<PAGE>
PROSPECTUS SUPPLEMENT
(To Prospectus dated September 28, 1998)
$173,979,000
OCWEN MORTGAGE LOAN ASSET BACKED NOTES, SERIES 1998-OAC1
$87,073,000 Class A-1 Variable Rate Notes
$86,906,000 Class A-2 Variable Rate Notes
FINANCIAL ASSET SECURITIES CORP.
Depositor
Consider carefully ------------------
the risk factors
beginning on OAIC MORTGAGE RESIDENTIAL SECURITIES HOLDINGS, LLC
page-S-8 in this Transferor
prospectus
supplement and on ------------------
page 14 in the
prospectus. OCWEN FEDERAL BANK FSB
Servicer
The Notes represent
obligations of the ------------------
trust only and do
not represent an [FSA Logo]
interest in or
obligation of any
other entity. The trust will issue two classes of Notes. The Notes
identified above are being offered by this prospectus
This prospectus supplement and the accompanying prospectus.
supplement may be
used to offer and The Notes
sell the Notes only o The Notes represent non-recourse obligations
if accompanied by of the trust.
the prospectus. o Payments on each Class of Notes will be
secured principally by the proceeds of the
related group of mortgage loans.
o Interest will accrue on the outstanding
principal balance of each Class of Notes at
a rate equal to the sum of One-Month LIBOR
and a fixed margin. Beginning in November
2003, interest payments on the Notes will be
subject to the limitations described in this
prospectus supplement.
Credit Enhancement
o Note insurance policy issued by Financial
Security Assurance Inc. will guarantee receipt
of interest and principal by the holders of the
Notes at the times and to the extent described
herein.
o Excess interest received from the mortgage
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 $________, before deducting issuance
expenses payable by the Depositor, estimated to be $_______. 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, Cedel Bank, societe anonyme,
and the Euroclear System on or about November 13, 1998.
-------------------
[GREENWICH LOGO]
November 12, 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 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-81 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.
S-2
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
SUMMARY.....................................S-5
The Notes................................S-5
The Trust................................S-5
Cut-Off Date.............................S-5
Closing Date.............................S-5
Depositor................................S-5
Transferor...............................S-5
Servicer.................................S-5
Indenture Trustee........................S-5
Owner Trustee............................S-5
Note Insurer.............................S-5
The Mortgage Loans.......................S-5
Payment Dates............................S-5
Interest and Principal Payments..........S-5
Credit Enhancement.......................S-6
Note Insurance Policy................S-6
Overcollateralization................S-6
Optional Redemption......................S-6
Ratings..................................S-6
Tax Status...............................S-6
ERISA Considerations.....................S-6
Legal Investment.........................S-7
RISK FACTORS................................S-8
Unpredictability of Prepayments
And Effect on Yields.................S-8
Potential Inadequacy of Credit
Enhancement..........................S-9
Risk of Limitations to Adjustments
of the Loan Rates....................S-9
Default Risks .. ........................S-10
Notes May Not Be Appropriate for
Certain Investors....................S-11
Year 2000 Systems Risk...................S-11
Limited Resale...........................S-12
The Bankruptcy or Insolvency
of the Contributor....................S-12
DESCRIPTION OF THE NOTES....................S-13
General..................................S-13
Book-Entry Registration and
Definitive Notes.......................S-13
Assignment of Mortgage Loans.............S-17
Payments on the Notes....................S-18
Calculation of One-Month LIBOR...........S-23
Note Accounts............................S-24
Liquidity Account........................S-25
Reserve Account..........................S-25
Overcollateralization Feature............S-25
Reports to the Noteholders...............S-26
Optional Redemption of the Class
A-1 and Class A-2 Notes..............S-27
Payments to the Holder of the
Equity Certificates..................S-28
The Indenture Trustee....................S-28
Voting...................................S-29
Note Events of Default...................S-29
THE TRUST...................................S-29
THE DEPOSITOR...............................S-29
THE TRANSFEROR..............................S-29
THE SERVICER................................S-29
DESCRIPTION OF THE MORTGAGE
LOANS..................................S-30
General..................................S-30
Mortgage Loan Statistics.................S-30
UNDERWRITING STANDARDS......................S-55
Flagstar Mortgage Loans..................S-55
Non-Flagstar Mortgage Loans..............S-55
PREPAYMENT AND YIELD
CONSIDERATIONS.........................S-57
General..................................S-57
Weighted Average Life....................S-60
THE SERVICING AGREEMENT.....................S-66
THE NOTE INSURER............................S-71
General..................................S-71
Reinsurance..............................S-72
Ratings .................................S-72
Capitalization ..........................S-73
Incorporation of Certain Documents
by Reference.........................S-73
Insurance Regulation.....................S-74
THE NOTE INSURANCE POLICY...................S-74
Note Insurance Policy Does Not Apply
to Prepayment Risk...................S-76
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES...........................S-77
General..................................S-77
STATE TAX CONSEQUENCES......................S-77
ERISA CONSIDERATIONS........................S-77
General..................................S-77
Prohibited Transactions..................S-77
General..................................S-77
Plan Asset Regulation....................S-78
Review by Plan Fiduciaries...............S-78
EXPERTS.....................................S-78
METHOD OF DISTRIBUTION......................S-79
LEGAL INVESTMENT MATTERS....................S-79
LEGAL MATTERS...............................S-79
RATINGS.....................................S-79
INDEX OF DEFINED TERMS......................S-81
ANNEX A ....................................A-1
ANNEX B ....................................B-1
S-3
<PAGE>
PROSPECTUS
Prospectus Supplement
or Current Report on Form 8-K......2
Incorporation of Certain Information
by Reference.......................2
Available Information..................3
Reports to Securityholders.............3
Summary of Terms.......................4
Risk Factors...........................14
The Trust Fund.........................21
Use of Proceeds........................28
The Depositor..........................28
Loan Program...........................28
Description of The
Securities .........................31
Credit Enhancement.....................43
Yield and Prepayment
Considerations......................50
The Agreements.........................54
Certain Legal Aspects
of the Loans........................70
Certain Material Federal Income
Tax Considerations..................86
FASIT Securities.......................110
State Tax Considerations...............114
ERISA Considerations...................115
Legal Investment.......................120
Method of Distribution.................121
Legal Matters..........................122
Financial Information..................122
Rating.................................122
S-4
<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 Class A-1 and Class A-2 Notes
pursuant to the indenture. Each Class of Notes will be secured principally by
the related group of mortgage loans. The assets pledged to secure the Notes
under the indenture and payments under the note insurance policy will be the
sole 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 Cedel or Euroclear (in Europe) in minimum denominations of $25,000.
The Trust
Ocwen Mortgage Loan Trust 1998-OAC1
Cut-Off Date
October 1, 1998
Closing Date
On or about November 13, 1998
Depositor
Financial Asset Securities Corp.
Transferor
OAIC Mortgage Residential Securities Holdings,
LLC
Servicer
Ocwen Federal Bank FSB
Indenture Trustee
Norwest Bank Minnesota, National Association
Owner Trustee
Wilmington Trust Company
Note Insurer
Financial Security Assurance Inc.
The Mortgage Loans
The Trust's main source of funds for making payments on each Class of Notes
will consist of the related group of mortgage loans. As of October 1, 1998,
Loan Group I consists of approximately 1,078 mortgage loans with an aggregate
principal balance of approximately $91,176,691 and original terms of up to 30
years and which are secured by first liens on single-family residential
properties. Loan Group II consists of approximately 730 mortgage loans with an
aggregate principal balance of approximately $91,001,412 and original terms of
up to 30 years and which are secured by first or second liens on single-family
residential properties.
See "Description of the Mortgage Loans."
Payment Dates
The 25th day of each month, or if the 25th day is not a business day, then the
next business day, beginning on November 25, 1998.
Interest and Principal Payments
The interest rate for each Class of Notes is variable. On each payment date,
the interest payable on the Classes will be calculated at the following rates:
Through the Initial Redemption Date
Class A-1 One-Month LIBOR + 65 basis points
Class A-2 One Month LIBOR + 70 basis points
Thereafter
Class A-1 One-Month LIBOR + 130 basis points
Class A-2 One Month LIBOR + 140 basis points
Beginning in November 2003, the interest payable on the Classes will be
subject to the limitations specified in this prospectus supplement.
Interest on each Class of Notes for a given payment date will be calculated
based on the actual number of days (and an assumed 360-day year) included in
the period commencing on the preceding payment date and ending on the day
preceding the current payment date, except that in the case of the first
payment date, interest will be calculated on the actual number of days
included in the period commencing on the Closing Date and ending on November
24, 1998.
S-5
<PAGE>
On each payment date available funds from Loan Group I will be applied to pay
interest and then principal on the Class A-1 Notes. On each payment date
available funds from Loan Group II will be applied to pay interest and then
principal on the Class A-2 Notes. In each case, payments on the Class A-1 and
Class A-2 Notes will be made after payment of servicing fees, trustees fees
and insurer fees.
See "Description of the Notes -- Payments on the Notes".
Credit Enhancement
The credit enhancements include a note insurance policy and
overcollateralization. These 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 herein.
In the absence of payments under the note insurance policy, Noteholders will
directly bear the credit and other risks associated with the mortgage loans.
Before each payment date, the Indenture Trustee will determine whether funds
available to make the required payments of principal and interest on the Notes
are sufficient. If a deficiency exists that is covered by the note insurance
policy, then the Indenture Trustee will make a claim under the note insurance
policy.
See "The Note Insurance Policy" herein.
Overcollateralization
It is anticipated that the mortgage loans in each loan group will generate
monthly interest in an aggregate amount that exceeds the amount needed to pay
certain trust expenses and monthly interest on the related Notes. A portion of
this excess interest will be applied to make additional principal payments on
the related Notes, which will reduce the principal balance of such Notes at a
faster rate than the aggregate principal balance of the related mortgage loans
is being reduced. As a result, the aggregate principal balance of the mortgage
loans in each loan group should generally exceed the principal balance of the
related 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 mortgage
loans to maintain the required level of overcollateralization.
