acts as advisor as long as such money market
funds satisfy the criteria of this subparagraph (g); and
(h) any investment otherwise acceptable to the Note Insurer and each
Rating Agency.
The Indenture Trustee may purchase from or sell to itself or an
affiliate, as principal or agent, the Permitted Investments listed above. All
Permitted Investments shall be held in a trust account under the Indenture and
shall be made in the name of the Indenture Trustee for the benefit of the
Noteholders and the Note Insurer.
OVERCOLLATERALIZATION FEATURE
Credit enhancement with respect to the Notes initially will be
provided in part by overcollateralization resulting from the Cut-off Date Pool
Principal Balance exceeding the original Note Balance. On the Closing Date,
the initial Overcollateralization Amount will be approximately 7.90% of the
Cut-off Date Pool Principal Balance. The Indenture requires that this
Overcollateralization Amount be increased to, and thereafter maintained at,
the Required Overcollateralization Amount. This increase and subsequent
maintenance is intended to be accomplished by the application of monthly
Excess Cash to accelerate the payment of the Note Balance until the
Overcollateralization Amount reaches the Required Overcollateralization
Amount. Such application of Excess Cash, which consists of interest
collections on the Home Loans, but is paid as principal on the Notes, will
increase the related Overcollateralization Amount. Such overcollateralization
is intended to result in amounts received on the Home Loans in excess of the
amount necessary to pay Note Interest and the Monthly Principal required to be
paid on the Notes on any Payment Date being applied to reduce the Note Balance
to zero no later than the Stated Maturity Date of the Notes.
The "Excess Cash" on any Payment Date will equal Available Funds for
such Payment Date, reduced by the sum of (i) any amounts payable to Note
Insurer for Insured Payments paid on prior Payment Dates and not yet
reimbursed and for any unpaid Note Insurer Premiums for prior Payment Dates
(in each case with interest thereon at the Late Payment Rate set forth in the
Insurance Agreement), (ii) the Note Interest for the related Payment Date and
(iii) the Monthly Principal for the related Payment Date.
The "Overcollateralization Amount" with respect to any Payment Date
is the amount, if any, by which (x) the Pool Principal Balance as of the end
of the related Collection Period exceeds (y) the Note Balance as of such
Payment Date after taking into account payments of Monthly Principal
(disregarding any permitted reduction in Monthly Principal due to an
Overcollateralization Surplus) made on such Payment Date. The required level
of the Overcollateralization Amount with respect to any Payment Date (the
"Required Overcollateralization Amount") will be equal to the amount specified
as such in the Indenture. The Indenture generally provides that the Required
Overcollateralization Amount may, over time, decrease or increase, subject to
certain floors, caps and triggers including triggers that allow the Required
Overcollateralization Amount to decrease or "stepdown" based on the
performance on the Home Loans with respect to certain delinquency tests
specified in the Indenture. In addition, Excess Cash will be applied to
principal of the Notes during the period that the Home Loans are unable to
meet certain tests specified in the Indenture based on delinquency. Any
increase in the applicable Required Overcollateralization Amount may result in
an accelerated amortization of the Notes until such Required
Overcollateralization Amount is reached. Conversely, any decrease in the
Required Overcollateralization Amount will result in a decelerated
amortization of the Notes until such Required Overcollateralization Amount is
reached.
The application of Excess Cash to reduce the Note Balance on any
Payment Date will have the effect of accelerating the amortization of the
Notes relative to the amortization of the Home Loans in the Trust Estate. In
the event that the Required Overcollateralization Amount is permitted to
decrease or "stepdown" on any Payment Date in the future, or in the event of
an Overcollateralization Surplus, the Indenture will provide that all or a
portion of the Excess Cash that would otherwise be paid to the Notes on any
such Payment Date in reduction of the Note Balance will be released to the
holder(s) of the Trust Certificates, as provided in the Trust Agreement.
With respect to any Payment Date, an "Overcollateralization Surplus"
means, the amount, if any, by which (x) the Overcollateralization Amount for
such Payment Date exceeds (y) the then applicable Required
Overcollateralization Amount of such Payment Date. An Overcollateralization
Surplus may result prior to the occurrence of any decrease or "stepdown" in
the Required Overcollateralization Amount because, in the absence of an
Overcollateralization Surplus, the Notes will be entitled to receive 100% of
collected principal on the Home Loans, even though the Note Balance will, as a
result of the initial overcollateralization and the accelerated amortization
caused by the application of the Excess Cash, be less than the Pool Principal
Balance, in the absence of any Realized Losses on the Home Loans.
The Indenture will provide that, on any Payment Date, all amounts
collected on the Home Loans in respect of principal to be applied on such
Payment Date will be paid to Noteholders in reduction of the Note Balance on
such Payment Date, except as provided above with respect to any Payment Date
for which there exists an Overcollateralization Surplus. If any Home Loan
became a Liquidated Home Loan during such prior Collection Period, the Net
Liquidation Proceeds related thereto and allocated to principal may be less
than the Principal Balance of the related Home Loan; the amount of any such
deficiency is a "Realized Loss." In addition, the Indenture will provide that
the Principal Balance of any Home Loan that becomes a Liquidated Home Loan
shall equal zero. The Indenture will not require that the amount of any
Realized Loss be paid to Noteholders on the Payment Date following the event
of loss. However, the occurrence of a Realized Loss will reduce the
Overcollateralization Amount, and will result in more Excess Cash, if any,
being paid on the Notes in reduction of the Note Balance on subsequent Payment
Dates than would be the case in the absence of such Realized Loss.
OVERCOLLATERALIZATION AND THE INSURANCE POLICY
The Indenture will require the Indenture Trustee to file a claim for
an Insured Payment under the Insurance Policy not later than 12:00 noon (New
York City time) on the third business day prior to any Payment Date as to
which the Indenture Trustee has determined that an Overcollateralization
Deficit with respect to the Notes will occur for the purpose of applying the
proceeds of such Insured Payment as a payment of principal to the Noteholders
on such Payment Date. With respect to any Payment Date, an
"Overcollateralization Deficit" will mean the amount, if any, by which (x) the
Note Balance, after taking into account all payments to be made on such
Payment Date in reduction thereof, including any Excess Cash payments, exceeds
(y) the Pool Principal Balance as of the end of the related Collection Period.
Accordingly, the Insurance Policy is similar to the provisions described above
with respect to the overcollateralization provisions insofar as the Insurance
Policy guarantees ultimate collection of the full amount of the Note Balances,
rather than current payments of the amounts of any Realized Losses to
Noteholders. Investors in the Notes should realize that, under certain loss or
delinquency scenarios, they may temporarily receive no payments in reduction
of the Note Balance even if the Notes are entitled to payments of principal.