See "Description of the Notes".
Optional Redemption
The majority holder of the ownership interest in the Trust may redeem each
Class of Notes at any time beginning on the earlier of (x) October 25, 2003
and (y) the payment date on which the principal balance of the mortgage loans
and any real estate owned by the trust is 20% or less of the principal balance
of the mortgage loans on October 1, 1998.
See "Description of the Notes - Optional Redemption of the Class A-1 and Class
A-2 Notes".
Ratings
It is a condition of the issuance of the Notes that they be assigned a rating
of "AAA" by Standard & Poor's, 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
S-6
<PAGE>
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. Neither the Class A-1 Notes nor the Class A-2
Notes will be "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act.
See "Legal Investment Matters" in this prospectus supplement and "Legal
Investment" in the prospectus.
S-7
<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 mortgage
loans in whole or in part at any time.
We cannot predict the rate at which
borrowers will repay their mortgage
loans. A prepayment of a mortgage loan
generally will result in a prepayment
on the Notes.
o If you purchase your Notes at
a discount and principal is
repaid slower than you expect,
or 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
mortgage loans will be
sensitive to prevailing
interest rates. Generally, if
prevailing interest rates
decline significantly below
the interest rates on the
fixed rate mortgage loans,
these mortgage loans are more
likely to prepay than if
prevailing rates remain above
the interest rates on such
mortgage loans. In addition,
if interest rates decline,
adjustable rate mortgage loan
prepayments may increase due
to the availability of fixed
rate mortgage loans at lower
interest rates. Conversely, if
prevailing interest rates rise
significantly, the prepayments
on fixed rate and adjustable
rate mortgage loans are likely
to decrease.
o The Transferor may be required
to partially redeem that
portion of a Note's principal
balance equal to the principal
balance of any mortgage loans
in the related loan group for
which representations and
warranties have been breached
and have not been cured. These
partial redemptions will have
the same effect on the holders
of the Notes as a prepayment
of the mortgage loans.
o In most circumstances,
liquidations of defaulted
mortgage loans will have the
same effect on the yield of
the holders of the Notes as a
prepayment of such mortgage
loans. See "--Default Risks"
for a discussion of the
default risks presented by the
mortgage loans.
o Approximately 1.57% of the
principal balance of the
mortgage loans on October 1,
1998 are "balloon loans."
Balloon loans generally
provide for scheduled monthly
payments of principal up to
the 179th month following the
month of their origination
with a final lump sum payment
on the 180th month. This lump
sum payment is substantially
larger than the previous
scheduled payments. Having
balloon loans in the trust may
cause the prepayment rate to
vary more than if there were
no balloon loans, because the
borrower generally must
refinance the mortgage loan or
sell the mortgaged property
prior to payment of the lump
sum on the maturity date.
S-8
<PAGE>
See "Prepayment and Yield
Considerations" for a description of
factors that may influence the rate
and timing of prepayments on the
mortgage loans.
Potential Inadequacy
Of Credit Enhancement...................Each group of mortgage loans is
expected to generate more interest
than is needed to pay interest on
related Class of Notes since the
weighted average interest rate on the
related mortgage loans is expected to
be higher than the weighted average
interest rate on the related Class of
Notes. If the related mortgage loans
generate more interest than is needed
to pay interest on the related Class
of Notes and certain fees and expenses
of the trust, the remaining interest
will be used to compensate for losses
on the related mortgage loans. After
these financial obligations of the
trust 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
mortgage loans during the preceding
month. Such amount will be influenced by
changes in the weighted average of the
mortgage interest rates resulting from
prepayments and liquidations of the
related mortgage loans as well as from
adjustments of the mortgage interest
rates on adjustable rate mortgage loans.
Because the index used to determine the
mortgage interest rates on the
adjustable rate mortgage loans is
different from the index used to
determine the interest rates payable on
the related Class of Notes, it is
possible that the interest rates on the
related Class of Notes may increase
relative to the interest rates on the
related mortgage loans. In that event,
it may be necessary to apply all or a
portion of the available excess interest
to make required payments of interest on
the related Class of Notes. As a result,
such excess interest may be unavailable
for any other purpose.
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.
Risk of Limitations
to Adjustments of
the Loan Rates..........................The calculation of the interest rates
on the Notes is based upon the value
of an index which is generally
different from the value of the index
applicable to the adjustable rate
mortgage loans. This difference may
result from the use of a different
index, a different rate determination
date or a different rate adjustment
date. Since the mortgage loan index
may respond to different economic and
market factors than the Note index,
there is not necessarily a correlation
in movement between them. For example,
it is possible that the interest rates
on certain of the mortgage loans may
decline while the interest rates on
the related Notes are stable or
rising. It is also possible that both
the mortgage interest rates and Note
interest rates may decline or increase
during the same period, but that the
mortgage interest rates on certain of
the mortgage loans may decline more
rapidly or increase more slowly than
the related Note interest rates.
S-9
<PAGE>
This absence of a correlation between
movement in the mortgage loan index and
the Note index may reduce the interest
payable on the Notes beginning in
November 2003, when the interest rate on
the Notes will be limited by the
imposition of a rate cap. The rate cap
will be the least of (i) the LIBOR-based
rate, (ii) the rate equal to the amount
of interest accrued on the related
mortgage loans (net of certain amounts
described herein) divided by the balance
of the Notes, and (iii) 16%, subject to
a payment cap calculated based on the
amount of interest accrued on the
related mortgage loans (net of certain
amounts described herein). If the amount
of interest that would accrue on a Class
of Notes is greater than the payment
cap, then a deficiency in interest paid
to the Noteholders will occur. Although
Noteholders will be entitled to receive
such deficiency from excess available
funds, on future payment dates, we
cannot assure you that excess funds will
be available for such purpose. The
ratings of the Notes do not address the
likelihood of the payment of any such
deficiency, nor will the Note Insurer be
liable for the payment of any such
deficiency.
Default Risks...........................Holders of the Notes are protected to
the extent described herein by the
various forms of credit enhancement
against the risk of losses on the
mortgage loans. In most circumstances,
liquidations of defaulted mortgage
loans will have the same effect on the
Notes as a prepayment of such mortgage
loans. However, in the unlikely event
that the credit enhancements are no
longer available to provide protection
to Noteholders, any losses on the
mortgage loans would be borne by such
holders. The risks presented by the
mortgage loans include the following:
o Underwriting Standards. The
mortgage loans were originated by
Flagstar Bank, FSB and various
other originators. The Flagstar
loans were originated pursuant to
alternative documentation
programs. Those originated by
various other originators were
intended to conform with FNMA,
FHLMC, GNMA or other conduit
standards but subsequently were
discovered not to meet the
originally intended FNMA, FHLMC,
GNMA or other conduit market
parameters, as applicable, due to
errors in relevant documentation
or credit deterioration of the
borrower. As a result, the
mortgage loans are likely to
experience higher rates of
delinquencies, defaults and
foreclosures than mortgage loans
conforming to more traditional
underwriting standards.
o Early Default. Defaults on
mortgage loans are generally
expected to occur more frequently
in the early years of the terms
of mortgage loans. Substantially
all of the mortgage loans in the
trust were originated since
October 1997.
o High LTV Ratios. When measured by
aggregate principal balance,
approximately 18.07% of the
mortgage loans in Loan Group I
and approximately 12.79% of the
mortgage loans in Loan Group II
have loan-to-value ratios in
excess of 90%. Mortgage loans
with high loan-to-value ratios
will be more sensitive to
declining property values than
those with lower loan-to-value
ratios and therefore may
experience a higher incidence of
default.
o Geographic Concentration. When
measured by aggregate principal
balance, mortgaged properties
located in the states of
Michigan, California and Florida
secure approximately 31.05%,
9.77% and
S-10
<PAGE>
6.08%, respectively, of the
mortgage loans in Loan Group
I. When measured by aggregate
principal balance, mortgaged
properties located in the states
of Michigan, California and South
Carolina secure approximately
22.00%, 10.69% and 5.23%,
respectively, of the mortgage
loans in Loan Group II. 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
mortgage 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.
Notes May Not Be
Appropriate for Certain
Investors...............................The Notes may not be an appropriate
investment for investors who 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
mortgage loans.
o The rate of principal payments on
and the weighted average lives of
the Notes will be sensitive to
the uncertain rate and timing of
principal prepayments on the
mortgage 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
Noteholders with liquidity of
investment.
Year 2000 Systems Risk..................As is the case with most companies
using computers in their operations,
the Servicer is faced with the task of
completing its compliance goals in
connection with the year 2000 issue.
The year 2000 issue is the result of
prior computer programs being written
using two digits, rather than four
digits, to define the applicable year.
Any of the Servicer's computer
programs that have time-sensitive
software may recognize a date using
"00" as the year 1900 rather than the
year 2000. Any such occurrence could
result in major computer system
failure or miscalculations. The
Servicer is presently engaged in
various procedures to ensure that its
computer systems and software will be
year 2000 compliant. However, in the
event that the Servicer, or any of its
suppliers, customers, brokers or
agents do not successfully and timely
achieve year 2000 compliance, the
performance of obligations of the
Servicer under the Servicing Agreement
could be materially adversely
affected.
S-11
<PAGE>
Limited Resale..........................The Underwriter intends to make a
market for resale in the Notes but has
no obligation to do so. There is no
assurance that such a market will
develop or, if it develops, that it
will continue. Consequently, you may
not be able to sell your Notes readily
or at prices that will enable you to
realize your desired yield. The market
values of the Notes are likely to
fluctuate; these fluctuations may be
significant and could result in
significant losses to you.
The secondary markets for mortgage
backed securities have experienced
periods of illiquidity and can be
expected to do so in the future.
Illiquidity can have a severely adverse
effect on the prices of securities that
are especially sensitive to prepayment,
credit, or interest rate risk, or that
have been structured to meet the
investment requirements of limited
categories of investors.