REPORTS TO NOTEHOLDERS
Concurrently with each payment to Noteholders, the Note Administrator
will prepare and the Indenture Trustee will mail a statement to each
Noteholder and the Note Insurer in the form required by the Indenture and
setting forth the following information (to the extent the Servicer makes such
information available to the Note Administrator):
(a) the amount of the payment to the Noteholders on the related
Payment Date allocable to (i) Monthly Principal (separately setting forth
Principal Prepayments) and (ii) any Excess Cash payment;
(b) the amount of the payment to the Noteholders on such Payment
Date allocable to Note Interest;
(c) the Note Balance after giving effect to the payment of Monthly
Principal and any Excess Cash on such Payment Date;
(d) the Pool Principal Balance as of the end of the related
Collection Period;
(e) the amount of Servicing Advances made with respect to such
Payment Date and the aggregate amount of unreimbursed Servicing Advances,
if any;
(f) the number and the aggregate of the Principal Balances of the
Home Loans delinquent (i) one month, (ii) two months or (iii) three or
more months, as of the end of the related Collection Period;
(g) the aggregate of the Principal Balances of the Home Loans in
foreclosure or other similar proceedings or in which the borrower is in
bankruptcy and the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure during the related
Collection Period;
(h) the aggregate of the Principal Balances of the Home Loans
repurchased by the Seller or the Servicer, separately setting forth the
aggregate of the Principal Balances of Home Loans delinquent for three
consecutive monthly installments purchased by the Servicer at its option
pursuant to the Servicing Agreement;
(i) the Insured Payment, if any, for such Payment Date;
(j) the amount of the Servicing Fee and the Master Servicing fee
paid to or retained by the Servicer and the Master Servicer with respect
to such Payment Date, and Administrative Fee Amount with respect to such
Payment Date;
(k) the Overcollateralization Amount, the then applicable Required
Overcollateralization Amount, the Overcollateralization Surplus, if any,
and the Overcollateralization Deficit, if any, with respect to such
Payment Date;
(l) the aggregate outstanding Principal Balance of the three
largest outstanding Home Loans in the Home Loan Pool;
(m) the aggregate amount of Realized Losses incurred during the
related Collection Period and the cumulative amount of Realized Losses
since the Cut-off Date;
(n) for the purpose of determining whether there has been a Servicer
Termination Event, the Rolling Delinquency Percentage, the Rolling Loss
Percentage, the Cumulative Loss Percentage, the Delinquency Loss Factor
and Total Expected Losses;
(o) for the purposes of calculating the Required
Overcollateralization Amount, the Rolling Three Month Average Annualized
Losses, the Delinquency Percentage, the Delinquency Loss Factor and the
Total Expected Losses; and
(p) the percentage of Home Loans that have been modified during the
related Collection Period and the percentage of Home Loans that have been
modified since the Cut-off Date (in each case measured by the the
aggregate Principal Balances of such Home Loans as a percentage of the
Pool Principal Balance).
In the case of information furnished pursuant to clauses (a) and (b)
above, the amounts shall be expressed as a dollar amount per Note with a
$1,000 principal denomination.
Within 90 days after the end of each calendar year, the Note
Administrator will mail to each person who at any time during such calendar
year was a Noteholder a statement containing the information set forth in
clauses (a) and (b) above, aggregated for such calendar year or applicable
portion thereof during which such person was a Noteholder. Such obligation of
the Indenture Trustee shall be deemed to have been satisfied to the extent
that substantially comparable information shall be prepared and furnished by
the Indenture Trustee to Noteholders pursuant to any requirements of the Code
as are in force from time to time.
REDEMPTION OF THE NOTES
The Notes will be subject to redemption, in whole but not in part, at
the option of the holder(s) of the Trust Certificates or, if not so exercised,
at the option of the Note Insurer, on or after the Payment Date on which the
Note Balance has declined to 5% or less of the Note Balance as of the Cut-off
Date (the "Redemption Date").
The Notes will be redeemed at a redemption price of 100% of the then
outstanding Note Balance, plus accrued but unpaid Note Interest thereon
through the end of the Interest Period immediately preceding the related
Payment Date. Notwithstanding the foregoing, however, no redemption may take
place unless, in connection with such redemption, any amounts due and owing to
the Note Insurer under the Insurance Agreement are paid in full to the Note
Insurer. There will be no prepayment premium in connection with such a
redemption. Notice of an optional redemption of the Notes must be mailed by
the Indenture Trustee to the Noteholders and the Note Insurer at 1east ten
days prior to the Payment Date set for such redemption.
In addition, the Trust may redeem the Notes at any time upon a
determination by the Trust, based upon an opinion of counsel, that a
substantial risk exists that the Notes will not be treated for federal income
tax purposes as evidences of indebtedness. See "Certain Federal Income Tax
Considerations--General" herein. The Note Insurance Policy will not cover such
redemption.
The payment on the final Payment Date in connection with the redemption
of the Notes shall be in lieu of the payment otherwise required to be made on
such Payment Date in respect of the Notes.
PAYMENTS TO THE HOLDER(S) OF THE TRUST CERTIFICATES
On each Payment Date, any portion of Available Funds remaining after
making payments of interest and principal due on the Notes and other payments
required on such Payment Date will be released to the holder(s) of the Trust
Certificates as provided in the Trust Agreement, free of the lien of the
Indenture. Such amounts will not be available to make payments on the Notes or
payments to the Note Insurer on any subsequent Payment Date.
THE INDENTURE TRUSTEE
Norwest Bank Minnesota, National Association, a national banking
association, will be the Indenture Trustee under the Indenture. The Indenture
will provide that the Indenture Trustee is entitled to the Indenture Trustee
fee and reimbursement of certain expenses.
The Indenture also will provide that the Indenture Trustee may resign
at any time, upon notice to the Trust, the Servicer, the Note Insurer and any
Rating Agency, in which event the Trust will be obligated to appoint a
successor Indenture Trustee acceptable to the Note Insurer. The Trust, with
the prior consent of the Note Insurer, may remove the Indenture Trustee if the
Indenture Trustee ceases to be eligible to continue as such under the
Indenture or if the Indenture Trustee becomes insolvent. In addition, the
Indenture Trustee may be removed at any time by the Note Insurer, or with the
consent of the Note Insurer, by the holders of more than 50% of the Note
Balance. Any resignation or removal of the Indenture Trustee and appointment
of a successor Indenture Trustee will not become effective until acceptance of
the appointment by the successor Indenture Trustee. The Indenture will provide
that the Indenture Trustee is under no obligation to exercise any of the
rights or powers vested in it by the Indenture at the request or direction of
any of the Noteholders, unless such Noteholders shall have offered to the
Indenture Trustee reasonable security or indemnity against the costs, expenses
and liabilities which might be incurred by it in compliance with such request
or direction. The Indenture Trustee may execute any of the rights or powers
granted by the Indenture or perform any duties thereunder either directly or
by or through its agents or attorneys, and the Indenture Trustee is not
responsible for any misconduct or negligence on the part of any agent or
attorney appointed and supervised with due care by it thereunder. Pursuant to
the Indenture, the Indenture Trustee is not liable for any action it takes or
omits to take in good faith which it reasonably believes to be authorized by
an authorized officer of any person or within its rights or powers under the
Indenture. The Indenture Trustee may rely and will be protected in acting or
refraining from acting in good faith in reliance on any certificate, notice or
other document of any kind prima facie properly executed and submitted by the
authorized officer of any person respecting any matters arising under the
Indenture. The Indenture Trustee will be indemnified by the Transferor for
certain losses and other events to the extent described in the Servicing
Agreement.
NOTE EVENTS OF DEFAULT
An Event of Default with respect to the Notes shall occur if, on any
Payment Date, after taking into account all payments made in respect of the
Notes on such Payment Date, the Note Interest for such Payment Date remains
unpaid or an Overcollateralization Deficit exists with respect to the Notes or
the Notes are not paid in full before their Stated Maturity Date, and such
default continues unremedied for a period of five days. An "Event of Default"
with respect to the Notes will also occur upon the occurrence of any of the
following (a) a default in the observance of certain negative covenants in the
Indenture; (b) a default in the observance of any other covenant of the
Indenture, and the continuation of any such default for a period of thirty
days after the earlier of (i) the date on which the Trust obtains knowledge of
such default, and (ii) the date on which notice is given to the Trust by the
Indenture Trustee at the direction of the Note Insurer or to the Trust and the
Indenture Trustee by the Holders of at least 25% in principal amount of the
Notes then outstanding with the prior written consent of the Note Insurer; (c)
any representation or warranty made by the Trust in the Indenture or in any
certificate delivered pursuant thereto having been incorrect in a material
respect as of the time made, and the circumstance in respect of which such
representation or warranty is incorrect not having been cured within thirty
days after the earlier of (i) the date on which the Trust obtains knowledge of
such incorrectness, and (ii) the date on which notice thereof is given to the
Trust by the Indenture Trustee or by the Holders of at least 25% in principal
amount of the Notes then outstanding; or (d) certain events of bankruptcy,
insolvency, receivership or reorganization of the Trust.
RIGHTS UPON EVENT OF DEFAULT
In case an Event of Default should occur and be continuing with
respect to the Notes, the Indenture Trustee may, with the consent of the Note
Insurer in the absence of a Note Insurer Default, and on request of Holders of
more than 50% in principal amount of the Notes then outstanding shall, with
the consent of the Note Insurer in the absence of a Note Insurer Default,
declare the principal of the Notes to be due and payable. Such declaration may
under certain circumstances be rescinded by the Holders of a majority in
principal amount of the Notes then outstanding, with the prior consent of the
Note Insurer.
Subject to the provisions of the Indenture relating to the duties of
the Indenture Trustee, in case an Event of Default shall occur and be
continuing, the Indenture Trustee shall be under no obligation to exercise any
of the rights and powers under the Indenture at the request or direction of
any of the Holders of Notes, unless such Holders have offered to the Indenture
Trustee reasonable security or indemnity satisfactory to it against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request or direction. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, the Note Insurer or the
Holders of a majority in principal amount of the outstanding Notes, with the
prior written consent of the Note Insurer, shall have the right to direct the
time, method, and place of conducting any proceeding or any remedy available
to the Indenture Trustee or exercising any trust or power conferred on the
Indenture Trustee with respect to the Notes; and the Holders of a majority in
principal amount of the Notes then outstanding may, with the prior written
consent of the Note Insurer, 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 the Holder of each outstanding Note affected
thereby.
SUPPLEMENTAL INDENTURES
Subject to the prior written consent of the Note Insurer, at any time
and from time to time, without the consent of the Noteholders, the Indenture
Trustee and the Trust may enter into one or more supplemental indentures to
cure any ambiguity, to correct or supplement any provision of the Indenture
that may be defective or inconsistent with any other provision thereof, or to
amend any other provisions with respect to matters or questions arising under
the Indenture, which shall not be inconsistent with the provisions of the
Indenture; provided, however, that such action shall not adversely affect in
any material respect the interests of the Noteholders; and provided further
that the amendment shall not be deemed to adversely affect in any material
respect the interests of the Noteholders if the party requesting the amendment
obtains an opinion of counsel to such effect.
The Indenture may also be amended by the Indenture Trustee and the
Trust at any time and from time to time, with the prior written approval of
the Rating Agencies and the Note Insurer for the purpose of adding any
provisions or changing in any manner or eliminating any of the provisions
thereof or of modifying in any manner the rights of the Noteholders
thereunder; provided, however, that no such amendment shall, without the
consent of all Noteholders, (a) change the date of any Payment Date or the
Stated Maturity Date of the Notes or reduce the principal amount thereof, the
Note Interest Rate thereon or the redemption price with respect to, or (b)
reduce the percentage of Noteholders which are required to consent to any such
amendments.
EXERCISE OF NOTEHOLDER RIGHTS BY THE NOTE INSURER
The Indenture provides that, unless a Note Insurer Default exists,
the Note Insurer shall have the right to exercise all rights of the
Noteholders under the Indenture without any further consent of the
Noteholders, other than rights with respect to the approval of certain
amendments to the Indenture and certain other specified rights.
<PAGE>
NOTE INSURANCE
THE INSURANCE POLICY
The information set forth in this section has been provided by the
MBIA Insurance Corporation, a New York stock insurance company (the "Note
Insurer"). No representation is made by the Seller, the Trust, the Depositor,
the Servicer, the Transferor or any of their affiliates as to the accuracy or
completeness of such information or any information related to the Note
Insurer incorporated by reference herein.
The Note Insurer, in consideration of the payment of the premium and
subject to the terms of the Insurance Policy, thereby unconditionally and
irrevocably guarantees to any Noteholder that an amount equal to each full and
complete Insured Payment will be received by the Indenture Trustee or its
successor, as trustee for the Noteholders, on behalf of the Noteholders from
the Note Insurer, for distribution by the Indenture Trustee to each Noteholder
of each Noteholder's proportionate share of the Insured Payment. The Note
Insurer's obligations under the Insurance Policy with respect to a particular
Insured Payment shall be discharged to the extent funds equal to the
applicable Insured Payment are received by the Indenture Trustee, whether or
not such funds are properly applied by the Indenture Trustee. Insured Payments
shall be made only at the time set forth in the Insurance Policy and no
accelerated Insured Payments shall be made regardless of any acceleration of
the Notes, unless such acceleration is at the sole option of the Note Insurer.
Notwithstanding the foregoing paragraph, the Insurance Policy does
not cover shortfalls, if any, attributable to the liability of the Trust or
the Indenture Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability).
The Note Insurer will pay any Insured Payment that is a Preference
Amount on the Business Day following receipt on a Business Day by the Fiscal
Agent (as described below) of (i) a certified copy of the order requiring the
return of such preference payment, (ii) an opinion of counsel satisfactory to
the Note Insurer that such order is final and not subject to appeal, (iii) an
assignment in such form as is reasonably required by the Note Insurer,
irrevocably assigning to the Note Insurer all rights and claims of the
Noteholder relating to or arising under the Notes against the debtor which
made such preference payment or otherwise with respect to such preference
payment and (iv) appropriate instruments to effect the appointment of the Note
Insurer as agent for such Noteholder in any legal proceeding related to such
preference payment, such instruments being in a form satisfactory to the Note
Insurer; provided, that if such documents are received after 12:00 noon New
York City time on such Business Day, they will be deemed to be received on the
following Business Day. Such payment shall be disbursed to the receiver or
trustee in bankruptcy named in the final order of the court exercising
jurisdiction on behalf of the Noteholder and not to any Noteholder directly
unless such Noteholder has returned principal or interest paid on the Notes to
such receiver or trustee in bankruptcy, in which case such payment shall be
disbursed to such Noteholder.
The Note Insurer will pay any other amount payable under the
Insurance Policy no later than 12:00 noon New York City time, on the later of
the Payment Date on which the related Deficiency Amount is due or the third
Business Day following receipt in New York, New York, on a Business Day by
State Street Bank and Trust Company, N.A., as Fiscal Agent for the Note
Insurer or any successor fiscal agent appointed by the Note Insurer (the
"Fiscal Agent") of a Notice (as described below); provided that if such Notice
is received after 12:00 noon New York City time on such Business Day, it will
be deemed to be received on the following Business Day. If any such Notice
received by the Fiscal Agent is not in proper form or is otherwise
insufficient for the purpose of making a claim under the Insurance Policy, it
shall be deemed not to have been received by the Fiscal Agent for purposes of
this paragraph, and the Note Insurer or the Fiscal Agent, as the case may be,
shall promptly so advise the Indenture Trustee and the Indenture Trustee may
submit an amended Notice.
Insured Payments due under the Insurance Policy, unless otherwise
stated therein, will be disbursed by the Fiscal Agent to the Indenture Trustee
on behalf of Noteholders by wire transfer of immediately available funds in
the amount of the Insured Payment less, in respect of Insured Payments related
to Preference Amounts, any amount held by the Indenture Trustee for the
payment of such Insured Payment and legally available therefor.