The Bankruptcy or Insolvency
of the Contributor......................The Contributor and the Transferor
believe that the transfer of the
mortgage loans from the Contributor to
the Transferor will constitute a
contribution by the Contributor to the
capital of the Transferor. However, in
the event of the bankruptcy or
insolvency of the Contributor, a
trustee in bankruptcy could attempt to
recharacterize the contribution of the
mortgage loans. Such an attempt, even
if unsuccessful, could result in
delays in payments on the Notes. If
such an attempt were successful, the
trustee in bankruptcy could elect to
accelerate payment of the Notes and
liquidate the assets held in the
trust, with the Noteholders entitled
to no more than the outstanding
principal amount of their Notes
together with interest to the date of
payment. There is no assurance that
the proceeds of any such sale would be
sufficient to pay such amounts.
S-12
<PAGE>
DESCRIPTION OF THE NOTES
The Notes will be issued pursuant to the Indenture, dated as of
October 1, 1998 between Ocwen Mortgage Loan Trust 1998-OAC1 (the "Trust") and
Norwest Bank Minnesota, National Association (the "Indenture Trustee"). The
Trust was formed pursuant to a deposit trust agreement (the "Trust
Agreement"), dated as of October 1, 1998 between Financial Asset Securities
Corp. (the "Depositor"), Wilmington Trust Company (the "Owner Trustee") and
Norwest Bank Minnesota, National Association, as paying agent. The summaries
of certain provisions of the Indenture set forth below and under the caption
"The Agreements" in the Prospectus, 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, a copy of which the Depositor will provide (without exhibits)
without charge upon written request addressed to the Depositor at 600
Steamboat Road, Greenwich, Connecticut 06830.
General
The Notes will be secured by the trust estate (the "Trust Estate")
created by the Indenture. The Notes represent non-recourse obligations of the
Trust, and proceeds of the assets in the Trust Estate and payments under the
Note Insurance Policy, if any, will be the only sources of payments on the
Notes. The Notes will not represent an interest in or obligation of the
Contributor, the Servicer, the Indenture Trustee, the Owner Trustee, the
Depositor, 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 Trust.
The assets of the Trust Estate will consist of (i) two groups (each,
a "Group") of mortgage loans transferred to the Trust on the Closing Date (the
"Mortgage Loans"); (ii) all interest and principal due under the respective
Mortgage Loans after the Cut-Off Date; (iii) security interests in the
properties securing such Mortgage Loans (the "Mortgaged Properties"); (iv)
amounts on deposit in the Note Account, the Reserve Account and the Liquidity
Account; (v) the Trust's rights under the Swap Agreement, the Mortgage Loan
Contribution Agreement, the Ownership Transfer Agreement and the Servicing
Agreement; and (vi) certain other property.
All payments on the Notes will be made by or on behalf of the
Indenture Trustee to each Noteholder of record on the Record Date for the
related Payment Date. Payments on Notes issued in book-entry form will be made
by or on behalf of the Indenture Trustee to DTC. Payments on Definitive Notes
generally will be made either (i) by check mailed to the address of each
Noteholder as it appears in the register maintained by the Indenture Trustee
or (ii) by wire transfer of immediately available funds to the account of a
Noteholder, if such Noteholder (a) is the registered holder of Definitive
Notes having an initial principal amount of at least $1,000,000 and (b) has
provided the Indenture Trustee with wiring instructions in writing five days
prior to the related Record Date or has provided the Indenture Trustee with
such instructions for any previous Payment Date. A fee may be charged by the
Indenture Trustee to a Noteholder of Definitive Notes for any payment made by
wire transfer. Notwithstanding the above, the final payment in redemption of
any Definitive Note will be made only upon presentation and surrender of such
Definitive Note at the office or agency designated by the Indenture Trustee
for that purpose.
The Notes will be issued in denominations of not less than $25,000
principal amount and in integral dollar multiples of $1,000 in excess thereof,
with the exception of one Note of each Class which may be issued in a lesser
amount.
Book-Entry Registration and Definitive Notes
The Notes initially will be Book-Entry Notes (the "Book-Entry
Notes"). Persons acquiring beneficial ownership interests in the Notes
("Beneficial Owners") will hold such Notes through DTC, in the United States,
or Cedel or Euroclear, in Europe, if they are participants of such systems, or
indirectly through organizations that are participants in such systems. The
Book-Entry Notes initially will be registered in the name of Cede & Co., the
nominee of DTC. Cedel and Euroclear will hold omnibus positions on behalf of
Cedel Participants and Euroclear Participants, respectively, through
customers' securities accounts in Cedel's and Euroclear's names on the books
of
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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. ("Citibank") will act as depositary for Cedel, and Morgan
Guaranty Trust Company of New York ("Morgan") will act as depositary for
Euroclear (Citibank and Morgan, in such capacities, individually the "Relevant
Depositary" and collectively, the "European Depositaries"). Except as
described below, no person acquiring a Book-Entry Note will be entitled to
receive a Definitive Note. Unless and until Definitive Notes are issued, it is
anticipated that the only "Noteholder" will be Cede & Co., as nominee of DTC
or Citibank or Morgan, as nominees of Cedel and Euroclear, respectively.
Beneficial Owners will not be Noteholders as that term is used in the
Indenture. Beneficial Owners are permitted to exercise their rights only
indirectly through DTC and its Participants (including Cedel and Euroclear).
The beneficial ownership of a Book-Entry Note will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the Beneficial
Owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Note will be recorded on the records of DTC (or
of a participating firm that acts as agent for the Financial Intermediary,
whose interest will in turn be recorded on the records of DTC, if the
Beneficial Owner's Financial Intermediary is not a Participant and on the
records of Cedel or Euroclear, as appropriate).
Beneficial Owners will receive all payments of principal of, and
interest on, the Notes from the Indenture Trustee through DTC and its
Participants (including Cedel and Euroclear). While the Notes 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 Notes and is required to receive and
transmit payments of principal of, and interest on, such Notes. Participants
and indirect participants with whom Beneficial Owners have accounts with
respect to Book-Entry Notes are similarly required to make book-entry
transfers and receive and transmit such payments on behalf of their respective
Beneficial Owners. Accordingly, although Beneficial Owners will not possess
certificates, the Rules provide a mechanism by which Beneficial Owners will
receive payments and will be able to transfer their interests.
Beneficial Owners will not receive or be entitled to receive
certificates representing their respective interests in the Notes, except
under the limited circumstances described below. Unless and until Definitive
Notes are issued, Beneficial Owners who are not Participants may transfer
ownership of Notes only through Participants and indirect participants by
instructing such Participants and indirect participants to transfer Notes, by
book-entry transfer, through DTC for the account of the purchasers of such
Notes, which account is maintained with their respective Participants. Under
the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Notes 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
Beneficial 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 Participants 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 or Euroclear Participant will be received with
value on the DTC settlement date but will be available in the relevant Cedel
or Euroclear cash account only as of the business day following settlement in
DTC. For information with respect to tax documentation procedures relating to
the Notes, See "Certain Material Federal Income Tax Consequences--Taxation of
Debt Securities" in the Prospectus and "--Information Reporting and Backup
Withholding" in "Annex A: Global Clearance, Settlement and Tax Documentation
Procedures-Certain U.S. Federal Income Tax Documentation Requirements" hereto.
Transfers between Participants will occur in accordance with DTC
Rules. Transfers between Cedel Participants and Euroclear Participants will
occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or
indirectly through DTC, on the one hand, and directly or indirectly through
Cedel Participants or Euroclear Participants, on the other, will be effected
in DTC in accordance with DTC Rules on behalf of the relevant European
international clearing system by the Relevant
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Depositary; however, such cross-market transactions will require delivery of
instructions to the relevant European international clearing system by the
counterparty in such system in accordance with its rules and procedures and
within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to the Relevant Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures
for same day funds settlement applicable to DTC. Cedel Participants and
Euroclear Participants may not deliver instructions directly to the European
Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its participants ("Participants"), some of which (and/or
their representatives) own DTC. In accordance with its normal procedures, DTC
is expected to record the positions held by each Participant in the Book-Entry
Notes, whether held for its own account or as a nominee for another person. In
general, beneficial ownership of Book-Entry Notes will be subject to the
rules, regulations and procedures governing DTC and its Participants as in
effect from time to time.
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 depositary, 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 through Euroclear in any of 32
currencies, including United States Dollars. Euroclear provides various other
services, including securities lending and borrowing, and interfaces with
domestic markets in several countries generally similar to the arrangements
for cross-market transfers with DTC described above. Euroclear is operated by
the Brussels, Belgium office of Morgan Guaranty Trust Company of New York (the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on
behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other
professional financial intermediaries. Indirect access to Euroclear is also
available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that 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 (the "Federal Reserve Board") and the New York State Banking
Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution 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.
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Payments on the Book-Entry Notes will be made on each Payment Date
by the Indenture Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable Participants in
accordance with DTC's normal procedures. Each Participant will be responsible
for disbursing such payments to the Beneficial Owners that it represents and
to each Financial Intermediary for which it acts as agent. Each such Financial
Intermediary will be responsible for disbursing funds to the Beneficial Owners
that it represents.
Under a book-entry format, Beneficial Owners may experience some
delay in their receipt of payments because such payments will be forwarded by
the Indenture Trustee to Cede & Co. Payments with respect to Notes 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 payments will be subject to tax reporting in accordance with
relevant United States tax laws and regulations. See "Certain Material Federal
Income Tax Consequences--Taxation of Debt Securities" in the Prospectus and
"--Information Reporting and Backup Withholding" in "Annex A: Global
Clearance, Settlement and Tax Documentation Procedures--Certain U.S. Federal
Income Tax Documentation Requirements" hereto. Because DTC has indicated that
it will act only on behalf of Financial Intermediaries, the ability of
Beneficial Owners to pledge Book-Entry Notes to persons or entities that do
not participate in the depository system or otherwise take actions in respect
of such Book-Entry Notes may be limited due to the lack of physical
certificates representing such Book-Entry Notes. In addition, issuance of the
Book-Entry Notes in book-entry form may reduce the liquidity of such Notes in
the secondary market because certain potential investors may be unwilling to
purchase Notes for which they cannot obtain physical certificates.
The monthly and annual statements with respect to the Mortgage Loans
of each Group and the related Notes as described under "--Reports to
Noteholders" herein will be provided by the Indenture Trustee to Cede & Co.,
as nominee of DTC and a Noteholder, and may be made available by such entity
to Beneficial Owners upon request, in accordance with the Rules, and to the
Financial Intermediaries to whose DTC accounts the related Book-Entry Notes
are credited.
DTC has advised the Indenture Trustee that, unless and until
Definitive Notes are issued, DTC will take any action permitted to be taken by
a Noteholder under the Indenture only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Notes are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Notes. Cedel or the
Euroclear Operator, as the case may be, will take any other action permitted
to be taken by a Noteholder under the Indenture 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 Notes that
conflict with actions taken with respect to other Notes.
Definitive Notes will be issued in registered form to Beneficial
Owners, or their nominees, rather than to DTC, only if (i) DTC or the Trust
advises the Indenture Trustee in writing that DTC is no longer willing or able
to discharge properly its responsibilities as nominee and depositary with
respect to the Notes and the Trust or the Indenture Trustee is unable to
locate a qualified successor, (ii) the Trust, at its option, advises the
Indenture Trustee that it elects to terminate the book-entry system through
DTC, or (iii) after a Note Event of Default under the Indenture, the
Beneficial Owners representing not less than 51% of the Note Balance of the
Book-Entry Notes advise the Indenture Trustee and DTC that the book-entry
system is no longer in the best interests of such Beneficial Owners. Upon
issuance of Definitive Notes to Beneficial Owners, such Notes will be
transferable directly (and not exclusively on a book-entry basis), and
registered holders will deal directly with the Indenture Trustee with respect
to transfers, notices and payments. See "Description of the
Securities--General" in the Prospectus.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will be required to use its best
efforts to notify all Beneficial Owners of the occurrence of such event and the
availability through DTC of Definitive Notes. Upon surrender by DTC of the
global certificates representing the Book-Entry Notes and instructions for
re-registration, the Indenture Trustee will issue Definitive Notes and
thereafter the Indenture Trustee will recognize the holders of such Definitive
Notes as Noteholders under the Indenture.
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Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfer of Notes 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.
Assignment of Mortgage Loans
The Mortgage Loans were acquired by Ocwen Partnership, L.P., a
Virginia limited partnership (the "Contributor") and contributed by the
Contributor to the capital of the Transferor. On the Closing Date, the
Transferor will convey the Mortgage Loans to the Depositor who in turn will
convey the Mortgage Loans to the Trust.
At the time of issuance of the Notes, the Trust will pledge all of
its right, title and interest in and to the Mortgage Loans, including all
principal and interest due on each such Mortgage Loan after the Cut-Off Date,
without recourse, to the Indenture Trustee pursuant to the Indenture as
collateral for the Notes; provided, however, that the Contributor will reserve
and retain all its right, title and interest in and to principal and interest
due on such Mortgage Loan on or prior to the Cut-Off Date (whether or not
received on or prior to the Cut-Off Date), and to prepayments received on or
prior to the Cut-Off Date. 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 Mortgage Loans.
In connection with the transfer and assignment of the Mortgage Loans
on the Closing Date, the Indenture will require the Trust:
(i) to deliver without recourse to the Indenture Trustee
on the Closing Date identified in the schedule of Mortgage Loans
(the "Schedule of Mortgage Loans") (a) the original Mortgage Notes,
endorsed in blank or to the order of the Indenture Trustee, (b) (1)
the original title insurance commitment or a copy thereof certified
as a true copy by the closing agent or the originator, or if
available, the original title insurance policy or a copy certified
by the Trust of the title insurance policy or (2) the attorney's
opinion of title, (c) originals or copies of all intervening
assignments, if any, certified as true copies by the closing agent
or the originator, showing a complete chain of title from
origination to the Indenture Trustee, including warehousing
assignments, if recorded, (d) originals, or copies certified by the
Contributor, of all assumption and modification agreements, if any
and (e) either: (1) the original Mortgage, with evidence of
recording thereon (if such original Mortgage has been returned to
the originator from the applicable recording office) or a copy (if
such original Mortgage has not been returned to the originator from
the applicable recording office) of the Mortgage certified as a true
copy by the closing agent or the originator or (2) a copy of the
Mortgage certified by the public recording office in those instances
where the original recorded Mortgage has been lost or retained by
the recording office;
(ii) to cause, within 60 days following the Closing Date,
assignments of the Mortgages to "Norwest Bank Minnesota, National
Association, as Indenture Trustee of Ocwen Mortgage Loan Trust
1998-OAC1 under the Indenture dated as of October 1, 1998" to be
submitted for recording in the appropriate jurisdictions; provided,
however, that the Trust shall not be required to prepare any
assignment of mortgage for a Mortgage with respect to which the
original recording information has not yet been received from the
recording office; provided, further, that the Trust shall not be
required to record an assignment of a mortgage if the Trust
furnishes to the Indenture Trustee, the Note Insurer and the Rating
Agencies, on or before the Closing Date, with respect to the
Mortgage Loans, at the Trust's expense, an opinion of counsel with
respect to the relevant jurisdiction that such recording is not
required to perfect the Indenture Trustee's interests in the related
Mortgages Loans (in form satisfactory to the Indenture Trustee, the
Note Insurer and the Rating Agencies); and
(iii) to deliver the title insurance policy, the original
Mortgages and such recorded assignments, together with originals or
duly certified copies of any and all prior assignments (other than
unrecorded warehouse assignments), to the Indenture Trustee within
15 days of receipt thereof by the Trust (but in any event, with
respect to any Mortgage as to which original recording information
has been made available to the Trust, within one year after the
Closing Date).
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The Indenture Trustee will agree, for the benefit of the Noteholders,
to review each Mortgage File within 45 days after the Closing Date (or the date
of receipt of any documents delivered to the Indenture Trustee after the Closing
Date), to ascertain that all required documents (or certified copies of
documents) have been executed and received.
If the Indenture Trustee during such 45-day period finds any
document constituting a part of the documents delivered to the Indenture
Trustee pursuant to the Mortgage Loan Contribution Agreement (the "Mortgage
File"), which is not properly executed, has not been received, is unrelated to
the Mortgage Loans or that any Mortgage Loan does not conform in a material
respect to the description thereof as set forth in the Schedule of Mortgage
Loans, the Indenture Trustee will be required to promptly notify the
Depositor, the Contributor, the Noteholders and the Note Insurer. The
Contributor will agree in the Mortgage Loan Contribution Agreement to use
reasonable efforts to remedy a material defect in a document constituting part
of a Mortgage File of which it is so notified by the Indenture Trustee. If,
however, within the time period specified in the Mortgage Loan Contribution
Agreement the Contributor shall not have remedied the defect and the defect
materially and adversely affects the interest in the related Mortgage Loan of
the Noteholders or the Note Insurer, the Contributor will be required on the
next succeeding Monthly Remittance Date to (or will cause an affiliate of the
Contributor to) (i) substitute in lieu of such Mortgage Loan a Qualified
Replacement Mortgage (as such is defined in the Mortgage Loan Contribution
Agreement) and deliver an amount equal to the excess, if any, of the Principal
Balance of the Mortgage Loan being replaced over the outstanding Principal
Balance of the replacement Mortgage Loan plus interest (the "Substitution
Amount") to the Indenture Trustee on behalf of the Trust as part of the
Monthly Remittance remitted by the Servicer on such Monthly Remittance Date or
(ii) purchase such Mortgage Loan at a purchase price equal to the Loan
Purchase Price thereof, which purchase price shall be delivered to the
Indenture Trustee along with the Monthly Remittance Amount remitted by the
Servicer on such Monthly Remittance Date.
In addition to the foregoing, the Indenture Trustee has agreed to
make a review during the 12th month after the Closing Date indicating the
current status of the exceptions previously indicated on the pool
certification (the "Final Certification"). After delivery of the Final
Certification, the Indenture Trustee and the Servicer shall provide to Note
Insurer no less frequently than monthly updated certifications indicating the
then current status of exceptions, until all such exceptions have been
eliminated.
Payments on the Notes
Payments on the Notes will be made by the Indenture Trustee on the
25th day of each month, or if such date is not a Business Day, on the first
Business Day thereafter (each, a "Payment Date"), commencing with the Payment
Date in November 1998, to Noteholders as of the related Record Date in an
amount equal to the product of such Noteholders' Percentage Interest and the
amount paid in respect of the Notes. Payments on the Class A-1 Notes will be
made generally from Available Funds for Group I, and payments on the Class A-2
Notes will be made generally from Available Funds for Group II. The
"Percentage Interest" represented by any Note will be equal to the percentage
obtained by dividing the aggregate principal balance of such Note by the
related Note Balance.