The Fiscal Agent is the agent of the Note Insurer only and the Fiscal
Agent shall in no event be liable to Noteholders for any acts of the Fiscal
Agent or any failure of the Note Insurer to deposit or cause to be deposited,
sufficient funds to make payment due under the Insurance Policy.
Subject to the terms of the Agreement, the Note Insurer shall be
subrogated to the rights of each Noteholder to receive payments under the
Notes to the extent of any payment by the Note Insurer under the Insurance
Policy.
As used in the Insurance Policy, the following terms shall have the
following meanings:
"Agreement" means the Indenture, dated as of November 1, 1998,
between the Trust and Norwest Bank Minnesota, National Association,
as the Indenture Trustee, the Note Administrator and the Custodian,
without regard to any amendment or supplement thereto, unless the
Note Insurer shall have consented in writing thereto.
"Business Day" means any day other than a Saturday, a Sunday or a day
on which banking institutions in New York City or the city in which
the corporate trust office of the Indenture Trustee is located,
authorized or obligated by law or executive order to close.
"Deficiency Amount" means, with respect to any Payment Date the sum
of (i) the Note Interest for such Payment Date minus Available Funds
and (ii) the then existing Overcollateralization Deficit, if any,
after application of Available Funds to reduce the Note Balance on
such Payment Date.
"Insured Payment" means, (i) as of any Payment Date, the Deficiency
Amount and (ii) any Preference Amount due and then owing under the
Insurance Policy.
"Noteholder" means each Noteholder (as defined in the Agreement)
(other than the Seller or the Servicer) who, on the applicable
Payment Date, is entitled under the terms of the applicable Note to
payment thereunder.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy substantially in the form of Exhibit
A attached to the Insurance Policy, the original of which is
subsequently delivered by registered or certified mail, from the
Indenture Trustee specifying the Insured Payment which shall be due
and owing on the applicable Payment Date.
"Preference Amount" means any amount previously distributed to a
holder of a Note that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United
States Bankruptcy Code (11 U.S.C.), as amended from time to time, in
accordance with a final nonappealable order of a court having
competent jurisdiction.
Capitalized terms used in the Insurance Policy and not otherwise
defined therein will have the respective meanings set forth in the Agreement
as of the date of execution of the Insurance Policy, without giving effect to
any subsequent amendment to or modification of the Agreement unless such
amendment or modification has been approved in writing by the Note Insurer.
Any notice under the Insurance Policy or service of process on the
Fiscal Agent of the Note Insurer may be made at the address listed below for
the Fiscal Agent of the Note Insurer or such other address as the Note Insurer
shall specify in writing to the Indenture Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway,
New York, New York, 10006, Attention: Municipal Registrar and Paying Agency,
or such other address as the Fiscal Agent shall specify to the Indenture
Trustee in writing.
The Insurance Policy is being issued under and pursuant to, and shall
be construed under, the laws of the State of New York, without giving effect
to the conflict of laws principles thereof.
THE INSURANCE PROVIDED BY THE INSURANCE POLICY IS NOT COVERED BY THE
PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW.
The Insurance Policy is not cancelable for any reason. The premium on
the Insurance Policy is not refundable for any reason including payment, or
provision being made for payment, prior to the maturity of the Notes.
THE NOTE INSURER
The Note Insurer is the principal operating subsidiary of MBIA Inc.,
a New York Stock Exchange listed company ("MBIA Inc."). MBIA Inc. is not
obligated to pay the debts of or claims against the Note Insurer. The Note
Insurer is domiciled in the State of New York and is licensed to do business
in and is subject to regulation under the laws of all 50 states, the District
of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern
Mariana Islands, the Virgin Islands of the United States and the Territory of
Guam. The Note Insurer has two European branches, one in the Republic of
France and the other in the Kingdom of Spain. New York has laws prescribing
minimum capital requirements, limiting classes and concentrations of
investments and requiring the approval of policy rates and forms. State laws
also regulate the amount of both the aggregate and individual risks that may
be insured, the payment of dividends by the Note Insurer, changes in control
and transactions among affiliates. Additionally, the Note Insurer is required
to maintain contingency reserves on its liabilities in certain amounts and for
certain periods of time.
Effective February 17, 1998, MBIA Inc. acquired all of the
outstanding stock of Capital Markets Assurance Corporation ("CMAC") through a
merger with its parent, CapMAC Holdings Inc. Pursuant to a reinsurance
agreement, CMAC has ceded all of its net insured risks (including any amounts
due but unpaid from third party reinsurers), as well as its unearned premiums
and contingency reserves, to the Note Insurer. MBIA Inc. is not obliged to pay
the debts of or claims against CMAC.
The consolidated financial statements of the Note Insurer, a wholly
owned subsidiary of MBIA Inc., and its subsidiaries as of December 31, 1997
and December 31, 1996 and for each of the three years in the period ended
December 31, 1997, prepared in accordance with generally accepted accounting
principles, included in the Annual Report on Form 10-K of MBIA Inc. for the
year ended December 31, 1997 and the consolidated financial statements of the
Note Insurer and its subsidiaries as of September 30, 1998 and for the nine
month periods ended September 30, 1998 and September 30, 1997 included in the
Quarterly Report on Form 10-Q of MBIA Inc. for the period ended September 30,
1998, are hereby incorporated by reference into this Prospectus Supplement and
shall be deemed to be a part hereof. Any statement contained in a document
incorporated by reference herein shall be modified or superseded for purposes
of this Prospectus Supplement to the extent that a statement contained herein
or in any other subsequently filed document which also is incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus Supplement.
All financial statements of the Note Insurer and its subsidiaries
included in documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act of 1934, as amended, subsequent to the date of
this Prospectus Supplement and prior to the termination of the offering of the
Notes shall be deemed to be incorporated by reference into this Prospectus
Supplement and to be a part hereof from the respective dates of filing such
documents.
The tables below present selected financial information of the Note
Insurer determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities ("SAP") and
generally accepted accounting principles ("GAAP"):
SAP
----------------------------------------------------
December 31, 1997 September 30, 1998
(Audited (Unaudited)
(In millions)
Admitted Assets $5,256 $6,318
Liabilities 3,496 4,114
Capital and Surplus 1,760 2,204
GAAP
----------------------------------------------------
December 31, 1997 September 30, 1998
(Audited) (Unaudited)
(In millions)
Assets $5,988 $7,439
Liabilities 2,624 3,268
Shareholder's Equity 3,364 4,171
Copies of the financial statements of the Note Insurer incorporated
by reference herein and copies of the Note Insurer's 1997 year-end audited
financial statements prepared in accordance with statutory accounting
practices are available, without charge, from the Note Insurer. The address of
the Note Insurer is 113 King Street, Armonk, New York 10504. The telephone
number of the Note Insurer is (914) 273-4545.
The Note Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Insurance Policy and Note Insurer set forth
under the headings "Note Insurance--The Insurance Policy" and "--The Note
Insurer" herein. Additionally, the Note Insurer makes no representation
regarding the Notes or the advisability of investing in the Notes.
Moody's Investors Service, Inc. rates the financial strength of the Note
Insurer "Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. rates the financial strength of the Note Insurer "AAA."
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.) rates
the financial strength of the Note Insurer "AAA."
Each rating of the Note Insurer should be evaluated independently.
The ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Note Insurer and its ability to pay claims on its
policies of insurance. Any further explanation as to the significance of the
above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
Notes, and such ratings may be subject to revision or withdrawal at any time
by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the Notes. The
Note Insurer does not guaranty the market price of the Notes nor does it
guaranty that the ratings on the Notes will not be revised or withdrawn.