On each Payment Date, the Indenture Trustee will be required to pay
with respect to each Class of Notes, to the extent such funds are then on
deposit in the related Note Account and immediately available, the following
amounts, in the following order of priority, and each such payment shall be
treated as having occurred only after all preceding payments have occurred:
(i) (A) to the Indenture Trustee, the Indenture Trustee
Fee, and (B) provided no Note Insurer Default has occurred and is
continuing, to the Note Insurer, the related Premium Amount for such
Payment Date;
(ii) to the Noteholders of a Class, out of amounts then on
deposit in the related Note Account and to the extent necessary out
of amounts then on deposit in the related Liquidity Account and in
the Reserve Account, the related Note Interest with respect to such
Payment Date;
(iii) to the Noteholders of a Class, out of amounts then
on deposit in the related Note Account, the amount of applicable
Monthly Principal for the Notes of such Class with respect to such
Payment Date, in reduction of the related Note Balance until such
Note Balance is reduced to zero;
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(iv) to the Note Insurer, out of amounts then on deposit
in either Note Account, 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 of either Class
on such Payment Date or prior Payment Dates and the amount of any
unpaid Premium Amounts for such Payment Dates or prior Payment Dates
(together with interest thereon at the late payment rate specified
in the Insurance Agreement) and any other payments due to the Note
Insurer under the Insurance Agreement;
(v) to the Noteholders of each Class, as applicable, out
of amounts then on deposit in the Reserve Account, an amount equal
to all Realized Losses that have been recognized with respect to the
related Mortgage Loans during the related Due Period, such amount to
be allocated on a pro rata basis;
(vi) to the related Liquidity Account, out of amounts then
on deposit in the related Note Account, an amount equal to the
Required Liquidity Account Deposit;
(vii) to the Noteholders of a Class, out of amounts then
on deposit in the related Note Account, in reduction of the related
Note Balance, the amount, if any, equal to the Excess Cash Payment
with respect to the related Group and with respect to such Payment
Date;
(viii) to the Reserve Account, out of amounts on deposit
in a Note Account, an amount equal to the Overcollateralization
Deficiency Amount for the unrelated Class (after taking into account
payments of related Monthly Principal and Excess Cash for such Class
on such Payment Date) until such Overcollateralization Deficiency
Amount is reduced to zero; and
(ix) to the Noteholders of a Class, from amounts then on
deposit in the related Note Account, the amount of any Basis Risk
Shortfall for such Payment Date and any unpaid Basis Risk Shortfall
for any previous Payment Date, together with interest on such unpaid
Basis Risk Shortfall at the related Note Interest Rate for the
actual numbers of days elapsed since the previous Payment Date.
Any Available Funds for a Class of Notes remaining after application
in the manner specified above will be released to the holders of the Equity
Certificates on such Payment Date, free from the lien of the Indenture
Trustee, 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 for a Group (or, to the limited extent provided herein, any
amounts withdrawn from the Reserve Account or the related Liquidity Account)
on such date will not be sufficient to pay any portion of Note Interest for
the related Class of Notes, the Indenture Trustee will file a claim on the
Note Insurance Policy 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 Note Insurance Policy in an amount equal to any Overcollateralization
Deficit for a Class on a Payment Date (after taking into account payments in
respect of related Monthly Principal and Excess Cash and any amounts withdrawn
from the Reserve Account and the related Liquidity Accounts 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 a Class of Notes to make up any Overcollateralization Deficit
shall be paid to the related Noteholders, in reduction of the related Note
Balance, until such Note Balance is reduced to zero.
In no event will the aggregate payments of principal to Noteholders
of a Class exceed the related Original Note Balance.
"Administrative Fee Amount" means for each Group and any Payment
Date, the sum of the related Servicing Fee, the related Indenture Trustee Fee
and the related Premium Amount.
"Available Funds" with respect to a Mortgage Loan Group and any
Payment Date, will consist of the sum of the amounts described in clauses (a)
through (h) below, less (i) the Administrative Fee Amount for such Group in
respect of such Payment Date, (ii) Servicing Advances for such Group
previously made that are reimbursable to the
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Servicer (other than those included in liquidation expenses for any Liquidated
Loan in such Group and already reimbursed from the related Liquidation
Proceeds) to the extent permitted by the Servicing Agreement and (iii) the
aggregate amounts (A) deposited into the Principal and Interest Account and
allocable to the related Group or into the related Note Account that may not
be withdrawn therefrom pursuant to a final and nonappealable order of a 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 Mortgage Loans in such Group and due during the
related Due Period and all other interest payments on or in respect
of such Mortgage Loans received by or on behalf of the Servicer
during the preceding calendar month, net of amounts representing
interest accrued on such Mortgage Loans in respect of any period
prior to the Cut-Off Date, plus any Compensating Interest Payments
and Delinquency Advances made by the Servicer in respect of the
related Mortgage Loans and any net income from related REO
Properties for the preceding calendar month and any amounts received
pursuant to the Swap Agreement with respect to the related Interest
Period;
(b) all scheduled payments of principal received with
respect to the Mortgage Loans in such Group and due during the
related Due Period and all other principal payments (including
Prepayments) received or deemed to be received during the preceding
calendar month in respect of such Mortgage 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 preceding calendar month and applied by the
Servicer to reduce the Principal Balance of the related Mortgage
Loan ("Insurance Proceeds") (which proceeds will include any
deductible payable by the Servicer with respect to a blanket
insurance policy pursuant to the Servicing Agreement and the
proceeds from any fidelity bond or errors and omission policy
pursuant to the Servicing Agreement, net of any component thereof
covering any expenses incurred by or on behalf of the Servicer and
specifically reimbursable under the Servicing Agreement);
(d) the aggregate of any other proceeds received by the
Servicer during the preceding calendar month in connection with the
liquidation of any Mortgaged Property securing a Mortgage Loan in
such Group, whether through trustee's sale, foreclosure or otherwise
(including any Insurance Proceeds to the extent not duplicative of
amounts in clause (c) above) ("Liquidation Proceeds"), less expenses
incurred by the Servicer, (including unreimbursed servicing expenses
and Delinquency Advances relating to such Mortgage Loan) in
connection with the liquidation of such Mortgage Loan ("Net
Liquidation Proceeds");
(e) the aggregate of the amounts received in respect of
any Mortgage Loans in such Group that are required or permitted to
be repurchased, released, removed or substituted by the Contributor
during the preceding calendar month as described in "--Assignment of
Mortgage Loans" and "The Servicing Agreement --Principal and
Interest Account" herein, to the extent such amounts are received by
the Indenture Trustee on or before the related Monthly Remittance
Date;
(f) the aggregate of amounts deposited in the related Note
Account by the Indenture Trustee in connection with redemption of
the Notes as described under "--Optional Redemption of the Class A-1
and Class A-2 Notes" herein;
(g) the aggregate of amounts which may be withdrawn from
the related Liquidity Account pursuant to the Indenture; and
(h) the aggregate of amounts which may be withdrawn from
the Reserve Account pursuant to the Indenture.
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"Available Funds Interest" means, as to any Payment Date and any
Class of Notes, the amount of interest that accrued on the Mortgage Loans in
the related Group at the weighted average of the related Mortgage Rates
applicable to Monthly Payments due on such Mortgage Loans during the related
Due Period, reduced by the sum of (i) the related Administrative Fee Amount
and (ii) an amount equal to the product of (A) the Principal Balance of the
Mortgage Loans in the related Group and (B) a rate per annum equal to 0.75%.
"Available Funds Interest Rate" means, as to any Payment Date and
any Class of Notes, the per annum rate equal to the percentage obtained by
dividing (x) the related Available Funds Interest by (y) the product of (i)
the Note Balance for such Class of Notes and (ii) the actual number of days
elapsed during such Interest Period divided by 360.
"Basis Risk Shortfall" means, as to any Class of Notes and any
Payment Date after the Payment Date in October 2003, the excess, if any, of
(i) Note Interest calculated at the lesser of 16% per annum and the LIBOR Rate
over (ii) Note Interest calculated at the Note Interest Rate for such Payment
Date.
"Business Day" means any day other than (i) a Saturday or Sunday or
(ii) a day on which banking institutions in The City of New York, New York are
authorized or obligated by law or executive order to be closed.
"Due Period" means, as to any Payment Date, the period from the
second day of the month preceding the month in which such Payment Date occurs
through the first day of the month in which such Payment Date occurs.
"Excess Cash" with respect to a Group on any Payment Date will be
equal to Available Funds for such Group and Payment Date, reduced by the sum
of all payments described in clauses (i) through (iv) under "-Payments on the
Notes" above.
"Excess Cash Payment" for each Class of Notes and any Payment Date,
means the lesser of (x) the applicable Overcollateralization Deficiency Amount
with respect to the related Group and such Payment Date and (y) the aggregate
amount of Excess Cash with respect to the related Group and such Payment Date.
"Final Recovery Determination" means, with respect to any defaulted
Mortgage Loan or REO Property (other than a Mortgage Loan purchased by the
Contributor or the Servicer), a determination made by the Servicer that all
Liquidation Proceeds which the Servicer, in its reasonable business judgment
expects to be finally recoverable in respect thereof have been so recovered or
that the Servicer believes in its reasonable business judgment the cost of
obtaining any additional recoveries therefrom would exceed the amount of such
recoveries.
"Index Counterparty" is National Westminster Bank Plc.
"Insured Payment" is the amount of the actual payment made by the
Note Insurer to the Noteholders under the Note Insurance Policy on each
Payment Date and with respect to each Class of Notes.
"Interest Period" with respect to any Class of Notes and any Payment
Date, means the period commencing on the immediately preceding Payment Date
and ending on the day immediately preceding such Payment Date.
"LIBOR Rate" with respect to any Class of Notes and any Payment
Date, the sum of One-Month LIBOR and the applicable Margin.
"Liquidated Loan" means any Mortgage Loan as to which a Final
Recovery Determination has been made.
"Liquidation Proceeds" means, with respect to any Liquidated Loan,
all amounts (including the proceeds of any insurance policy on such Liquidated
Loan) recovered by the Servicer in connection with such Liquidated Loan,
whether through trustee's sale, foreclosure sale or otherwise.
"Margin" means, with respect to the Class A-1 Notes, for any Payment
Date on or before the Initial Redemption Date, 0.65%; for any Payment Date
after the Initial Redemption Date, 1.30%. With respect to the Class
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A-2 Notes, for any Payment Date on or before the Initial Redemption Date,
0.70%; for any Payment Date after the Initial Redemption Date, 1.40%.
"Monthly Principal" for each Class of Notes and for any Payment Date
will be an amount equal to the related Principal Remittance Amount reduced by
the amount of any Overcollateralization Reduction Amount for each Class of
Notes with respect to such Payment Date.
"Note Balance" for each Class of Notes will equal, as of any Payment
Date, the related Original Note Balance less all Monthly Principal and Excess
Cash paid to the Noteholders of such Class on previous Payment Dates in
reduction of the related 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 for the related Group
under the Note Insurance Policy, except to the extent reimbursed to the Note
Insurer pursuant to the Indenture).
"Note Insurer Default" is (x) the failure by the Note Insurer to
make a required payment under the Note Insurance Policy or (y) the bankruptcy
or insolvency of the Note Insurer.
"Note Interest" for a Class of Notes and any Payment Date will be an
amount equal to interest accrued during the related Interest Period at the
related Note Interest Rate on the related Note Balance as of the preceding
Payment Date (after giving effect to the payment, if any, in reduction of
principal made on such Notes on such preceding Payment Date). All calculations
of interest on the Notes will be computed on the basis of a year of 360 days
and the actual number of days in the related Interest Period.
"Note Interest Rate" means for each Class of Notes, with respect to
each Interest Period prior to the Payment Date in October 2003, a rate per
annum equal to the LIBOR Rate. For each Class of Notes, with respect to each
Interest Period after the Payment Date in October 2003, a rate per annum equal
to the least of (i) the LIBOR Rate, (ii) the Available Funds Interest Rate,
and (iii) 16%.
"One-Month LIBOR" means the London interbank offered rate for
one-month United States dollar deposits and will be determined as described in
"--Calculation of One-Month LIBOR".
"Overcollateralization Amount" with respect to a Class and any
Payment Date is the amount, if any, by which (x) the Aggregate Principal
Balance of the Mortgage Loans in such Group as of the end of the related Due
Period exceeds (y) the Note Balance of the related Class of Notes as of such
Payment Date after taking into account payments of Monthly Principal and
Excess Cash Payments made on such Payment Date.
"Overcollateralization Deficiency Amount" for each Class of Notes
means, with respect to any Payment Date, the excess, if any, of (i) the
related Required Overcollateralization Amount applicable to such Payment Date
over (ii) the applicable Overcollateralization Amount applicable to such
Payment Date (assuming the application of 100% of principal collections
received with respect to the related Due Period or during the preceding
calendar month, as applicable, but prior to taking into account the payment of
any related Excess Cash Payments on such Payment Date).
"Overcollateralization Deficit" means with respect to a Class and
any Payment Date, the amount, if any, by which (x) the related Note Balance,
after taking into account all payments to be made on such Payment Date in
reduction thereof, including any related Excess Cash Payments, exceeds (y) the
sum of (i) the Aggregate Principal Balance of the Mortgage Loans in the
related Group as of the end of the applicable Due Period, and (ii) the
Overcollateralization Amount for the other Class.
"Overcollateralization Reduction Amount" for each Class of Notes
means, for any Payment Date, the lesser of (x) the related Principal
Remittance Amount with respect to such Payment Date and (y) the amount by
which the applicable Overcollateralization Amount would exceed the Required
Overcollateralization Amount (as specified in the Indenture) assuming that
100% of the related Principal Remittance Amount were to be applied as a
payment of principal on the Notes.
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"Premium Amount" is the fee paid monthly to the Note Insurer for the
Note Insurance Policy.
"Prepayment" means any payment of principal of a Mortgage Loan which
is received by the Servicer in advance of the scheduled due date for the
payment of such principal and which is not accompanied by an amount of
interest representing the full amount of scheduled interest due in any month
or months subsequent to the month of prepayment. Substitution Amounts, the
portion of the purchase price of any Mortgage Loan required to be repurchased
or substituted by the Contributor pursuant to the Mortgage Loan Contribution
Agreement or purchased by the Servicer pursuant to the Servicing Agreement
representing principal, and the proceeds of any Insurance Policy that are to
be applied as a payment of principal on the related Mortgage Loan shall be
deemed to be Prepayments.
"Principal Balance" means, with respect to each Mortgage Loan and as
of any date of determination, the scheduled outstanding Principal Balance
thereof on the Cut-Off Date after application of payments of principal due on
or prior to the Cut-Off Date, whether or not received, less any principal
payments relating to such Mortgage Loan included in previous Monthly
Remittance Amounts, provided, however, that the Principal Balance for any
Mortgage Loan that has become a Liquidated Loan shall be zero as of the first
day of the calendar month following the calendar month in which such Mortgage
Loan becomes a Liquidated Loan, and at all times thereafter. For purposes of
the statistical presentation of the Mortgage Loans set forth in this
Prospectus Supplement, the Principal Balances of the Mortgage Loans were
reduced by the amounts of the scheduled principal payments due on October 1,
1998, whether or not received.
"Principal Remittance Amount" means, as of any Monthly Remittance
Date and each Group of Mortgage Loans, the sum, without duplication, of the
following: (i) the principal to the extent received or advanced with respect
to the related Group of Mortgage Loans with respect to the related Due Period
or during the preceding calendar month, as applicable, (ii) the Principal
Balance of each such Mortgage Loan that was purchased from the Indenture
Trustee during the preceding calendar month, to the extent such Principal
Balance was actually deposited in the Principal and Interest Account, (iii)
any Substitution Amounts relating to principal delivered by the Contributor in
connection with a substitution of a Mortgage Loan, to the extent such
Substitution Amounts were actually deposited in the Principal and Interest
Account during the preceding calendar month, and (iv) the principal portion of
all Net Liquidation Proceeds actually collected by the Servicer with respect
to such Mortgage Loans during the preceding calendar month (to the extent such
Net Liquidation Proceeds related to principal).
"Required Liquidity Account Balance" means on or prior to the
Payment Date in October 2003, with respect to the Liquidity Account for each
Class of Notes, an amount equal to 0.50% of the Note Balance of the related
Class of Notes as of the Closing Date. After the Payment Date in October 2003,
the Required Liquidity Account Balance is zero.
"Required Liquidity Account Deposit" means with respect to any
Payment Date occurring before the Payment Date on which the amount on deposit
in a Liquidity Account first equals the Required Liquidity Account Balance,
the amount, if any, by which (i) the Required Liquidity Account Balance
exceeds (ii) the amount on deposit in such Liquidity Account immediately prior
to such date.
"Required Overcollateralization Amount" means the required level of
the Overcollateralization Amount with respect to each Class and any Payment
Date, which initially will be 8.00% of the Aggregate Principal Balance of the
Mortgage Loans in the related Group as of the Cut-Off Date and may over time
decrease or increase, subject to certain floors, caps and triggers described
in the Indenture.
"Swap Agreement" means the master agreement dated as of November 13,
1998, including any schedules attached thereto and confirmation letters
executed in connection therewith, between the Index Counterparty and the
Trust.
Calculation of One-Month LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Interest Period following the initial Interest Period
relating to the Notes (each such date, an "Interest Determination Date"),
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the Indenture Trustee will determine the London interbank offered rate for
one-month United States dollar deposits ("One-Month LIBOR") for such Interest
Period for the Notes on the basis of the offered rates of the Reference Banks
for one-month United States dollar deposits, as such rates appear on the
Telerate Page 3750, as of 11:00 a.m. (London time) on such Interest
Determination Date. As used in this section, "LIBOR Business Day" means a day
on which banks are open for dealing in foreign currency and exchange in London
and New York City; "Telerate Page 3750" means the display page currently so
designated on the Dow Jones Telerate Service (or such other page as may
replace that page on that service for the purpose of displaying comparable
rates or prices); and "Reference Banks" means leading banks selected by the
Indenture Trustee and engaged in transactions in Eurodollar deposits in the
international Eurocurrency market (i) with an established place of business in
London, (ii) whose quotations appear on the Telerate Page 3750 on the Interest
Determination Date in question, (iii) which have been designated as such by
the Indenture Trustee and (iv) not controlling, controlled by, or under common
control with, the Depositor or the Servicer.
On each Interest Determination Date, One-Month LIBOR for the related
Interest Period for the Notes will be established by the Indenture Trustee as
follows:
(a) If on such Interest Determination Date two or more
Reference Banks provide such offered quotations, One-Month
LIBOR for the related Interest Period will be the
arithmetic mean of such offered quotations (rounded
upwards if necessary to the nearest whole multiple of
0.0625%).
(b) If on such Interest Determination Date fewer than two
Reference Banks provide such offered quotations, One-Month
LIBOR for the related Interest Period will be the higher
of (x) One-Month LIBOR as determined on the previous
Interest Determination Date and (y) the Reserve Interest
Rate. The "Reserve Interest Rate" will be the rate per
annum that the Indenture Trustee determines to be either
(i) the arithmetic mean (rounded upwards if necessary to
the nearest whole multiple of 0.0625%) of the one-month
United States dollar lending rates which New York City
banks selected by the Indenture Trustee are quoting on the
relevant Interest Determination Date to the principal
London offices of leading banks in the London interbank
market or, in the event that the Indenture Trustee can
determine no such arithmetic mean, (ii) the lowest
one-month United States dollar lending rate which New York
City banks selected by the Indenture Trustee are quoting
on such Interest Determination Date to leading European
banks.
The establishment of One-Month LIBOR on each Interest Determination
Date by the Indenture Trustee and the Indenture Trustee's calculation of the
rate of interest applicable to the Notes for the related Interest Period will
(in the absence of manifest error) be final and binding.
For purposes of the first Payment Date after the Closing Date,
One-Month LIBOR shall be 5.27781%.
Note Accounts
Pursuant to the Indenture, the Indenture Trustee shall establish and
maintain a segregated trust account with respect to each Class of Notes (each,
a "Note Account") from which all payments with respect to such Notes will be
made. As described below, not later than two Business Days prior to a Payment
Date (the "Monthly Remittance Date"), the Servicer will be required pursuant
to the Servicing Agreement to wire transfer to the Indenture Trustee for
deposit in each Note Account the sum (without duplication) of all amounts on
deposit in the Principal and Interest Account that constitute any portion of
Available Funds for the related Group and for the related Payment Date. See
"Description of Securities--Distributions on Securities" in the Prospectus.
Any income in each Note Account will not be available to Noteholders
or otherwise subject to any claims or rights of the Noteholders and will be
held in such Note Account for the benefit of the Indenture Trustee, subject to
withdrawal from time to time as permitted by the Indenture.