CREDIT ENHANCEMENT DOES NOt APPLY TO PREPAYMENT RISK
In general, the protection afforded by the Insurance Policy is
protection for credit risk and not for prepayment risk. A claim may not be
made under the Insurance Policy in an attempt to guarantee or insure that any
particular rate of prepayment is experienced by the Trust.
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
Because the rate of payment of principal of the Notes depends
primarily on the rate of payment (including prepayments) of the principal
balance of the Home Loans, final payment of the Notes could occur
significantly earlier than the Stated Maturity Date. Noteholders will bear the
risk of being able to reinvest principal payments on the Notes at yields at
least equal to the yield on their respective Notes. No prediction can be made
as to the rate or timing of prepayments on the Home Loans in either stable or
changing interest rate environments. Any reinvestment risk due to the rate or
timing of prepayment of the Home Loans will be borne entirely by Noteholders.
The rate of principal payments on the Notes, the aggregate amount of
each interest payment on the Notes and the yields to maturity of the Notes
will be directly affected by the rate and timing of principal reductions on
the Home Loans. Such principal reductions may be in the form of scheduled
amortization payments or unscheduled payments or reductions, which may include
prepayments, repurchases and liquidations or write-offs due to default,
casualty, insurance or other disposition. On any Payment Date on or after the
Payment Date on which the Note Balance declines to 5% or the original Note
Balance, the holder(s) of the Trust Certificates or the Note Insurer may
effect a redemption of the Notes. See "Description of the Notes -- Redemption
of the Notes" herein.
The "weighted average life" of Notes refers to the average amount of
time that will elapse from the Closing Date to the date each dollar of
principal on the Notes is repaid. The weighted average life of the Notes will
be influenced by, among other factors, the rate at which principal reductions
occur on the Home Loans, the rate at which Excess Cash is paid to Noteholders
as described herein, and the extent to which any excess funds are distributed
to the holders of the Trust Certificates as described herein. If substantial
principal prepayments on the Home Loans are received as a result of
unscheduled payments, liquidations or repurchases, payments to Noteholders due
to such prepayments may significantly shorten the weighted average life of the
Notes. If the Home Loans experience delinquencies and defaults in the payment
of principal, then Noteholders will experience a delay in the receipt of
principal payments attributable to such delinquencies and defaults, which in
certain instances may result in a longer actual average weighted life of the
Notes than would otherwise be the case. Interest shortfalls on the Home Loans
due to principal prepayments in full and curtailments, and any resulting
shortfall in amounts payable on the Notes, will be covered to the extent of
amounts available from the applicable credit enhancement.
The rate and timing of principal payments on the Home Loans will be
influenced by a variety of economic, geographic, social and other factors.
These factors may include changes in borrowers' housing needs, job transfers,
unemployment, borrowers' net equity, if any, in the Mortgaged Properties,
servicing decisions, homeowner mobility, seasoning of home loans, market
interest rates for similar types of home loans and the availability of funds
for such home loans. In certain cases, the Servicer may, in a manner
consistent with its servicing practices, permit a borrower who is selling his
principal residence and purchasing a new one to substitute the new Mortgaged
Property as collateral for the related Home Loan, or may simply release its
lien on the existing collateral, leaving the related Home Loan unsecured. In
such event, the Servicer will generally require the borrower to make a partial
prepayment in reduction of the principal balance of the Home Loan to the
extent that the borrower has received proceeds from the sale of the prior
residence that will not be applied to the purchase of the new residence.
Certain of the Home Loans are subject to prepayment penalties during the first
three years after origination. Prepayment penalties may have the effect of
reducing the amount or the likelihood of prepayments on such Home Loans.
As with fixed rate obligations generally, the rate of prepayment on a
pool of home loans is affected by prevailing market interest rates for similar
types of home loans of a comparable term and risk level. If prevailing
interest rates were to fall significantly below the Home Loan Rates on the
Home Loans, the rate of prepayment would be expected to increase. Conversely,
if prevailing interest rates were to rise significantly above the Home Loan
Rates on the Home Loans, the rate of prepayment on the Home Loans would be
expected to decrease. In addition, any future limitations on the rights of
borrowers to deduct interest payments on mortgage loans for federal income tax
purposes may result in a higher rate of prepayment on the Home Loans. The
Depositor and the Transferor make no representations as to the particular
factors that will affect the prepayment of the Home Loans, as to the relative
importance of such factors, or as to the percentage of the principal balance
of the Home Loans that will be paid as of any date.
Payments of principal at a faster rate than anticipated will decrease
the yield on Notes purchased at a premium; payments of principal at a slower
rate than anticipated will decrease the yield on Notes purchased at a
discount. The effect on an investor's yield due to payments of principal
occurring at a rate that is faster (or slower) than the rate anticipated by
the investor during any period following the issuance of the Notes may not be
entirely offset by a subsequent like reduction (or increase) in the rate of
payments of principal during any subsequent period.
The rate of delinquencies and defaults on the Home Loans and of
recoveries, if any, on defaulted Home Loans and foreclosed properties will
affect the rate and timing of principal payments on the Home Loans, and,
accordingly, the weighted average lives of the Notes, and could cause a delay
in the payment of principal to the holders of Notes. Certain factors may
influence delinquencies and defaults, including origination and underwriting
standards, loan-to value ratios and delinquency history. In general, defaults
on Home Loans are expected to occur with greater frequency in their early
years, although little data is available with respect to the rate of default
on similar types of home loans. The rate of default on Home Loans with high
loan-to-value ratios, or on Home Loans secured by junior liens, may be higher
than that of home loans with lower loan-to-value ratios or secured by first
liens on comparable properties. In addition, the rate and timing of
prepayments, defaults and liquidations on the Home Loans will be affected by
the general economic condition of the area in which the related Mortgaged
Properties are located or the related borrower is residing. See "The Home Loan
Pool" herein. The risk of delinquencies and losses is greater and voluntary
principal prepayments are less likely in regions where a weak or deteriorating
economy exists, as may be evidenced by, among other factors, increasing
unemployment or falling property values.
Although certain data have been published with respect to the
historical prepayment experience of certain residential mortgage loans, such
mortgage loans may differ in material respects from the Home Loans and such
data may not be reflective of conditions applicable to the Home Loans. The
Depositor is aware of no significant historical prepayment data that is
generally available with respect to the types of Home Loans included in the
Home Loan Pool or similar types of home loans, and there can be no assurance
that the Home Loans will achieve or fail to achieve any particular rate of
principal prepayment. A number of factors suggest that the prepayment
experience of the Home Loan Pool may be significantly different from that of a
pool of conventional first lien, single family mortgage loans with equivalent
interest rates and maturities. One such factor is that the principal balance
of the average Home Loan is smaller than that of the average conventional
first lien mortgage loan. A smaller principal balance may be easier for a
borrower to prepay than a larger-balance and, therefore, a higher prepayment
rate may result for the Home Loan Pool than for a pool of first lien mortgage
loans, irrespective of the relative average interest rates and the general
interest rate environment. In addition, in order to refinance a first lien
mortgage loan, the borrower must generally repay any junior liens. However, a
small principal balance may make refinancing a Home Loan at a lower interest
rate less attractive to the borrower as the perceived impact to the borrower
of lower interest rates on the size of the monthly payment may not be
significant. Other factors that might be expected to affect the prepayment
rate of the Home Loan Pool include the amounts of and interest rates on the
underlying senior mortgage loans, and the tendency of borrowers to use real
property mortgage loans as long-term financing for home purchase and junior
liens as shorter-term financing for a variety of purposes, which may include
the direct or indirect financing of home improvement, education expenses, debt
consolidation, purchases of consumer durables such as automobiles, appliances
and furnishings and other consumer purposes. Furthermore, because at
origination the majority of the Home Loans had Original Combined Loan-to-Value
Ratios that approached or exceeded 100%, the related borrowers will generally
have significantly less opportunity to refinance the indebtedness secured by
the related Mortgaged Properties, including the Home Loans, and a lower
prepayment rate may result for the Home Loan Pool than for a pool of mortgage
(including first or junior lien) home loans that have Original Combined
Loan-to-Value Ratios less than 100%.
REINVESTMENT RISK
During periods of falling interest rates, Noteholders may receive an
increased amount of principal payments at a time when such holders may be
unable to reinvest such payments in investments having a yield and rating
comparable to the Notes. Conversely, during periods of rising interest rates,
Noteholders are likely to receive a decreased amount of principal payments at
a time when such holders may have an opportunity to reinvest such payments in
investments having a yield and rating comparable to the Notes.
STATED MATURITY DATE
The Stated Maturity Date of the Notes is October 25, 2029. The Stated
Maturity Date of the Notes has been determined on the assumption that all Home
Loans are repaid in accordance with their terms, with no principal payments or
defaults, and the Stated Maturity Date of the Notes has been determined by
adding 18 months to the last Payment Date scheduled for the Home Loan with the
latest stated maturity. It is anticipated that the actual final Payment Date
for the Notes will occur significantly earlier than the Stated Maturity Date.
WEIGHTED AVERAGE LIFE OF THE NOTES
The following information illustrates the effect of prepayments of
the Home Loans on the weighted average life of the Notes under certain stated
assumptions and is not a prediction of the prepayment rate that might actually
be experienced on the Home Loans. Weighted average life refers to the average
amount of time that will elapse from the date of delivery of a security until
each dollar of principal of such security will be repaid to the investor. The
weighted average life of the Notes will be influenced by the rate at which
principal of the Home Loans is paid, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
unscheduled reductions of principal, including without limitation those
resulting from full or partial prepayments, refinancings, liquidations and
write-offs due to defaults, casualties or other dispositions, and repurchases
by or on behalf of the Seller or the Depositor), the rate at which Excess Cash
is paid to Noteholders as described herein, and the extent to which any excess
funds are distributed to the holders of the Trust Certificates as described
herein.
Prepayments on home loans such as the Home Loans are commonly
measured relative to a prepayment standard or model. The model used in this
Prospectus Supplement, the Constant Prepayment Rate or "CPR" (the "Prepayment
Assumption") model, represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of the pool of home loans
for the life of such home loans. A 100% Prepayment Assumption assumes a CPR of
2.0% per annum of the outstanding principal balance of such home loans in the
first month of the life of the home loans and an additional approximately
0.90% (expressed as a percentage per annum) in each month thereafter until the
fifteenth month; beginning in the fifteenth month and in each month thereafter
during the life of the home loans, a CPR of 15% per annum each month is
assumed. As used in the table below, 0% Prepayment Assumption assumes
prepayment rates equal to 0% of the Prepayment Assumption (i.e., no
prepayments), which would include a CPR of 0%. 75% Prepayment Assumption
assumes prepayment rates equal to 75% of the Prepayment Assumption, and so
forth. The Prepayment Assumption does not purport to be a historical
description of prepayment experience or a prediction of the anticipated rate
of prepayment of any pool of home loans, including the Home Loans. Neither the
Transferor nor the Depositor makes any representations about the
appropriateness of the Prepayment Assumption or the CPR model.
Modeling Assumptions
For purposes of preparing the tables below, the following assumptions
(the "Modeling Assumptions") have been made.
(i) all scheduled payments on the Home Loans are timely received on the
first day of a Collection Period, commencing on November 1, 1998, no
delinquencies or losses occur on the Home Loans and all Home Loans have a
first payment date that occurs thirty (30) days after the origination thereof,
(ii) the scheduled payments on the Home Loans have been calculated on the
basis of the outstanding principal balance (prior to giving effect to
prepayments), the Home Loan Rate and the remaining term to stated maturity
such that the Home Loans will fully amortize by their remaining term to stated
maturity;
(iii) all scheduled payments of interest and principal in respect of the
Home Loans have been made up to, but not including the Cut-off Date;
(iv) the Home Loans prepay monthly at the specified percentages of the
Prepayment Assumption, no redemption or other early termination of the Notes
occurs and no repurchases of the Home Loans occur;
(v) all prepayments of Home Loans include 30 days of interest thereon;
(vi) the Closing Date for the issuance of the Notes is November 30, 1998,
each month will consist of 30 days and each year will consist of 360 days;
(vii) cash payments are received by the Noteholders on the 25th day of
each month, commencing in December 1998;
(viii) the initial Overcollateralization Amount equals $14,425,266.45
will gradually increase to the Required Overcollateralization Amount of
$26,750,652.35 and will thereafter be reduced in accordance with the terms of
the Indenture;
(ix) the Note Interest Rate is as set forth or described on the cover
page hereof;
(x) the Servicing Fee and Master Servicing fee are deducted from the
interest collections in respect of the Home Loans;
(xi) no reinvestment income from any Trust account is available for
payment to Noteholders; and
(xii) the Home Loan Pool consists of 4 pools of Home Loans having the
following characteristics:
ORIGINAL REMAINING
INTEREST TERM TERM
OUTSTANDING BALANCE RATE (MONTHS) (MONTHS)
- ---------------------- ------------ ---------------- ---------------
7,350,042.67 12.9689 116 112
58,657,807.99 13.0881 180 177
31,831,054.87 13.2207 240 236
84,759,404.00 13.2347 300 297
- ---------------------- ------------ ---------------- ---------------
182,598,309.53 13.1745 244 240
The table below indicates the percentage of the original Note Balance that
would be outstanding at each of the dates shown at the specified percentages
of the Prepayment Assumption and the corresponding weighted average life of
the Notes. These tables have been prepared based on the Modeling Assumptions
(including the assumptions regarding the characteristics and performance of
the Home Loans, which will differ from the actual characteristics and
performance thereof) and should be read in conjunction therewith.
<PAGE>
PERCENTAGE OF ORIGINAL CLASS NOTE BALANCE OUTSTANDING AT
THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A NOTES
DISTRIBUTION DATE 50% 75% 100% 125% 150% 200%
- ---------------------- ---- ---- ---- ---- ---- ----
Initial Percentage 100% 100% 100% 100% 100% 100%
November 1999 87% 85% 82% 79% 76% 71%
November, 2000 76% 70% 64% 59% 53% 43%
November, 2001 68% 59% 51% 44% 37% 24%
November, 2002 60% 49% 40% 33% 28% 19%
November, 2003 52% 40% 33% 26% 21% 13%
November, 2004 45% 34% 27% 21% 16% 9%
November, 2005 39% 29% 22% 16% 12% 6%
November, 2006 34% 25% 18% 13% 9% 4%
November, 2007 30% 21% 14% 10% 6% 3%
November, 2008 26% 18% 12% 7% 5% 1%
November, 2009 23% 15% 9% 6% 3% 1%
November, 2010 19% 12% 7% 4% 2% 0%
November, 2011 16% 10% 6% 3% 1% 0%
November, 2012 13% 8% 4% 2% 1% 0%
November, 2013 11% 6% 3% 1% 0% 0%
November, 2014 9% 5% 2% 1% 0% 0%
November, 2015 8% 4% 2% 0% 0% 0%
November, 2016 6% 3% 1% 0% 0% 0%
November, 2017 5% 2% 0% 0% 0% 0%
November, 2018 4% 1% 0% 0% 0% 0%
November, 2019 3% 1% 0% 0% 0% 0%
November, 2020 2% 0% 0% 0% 0% 0%
November, 2021 1% 0% 0% 0% 0% 0%
November, 2022 0% 0% 0% 0% 0% 0%
November, 2023 0% 0% 0% 0% 0% 0%
November, 2024 0% 0% 0% 0% 0% 0%
November, 2025 0% 0% 0% 0% 0% 0%
November, 2026 0% 0% 0% 0% 0% 0%
November, 2027 0% 0% 0% 0% 0% 0%
Weighted Average
Life(1) 6.89 5.47 4.48 3.77 3.23 2.48
Years to Call 6.81 5.38 4.39 3.69 3.16 2.41
- --------------------
(1) The weighted average life of the Notes is determined by (i)
multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Payment Date, (ii)
adding the results and (iii) dividing the sum by the initial Note
Balance.