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Liquidity Accounts
Pursuant to the Indenture, the Indenture Trustee shall establish and
maintain a segregated trust account for each Class of Notes (each, a
"Liquidity Account") for the benefit of the Noteholders of each Class and the
Note Insurer. The Indenture Trustee shall deposit into each Liquidity Account
all Excess Cash from the related Group on each Payment Date until the amount
on deposit in such account is equal to 0.50% of the Principal Balance of the
related Notes as of the Closing Date. Amounts in each Liquidity Account shall
be used to (i) pay interest on the related Class of Notes, to the extent
Available Funds are insufficient for such purpose, and (ii) to pay principal
on either Class of Notes, to the extent there is an Overcollateralization
Deficit with respect to such Class after the application of related Monthly
Principal, related Excess Cash and funds from the Reserve Account. Any amounts
in the Liquidity Accounts will be released to the holders of the Equity
Certificates after the Payment Date in October 2003.
Reserve Account
Pursuant to the Indenture, the Indenture Trustee shall establish and
maintain a segregated trust account (the "Reserve Account") for the benefit of
the Noteholders of both Classes and the Note Insurer. The Indenture Trustee
shall deposit into the Reserve Account all Excess Cash from a Group on each
Payment Date from and including the Payment Date on which (i) the related
Liquidity Account has been fully funded, and (ii) such Group has reached its
Required Overcollateralization Amount. The Indenture Trustee shall continue to
deposit such Excess Cash on each Payment Date until the balance on deposit in
such account is equal to the excess of (x) the sum of the Required
Overcollateralization Amounts for both Classes of Notes over (y) the sum of
the Overcollateralization Amounts for both Classes of Notes. Amounts in the
Reserve Account shall be paid on each Payment Date to each Class of Notes to
the extent of any Realized Loss realized on Mortgage Loans in the related
Group, allocated on a pro rata basis and, to the extent of funds available
after such payment, to reduce the related Overcollateralization Deficit to
zero.
Overcollateralization Feature
Credit enhancement with respect to each Class of Notes will be
provided in part by overcollateralization. On the Closing Date, approximately
$91,176,691 aggregate principal balance of Mortgage Loans in Group I will
secure the payment of the Class A-1 Note with an initial Principal Balance
$87,073,000, and approximately $91,001,412 aggregate principal balance of
Mortgage Loans in Group II will secure the payment of the Class A-2 Note with
an initial Principal Balance of $86,906,000. With respect to each Class, the
initial Overcollateralization Amount is equal to 4.5% of the Aggregate
Principal Balance of the related Mortgage Loans as of the Cut-Off Date. The
Indenture requires that the Overcollateralization Amount for each Class be
increased to, and thereafter maintained at, an amount equal to 8.00% of the
Aggregate Principal Balance of the Mortgage Loans in the related Group as of
the Cut-Off Date. This increase and subsequent maintenance is intended to be
accomplished by the application of monthly Excess Cash with respect to a
Group. Unless a Note Insurer Default has occurred and is continuing, the Note
Insurer is permitted to reduce the amount of overcollateralization required to
be maintained for either Class.
The application of Excess Cash for a Group to reduce the Note
Balance for the related Class of Notes on any Payment Date will have the
effect of accelerating the amortization of such Notes relative to the
amortization of the Mortgage Loans in the related Group and of thereby
increasing the related Overcollateralization Amount. On and after the date on
which a Class of Notes has achieved its Required Overcollateralization Amount,
Excess Cash for the related Group will be deposited in the Reserve Account.
Such deposits will be made until the sum of the Reserve Account balance and
the Overcollateralization Amounts for both Classes equals the sum of the
Required Overcollateralization Amounts for both Classes.
The Indenture generally provides that the related Required
Overcollateralization Amount may, over time, decrease or increase, subject to
certain floors, caps and triggers, including triggers (each, an
"Overcollateralization Step-Down Trigger") that allow the related Required
Overcollateralization Amount for a Class to decrease or "step down" based on
the performance on the Mortgage Loans in the related Group. This performance
will be measured by certain delinquency rate tests specified in the Indenture.
As long as these tests are met, the Required Overcollateralization Amount will
be permitted to decrease, in the manner specified in the Indenture, to no less
than 16% of the then current Aggregate Principal Balance of the Mortgage Loans
of the related Group, subject to a
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minimum of the greater of (x) 0.50% of the Aggregate Principal Balance of the
Mortgage Loans in the related Group as of the Cut-Off Date, and (y) twice the
principal balance of the largest Mortgage Loan then outstanding in the related
Group. Any increase in the applicable Required Overcollateralization Amount
may result in an accelerated amortization of the related Notes until such
Required Overcollateralization Amount is reached. Conversely, any decrease in
the Required Overcollateralization Amount for a Class will result in a
decelerated amortization of the Notes in the related Class until such Required
Overcollateralization Amount is reached.
In the event that the Required Overcollateralization Amount for a
Class is permitted to decrease or "step down" on any Payment Date in the
future, the Indenture will provide that all or a portion of the Principal
Remittance Amount for such Group that would otherwise be paid to the related
Notes on any such Payment Date in reduction of the related Note Balance will
be released to the holder of the Equity Certificates.
If any Mortgage Loan became a Liquidated Loan during such prior Due
Period, the Net Liquidation Proceeds related thereto and allocated to
principal may be less than the Principal Balance of the related Mortgage Loan;
the amount of any such deficiency is a "Realized Loss." The Indenture will
provide that the Principal Balance of any Mortgage Loan that becomes a
Liquidated Loan shall equal zero. The Indenture will require that the amount
of any Realized Loss be paid to Noteholders of the related Class on the
Payment Date following the event of loss, to the extent of funds available in
the Reserve Account on such Payment Date. However, the occurrence of a
Realized Loss in an amount in excess of funds available in the Reserve Account
on such Payment Date will reduce the Overcollateralization Amount for the
related Class of Notes, and will result in more Excess Cash, if any, being
paid on such Notes in reduction of the related Note Balance on subsequent
Payment Dates than would be the case in the absence of such Realized Loss.
Overcollateralization and the Note Insurance Policy. The Indenture will
require the Indenture Trustee to file a claim for an Insured Payment under the
Note Insurance Policy not later than 12:00 noon (New York City time) on the
second Business Day prior to any Payment Date as to which the Indenture
Trustee has determined that an Overcollateralization Deficit with respect to
the Notes of either Class 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. Accordingly, the Note Insurance Policy is similar to the
provisions described above with respect to the overcollateralization
provisions insofar as the Note Insurance Policy guarantees ultimate collection
of the full amount of the related Note Balance, rather than current payments
of the amounts of any Realized Losses to the Noteholders. Investors in the
Notes should realize that, under certain loss or delinquency scenarios, they
may temporarily receive no payments in reduction of the related Note Balance.
Reports to the Noteholders
On each Payment Date, the Indenture Trustee will mail a statement
for each Class of Notes to each Noteholder, the Note Insurer and the
Underwriter in the form required by the Indenture and setting forth the
following information (to the extent the Servicer makes such information
available to the Indenture Trustee):
(a) the amount of such payment to the Noteholders of such Class on
the related Payment Date allocable to (i) Monthly Principal (separately
setting forth Prepayments) and (ii) any Excess Cash Payment;
(b) the amount of such payment to the Noteholders of such Class on
such Payment Date allocable to Note Interest;
(c) the Note Balance for such Class after giving effect to the
payment of Monthly Principal and any Excess Cash applied to reduce such Note
Balance on such Payment Date;
(d) the Aggregate Principal Balance of the Mortgage Loans in the
related Group as of the end of the related Due Period;
(e) the aggregate of the Principal Balances of the Mortgage Loans in
the related Group 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 as of the end of
the preceding calendar month;
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(f) the number, aggregate Principal Balance of Mortgage Loans in the
related Loan Group as of the close of business on the last day of the calendar
month preceding such Payment Date that are (a) delinquent one payment, (b)
delinquent two payments, (c) delinquent three or more payments, (d) as to
which foreclosure proceedings have been commenced and (e) with respect to
which related Mortgagor has filed for protection under applicable bankruptcy
laws, with respect to whom bankruptcy proceedings are pending or with respect
to whom bankruptcy protection is in force (it being understood that for
purposes of calculating the information described in clauses (a), (b), and (c)
above, a Mortgage Loan is delinquent one payment if payment on such Mortgage
Loan is one calendar month past due on a contractual basis, a Mortgage Loan is
delinquent two payments if payment on such Mortgage Loan is two calendar
months past due on a contractual basis and a Mortgage Loan is delinquent three
payments if payment on such Mortgage Loan is three calendar months past due on
a contractual basis);
(g) the status and the number and dollar amounts of all Mortgage
Loans in the related Group in foreclosure proceedings as of the close of
business on the last Business Day of the calendar month immediately preceding
such Payment Date, separately stating, for this purpose, all Mortgage Loans in
the related Group with respect to which foreclosure proceedings were commenced
in the immediately preceding calendar month;
(h) the number of Mortgagors and the Principal Balances of the
related Mortgage Loans in the related Group involved in bankruptcy proceedings
as of the close of business on the last Business Day of the calendar month
immediately preceding such Payment Date;
(i) the cumulative Realized Losses incurred on the Mortgage Loans in
the related Group from the Cut-Off Date to and including the last day of the
preceding calendar month;
(j) the amount of Net Liquidation Proceeds realized on the Mortgage
Loans in the related Group during the related Due Period;
(k) the aggregate amount of the related Servicing Fee retained by
the Servicer for the related Group for the related Due Period;
(l) the aggregate Principal Balance of the three largest outstanding
Mortgage Loans in the related Group as of the end of the related Due Period;
(m) the total of any Substitution Amounts and any Loan Purchase
Price amounts included in such payment in the related Group;
(n) the weighted average Mortgage Interest Rate of the Mortgage
Loans in the related Group;
(o) the amount on deposit in the Reserve Account;
(p) the amount on deposit in the related Liquidity Account; and
(q) such other information as the Note Insurer or any Noteholder may
reasonably request with respect to delinquent Mortgage Loans in the related
Group.