<PAGE>
The paydown scenarios for the Notes set forth in the foregoing tables
are subject to significant uncertainties and contingencies (including those
discussed above under "Prepayment and Yield Considerations"). As a result,
there can be no assurance that any of the foregoing paydown scenarios and the
Modeling Assumptions on which they were made will prove to resemble the actual
performance of the Home Loans and the Notes, or that the actual weighted
average life of the Notes will not vary substantially from those set forth in
the foregoing tables, which variations may be shorter or longer, and which
variations may be greater with respect to later years. Furthermore, it is not
expected that the Home Loans will prepay at a constant rate or that all of the
Home Loans will prepay at the same rate. Moreover, the Home Loans actually
included in the Home Loan Pool, the payment experience of such Home Loans and
certain other factors affecting the payments on the Notes will not conform to
the Modeling Assumptions made in preparing the above tables. In fact, the
characteristics and payment experience of the Home Loans will differ in many
respects from such Modeling Assumptions. See "The Home Loan Pool" herein. To
the extent that the Home Loans actually included in the Home Loan Pool have
characteristics and a payment experience that differ from those assumed in
preparing the foregoing tables, the Notes are likely to have weighted average
life that is shorter or longer than those set forth in the foregoing tables.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates against the purchase price of the Home Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
In the opinion of Brown & Wood LLP, counsel to the Depositor and the
Underwriter and special tax counsel to the Trust ("Tax Counsel") for Federal
income tax purposes, the Notes will be characterized as debt and the Trust
will not be characterized as an association (or a publicly traded partnership)
taxable as a corporation or a taxable mortgage pool. Each Noteholder, by the
acceptance of a Note, will agree to treat the Notes as indebtedness for
Federal income tax purposes. See "Certain Material Federal Income Tax
Considerations" in the Prospectus for additional information concerning the
application of Federal income tax laws to the Trust and the Notes.
The Notes, depending on their issue prices, may be treated as having
been issued with original issue discount. As a result, holders of the Notes
may be required to recognize income with respect to the Notes somewhat in
advance of the receipt of cash attributable to that income. The prepayment
assumption that will be used for the purpose of computing original issue
discount for Federal income tax purposes is 100% of the Prepayment Assumption.
STATE TAX CONSEQUENCES
In addition to the Federal income tax consequences described in
"Certain Federal Income Tax Consequences" herein, potential investors should
consider the state income tax consequences of the acquisition, ownership and
disposition of the Notes. State income tax law may differ substantially from
the corresponding Federal tax law, and this discussion does not purport to
describe any aspect of the income tax laws of any state. Therefore, potential
investors should consult their own tax advisors with respect to the various
tax consequences of investments in the Notes.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended
("ERISA") and section 4975 of the Internal Revenue Code of 1986, as amended
(the "Code"), impose certain restrictions on employee benefit plans subject to
ERISA or plans or arrangements subject to section 4975 of the Code (each, a
"Plan") and on persons who are parties in interest or disqualified persons
("parties in interest") with respect to such Plans. Certain employee benefit
plans, such as governmental plans and church plans (if no election has been
made under section 410(d) of the Code), are not subject to the restrictions of
ERISA, and assets of such plans may be invested in the Notes without regard to
the ERISA considerations described below, subject to other applicable Federal
and state law. However, any such governmental or church plan which is
qualified under section 401(a) of the Code and exempt from taxation under
section 501(a) of the Code is subject to the prohibited transaction rules set
forth in section 503 of the Code. Any Plan fiduciary which proposes to cause a
Plan to acquire any of the Notes should consult with its counsel with respect
to the potential consequences under ERISA, and the Code, of the Plan's
acquisition and ownership of the Notes. See "ERISA Considerations" in the
Prospectus. Investments by Plans are also subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
PROHIBITED TRANSACTIONS
GENERAL
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions (including loans) involving the
Plan and its assets unless a statutory, regulatory or administrative exemption
applies to the transaction. Section 4975 of the Code imposes certain excise
taxes (or, in some cases, a civil penalty may be assessed pursuant to section
502(i) of ERISA) on parties in interest which engage in non-exempt prohibited
transactions.
PLAN ASSET REGULATION
The United States Department of Labor ("Labor") has issued final
regulations concerning the definition of what constitutes the assets of a Plan
for purposes of ERISA and the prohibited transaction provisions of the Code
(the "Plan Asset Regulation"). The Plan Asset Regulation describes the
circumstances under which the assets of an entity in which a Plan invests will
be considered to be "plan assets" such that any person who exercises control
over such assets would be subject to ERISA's fiduciary standards. Under the
Plan Asset Regulation, generally when a Plan invests in another entity, the
Plan's assets do not include, solely by reason of such investment, any of the
underlying assets of the entity. However, the Plan Asset Regulation provides
that, if a Plan acquires an "equity interest" in an entity that is neither a
"publicly-offered security" (as defined therein) nor a security issued by an
investment company registered under the Investment Company Act of 1940, the
assets of the entity will be treated as assets of the Plan investor unless
certain exceptions apply. If the Notes were deemed to be equity interests and
no statutory, regulatory or administrative exemption applied, the Trust could
be considered to hold plan assets by reason of a Plan's investment in the
Notes. Such plan assets would include an undivided interest in any assets held
by the Trust. In such an event, the Servicer and other persons, in providing
services with respect to the Trust's assets, would be parties in interest with
respect to such Plans, subject to the fiduciary responsibility provisions of
Title I of ERISA, including the prohibited transaction provisions of section
406 of ERISA, and to section 4975 of the Code with respect to transactions
involving the Trust's assets. Under the Plan Asset Regulation, the term
"equity interest" is defined as any interest in an entity other than an
instrument that is treated as indebtedness under "applicable local law" and
that has no "substantial equity features." Although the Plan Asset Regulation
is silent with respect to the question of which law constitutes "applicable
local law" for this purpose, Labor has stated that these determinations should
be made under the state law governing interpretation of the instrument in
question. In the preamble to the Plan Asset Regulation, Labor declined to
provide a precise definition of what features are equity features or the
circumstances under which such features would be considered "substantial,"
noting that the question of whether a Plan's interest has substantial equity
features is an inherently factual one, but that in making a determination it
would be appropriate to take into account whether the equity features are such
that a Plan's investment would be a practical vehicle for the indirect
provision of investment management services. The Depositor expects that the
Notes will be classified as indebtedness without substantial equity features
for ERISA purposes. However, if the Notes are deemed to be equity interests in
the Trust and no statutory, regulatory or administrative exception applies,
the Trust could be considered to hold plan assets by reason of a Plan's
investment in the Notes.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any Notes on
behalf of a Plan should consult with its counsel regarding the applicability
of the fiduciary responsibility and prohibited transaction provisions of ERISA
and the Code to such investment. Among other things, before purchasing any
Notes, a fiduciary of a Plan should make its own determination as to whether
the Trust, as obligor on the Notes, is a party in interest with respect to the
Plan, the availability of the exemptive relief provided in the Plan Asset
Regulation and the availability of any other prohibited transaction
exemptions. Purchasers should analyze whether the decision may have an impact
with respect to purchases of the Notes.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and its
Subsidiaries as of December 31, 1997, and December 31, 1996, and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows for each of the three years in the period ended December 31, 1997,
incorporated by reference in this Prospectus Supplement, have been
incorporated herein in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
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 Notes. Distribution
of the Notes will be made by the Underwriter from time to time in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. In connection with the sale of the Notes, the Underwriter may be deemed
to have received compensation from the Depositor in the form of underwriting
discounts.
The Depositor has been advised by the Underwriter that it intends to
make a market in the Notes but has no obligation to do so. There can be no
assurance that a secondary market for the Notes will develop or, if it does
develop, that it will continue.
The Depositor and the Seller have agreed to indemnify the Underwriter
against, or make contributions to the Underwriter with respect to, certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
LEGAL INVESTMENT MATTERS
The Notes will not constitute "mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"). Accordingly, many
institutions with legal authority to invest in "mortgage related securities"
may not be legally authorized to invest in the Notes.
There may be restrictions on the ability of certain investors,
including depository institutions, either to purchase the Notes or to purchase
Notes 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 Notes constitute legal investments for such investors.
LEGAL MATTERS
Certain legal matters will be passed upon on behalf of the Depositor
and the Underwriter by Brown & Wood LLP, New York, New York, and on behalf of
the Seller and the Transferor by Hunton & Williams, Richmond, Virginia.
RATINGS
It is a condition to the issuance of the Notes that the Notes be
rated "Aaa" by Moody's Investors Service, Inc. and "AAA" by Standard & Poor's
Ratings Services, a Division of The McGraw-Hill Companies, Inc.
The ratings on the Notes address the likelihood of the receipt by the
holders of the Notes of all payments on the Home Loans to which they are
entitled. The ratings on the Notes also address the structural, legal and
Trust-related aspects of the Notes, including the nature of the Home Loans. In
general, the ratings on the Notes address credit risk and not prepayment risk.
The ratings on the Notes do not represent any assessment of the likelihood
that principal prepayments of the Home Loans will be made by borrowers or the
degree to which the rate of such prepayments might differ from that originally
anticipated. As a result, the initial ratings assigned to the Notes do not
address the possibility that holders of the Notes might suffer a lower than
anticipated yield in the event of principal payments on the Notes resulting
from rapid prepayments of the Home Loans, or in the event that the Trust is
terminated prior to the Stated Maturity Date of the Notes.
The Depositor has not requested ratings on the Notes from any rating
agency other than the Rating Agencies. However, there can be no assurance as
to whether any other rating agency will rate the Notes, or, if it does, what
rating would be assigned by any such other rating agency. Any rating on the
Notes by another rating agency, if assigned at all, may be lower than the
ratings assigned to the Notes 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 Notes 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 the Notes.
<PAGE>
INDEX OF DEFINED TERMS
Administrative Fee Amount.....................................................32
Agreement.....................................................................43
Available Funds...............................................................32
Book-Entry Notes..............................................................30
Business Day..................................................................43
CMAC..........................................................................44
CMS.......................................................................11, 21
Code..........................................................................51
Collection Account............................................................25
CPR...........................................................................48
Credit Score..................................................................11
Custodian.....................................................................30
Cut-off Date..................................................................10
Cut-off Date Pool Principal Balance...........................................10
Cut-off Date Principal Balance................................................10
Defective Home Loan...........................................................14
Deficiency Amount.............................................................43
Definitive Notes..............................................................31
Deposit Date..................................................................33
Depositor.....................................................................10
Determination Date............................................................33
DTC...........................................................................30
ERISA.........................................................................51
Event of Default..............................................................39
Excess Cash...................................................................36
Fiscal Agent..................................................................42
GAAP..........................................................................44
High LTV Home Loan Servicing Portfolio........................................21
Home Loan Pool................................................................12
Home Loan Rate................................................................14
Home Loan Sale Agreement......................................................10
Home Loans....................................................................10
Indenture.....................................................................30
Indenture Trustee.............................................................30
Indirect Participants.........................................................30
Insured Payment...............................................................43
Interest Period...............................................................33
Labor.........................................................................52
Liquidated Home Loan..........................................................34
Liquidation Proceeds..........................................................33
Master Servicer Defaults......................................................28
MBIA Inc......................................................................44
Mego..........................................................................21
Modeling Assumptions..........................................................48
Monthly Principal.............................................................34
Mortgage......................................................................10
Mortgage Files................................................................13
Mortgaged Properties..........................................................10
Net Liquidation Proceeds......................................................33
Norwest.......................................................................22
Note Account..................................................................34
Note Administrator........................................................10, 30
Note Balance..................................................................34
Note Insurer..................................................................42
Note Interest.................................................................34
Note Interest Rate........................................................30, 34
Noteholder....................................................................43
Notes.....................................................................10, 30
Notice........................................................................43
Original Combined Loan-to-Value Ratio.........................................12
Overcollateralization Amount..................................................36
Overcollateralization Deficit.................................................37
Overcollateralization Surplus.................................................37
Owner Trustee.................................................................10
Participants..................................................................30
Payments Ahead................................................................34
Percentage Interest...........................................................31
Plan..........................................................................51
Plan Asset Regulation.........................................................52
Pool Principal Balance........................................................10
Preference Amount.............................................................43
Prepayment Assumption.........................................................48
Principal Balance.........................................................10, 34
Principal Prepayment..........................................................34
Realized Loss.................................................................37
Record Date...................................................................30
Redemption Date...............................................................38
Release Price.................................................................14
Required Overcollateralization Amount.........................................36
Rules.........................................................................30
SAP...........................................................................44
Seller........................................................................10
Servicer..............................................................10, 11, 21
Servicer Event of Default.....................................................27
Servicing Advance.............................................................29
Servicing Agreement...........................................................24
Servicing Fee.................................................................28
SMMEA.........................................................................53
Tax Counsel...................................................................51
the Home Loan Pool............................................................12
Total Servicing Portfolio.....................................................21
Transferor....................................................................10
Trust.........................................................................10
Trust Agreement...............................................................10
Trust Certificates............................................................10
Trust Insurance Proceeds......................................................33
Trust Paying Agent........................................................10, 31
Underwriter...................................................................10
USAP..........................................................................26
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON [CITY NATIONAL LOGO]
HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CITY CAPITAL HOME LOAN TRUST 1998-4
CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR $168,173,000 CLASS A 7.04% NOTES
REPRESENTATIONS MUST NOT BE rELIED
UPON. THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS DO NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN
THE SECURITIES OFFERED HEREBY, NOR AN
OFFER OF THE SECURITIES IN ANY STATE
OR JURISdICTION IN WHICH, OR TO ANY
PERSON TO WHOM, SUCH OFFER WOULD BE
UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AT ANY TIME DOES NOT IMPLY
THAT INFORMATION HEREIN OR THEREIN IS FINANCIAL ASSET SECURITIES CORP.
CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE. (DEPOSITOR)
-----------------------------------
PROSPECTUS SUPPLEMENT
-----------------------------------
[GREENWICH LOGO]
NOVEMBER 23, 1998
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.