In the case of information furnished pursuant to clauses (a), (b) and (c)
above, the amounts shall be expressed as a dollar amount per Note with a
$1,000 principal denomination.
Optional Redemption of the Class A-1 and the Class A-2 Notes
Each Class of Notes will be subject to redemption, in whole but not
in part, at the option of the majority holder of the Equity Certificates, on
or after the earlier to occur of (x) the Payment Date in October 2003, and (y)
the first Payment Date on which the Aggregate Principal Balance of the
Mortgage Loans has declined to less than 20% of the Aggregate Principal
Balance of the Mortgage Loans on the Cut-Off Date (the earlier to occur of
such dates, the "Initial Redemption Date").
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Each Class of Notes will be redeemed at a redemption price of 100%
of the then outstanding Note Balance of such Class, plus accrued but unpaid
interest thereon through the end of the Interest Period immediately preceding
the related Payment Date; provided, however, that no redemption may take place
unless, in connection with such redemption, (i) any amounts due and owing to
the Note Insurer under the Insurance Agreement are paid in full to the Note
Insurer, and (ii) the aggregate amount of unpaid Basis Risk Shortfall is paid
in full to the related Noteholders. 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 least ten days prior to the Payment Date set for such redemption.
The payment on the final Payment Date in connection with the
redemption of a Class of the Notes shall be in lieu of the payment otherwise
required to be made on such Payment Date in respect of such Notes.
Payments to the Holder of the Equity Certificates
On each Payment Date, any portion of Available Funds for each Group
remaining after making payments of interest and principal due on the related
Notes and other distributions required on such Payment Date, as specified
under "--Payments on the Notes" herein, will be released to the holder of the
Equity Certificates, free of the lien of the Indenture Trustee. It is
anticipated that the Equity Certificates will be held by the Transferor or an
affiliate thereof. Holders of the Equity Certificates will receive any amounts
remaining in the Liquidity Account after the Payment Date in October 2003.
The Indenture Trustee
Norwest Bank Minnesota, National Association, a national banking
association organized and existing under the laws of the United States, will
be the Indenture Trustee under the Indenture. The Indenture will provide that
the Indenture Trustee is entitled to (i) a fee (the "Indenture Trustee Fee")
payable monthly on each Payment Date at a rate equal to one-twelfth of
0.01375% multiplied by the Aggregate Principal Balance of the Mortgage Loans
as of the first day of the month immediately preceding the month of such
Payment Date, (ii) the income from funds deposited in each Note Account and
(iii) the reimbursement of certain expenses. The Indenture Trustee will also
act as successor servicer under the Servicing Agreement and, upon a
termination of the Servicer, shall be obligated to succeed to the obligations
of the Servicer or to appoint an eligible successor servicer.
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. 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; provided, however, the Indenture Trustee shall remain liable for
the performance of all of its duties. 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 and any director, officer, employee or agent of 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 Servicer for certain losses and other
events to the extent described in the Servicing Agreement.
S-28
<PAGE>
Voting
Unless otherwise specified in the Indenture, with respect to any
provisions of the Indenture providing for the action, consent or approval of
the Noteholders evidencing specified "Voting Interests," each Noteholder will
have a Voting Interest equal to the Percentage Interest represented by such
Noteholder's Note. Unless a Note Insurer Default has occurred and is
continuing, the Voting Interests of the Noteholders will be exercised solely
by or with the consent of the Note Insurer.
Note Events of Default
An Event of Default with respect to the Notes includes the
following: (i) a default in the payment of any principal or interest on either
Class of Notes on any Payment Date, which continues unremedied for a period of
five days; (ii) failure to perform any other covenant of the Trust in the
Indenture which continues for a period of thirty (30) days after notice
thereof is given in accordance with the Indenture; (iii) any representation or
warranty made by the Trust in the Indenture or in any certificate or other
writing delivered pursuant thereto or in connection therewith 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; and (iv) certain
events of bankruptcy, insolvency, receivership or liquidation of the Trust.
See "The Agreements--Events of Default; Rights upon Event of Default" in the
Prospectus for a description of the rights of Noteholders of a Class in
connection with any Event of Default with respect to the Notes. In the absence
of a failure by the Note Insurer to pay Insured Payments, no acceleration of
the maturity of the related Notes shall be permitted without the consent of
the Note Insurer.
THE TRUST
The Trust is a Delaware business trust established by the Depositor
pursuant to the Trust Agreement. After the Closing Date, the interest
representing all of the beneficial ownership interest in the Trust (the
"Equity Certificates") will initially be held by the Transferor or an
affiliate thereof. The principal office of the Trust is located in Wilmington,
c/o the Owner Trustee, Rodney Square North, 1100 North Market Street,
Wilmington, DE 19890, Attention: Corporate Trust Administration. The Trust
does not have, nor is it expected in the future to have, any significant
assets, other than the assets included in the Trust Estate.
THE DEPOSITOR
Financial Asset Securities Corp. (the "Depositor") is a Delaware
corporation. The Depositor is an indirect limited purpose finance subsidiary
of National Westminster Bank Plc and an affiliate of Greenwich Capital
Markets, Inc. (the "Underwriter"). See "The Depositor" in the Prospectus and
"Method of Distribution" herein. None of the Depositor, National Westminster
Bank Plc or any of their affiliates or any other person or entity will insure
or guarantee or otherwise be obligated with respect to the Notes.
THE TRANSFEROR
OAIC Mortgage Residential Securities Holdings, LLC (the
"Transferor") is a Delaware limited liability company. The Transferor's
corporate headquarters are located at 1675 Palm Beach Lakes Boulevard, West
Palm Beach, Florida 33401 and its telephone number is (561) 682-8000.
THE SERVICER
The information set forth in the following paragraphs has been
provided by Ocwen Federal Bank FSB. None of the Depositor, the Contributor,
the Transferor, the Indenture Trustee, the Note Insurer, the Underwriter or
any of their respective affiliates have made or will make any representation
as to the accuracy or completeness of such information.
Ocwen Federal Bank FSB ("Ocwen"), a federally-chartered savings
bank, with its home office in Fort Lee, New Jersey and its servicing
operations and corporate offices in West Palm Beach, Florida, will serve as
the servicer for the Mortgage Loans (in such capacity, the "Servicer"). Ocwen
is a wholly-owned subsidiary of Ocwen Financial
S-29
<PAGE>
Corporation, a public financial services holding company. As of June 30, 1998,
Ocwen had approximately $2.6 billion in assets, approximately $2.4 billion in
liabilities and approximately $257 million in equity. As of June 30, 1998,
Ocwen's tangible and leveraged capital ratio was approximately 9.64% and its
risk-based capital ratio was approximately 16.11%. For the four quarters ended
June 30, 1998, Ocwen's income from continuing operations was approximately
$65.1 million.
The major business of the Servicer has been the resolution of
nonperforming single-family, multi-family and commercial mortgage loan
portfolios acquired from the Resolution Trust Corporation, from private
investors, and most recently, from the United States Department of Housing and
Urban Development ("HUD") through HUD's auction of defaulted FHA Loans.
DESCRIPTION OF THE MORTGAGE LOANS
General
This subsection describes generally certain characteristics of the
Mortgage Loans. The statistical information presented in this Prospectus
Supplement concerning the Mortgage Loans is based on the Mortgage Loans in
Group I and Group II as of the Cut-Off Date.
The mortgage loans were originated by Flagstar Bank, FSB and various
other originators. The Flagstar loans were originated pursuant to alternative
documentation programs. Those originated by various other originators were
intended to conform with FNMA, FHLMC, GNMA or other conduit standards but
subsequently were discovered not to meet the originally intended FNMA, FHLMC,
GNMA or other conduit market parameters, as applicable, due to errors in
relevant underwriting documentation or credit deterioration of the borrower.
The Mortgage Loans are generally not assumable pursuant to the terms of the
related Mortgage Note. See "Certain Prepayment and Yield Considerations"
herein.
None of the Mortgage Loans is or will be insured or guaranteed by
the Trust, the Transferor, the Contributor, the Depositor, the Servicer, the
Indenture Trustee, the Note Insurer, any originator or any of their respective
affiliates, or by any governmental agency or other person.
As of the Cut-Off Date, the Group I Mortgage Loans consisted of
1,078 Mortgage Loans with an Aggregate Principal Balance totaling
$91,176,691.20 (the "Group I Aggregate Principal Balance"), the Group II
Mortgage Loans consisted of 730 Mortgage Loans with an Aggregate Principal
Balance totaling $91,001,412.48 (the "Group II Aggregate Principal Balance")
and the Mortgage Loans in the Trust Estate consisted of 1,808 Mortgage Loans
with an Aggregate Principal Balance totaling $182,178,103.68 (the "Aggregate
Principal Balance"). As used herein, the term "Aggregate Principal Balance"
means the aggregate of the Principal Balances of the Mortgage Loans in Group I
and Group II in the Trust Estate at any date of determination.
No assurance can be given that values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of
the related Mortgage Loans. If the residential real estate market has
experienced or should experience an overall decline in property values such
that the outstanding balances of the Mortgage Loans, together with the
outstanding balances of any first mortgage, become equal to or greater than
the value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced
in the mortgage lending industry.
Mortgage Loan Statistics
Set forth below in the following tables are descriptions of certain
characteristics of the Mortgage Loans as of the Cut-Off Date (except as
otherwise indicated). The information expressed below as a percentage of the
Aggregate Principal Balance may not total 100% due to rounding.
S-30
<PAGE>
SUMMARY OF CHARACTERISTICS OF THE GROUP I MORTGAGE LOANS
Aggregate Number of Mortgage Loans ................ 1,078
Principal Balance
Aggregate Principal Balance ................... $91,176,691.20
Average Principal Balance ..................... $84,579.49
Range of Principal Balances ................... $619.48 - $225,638.81
Mortgage Interest Rates
Weighted Average Mortgage Interest Rate ....... 8.73%
Range of Mortgage Interest Rates .............. 4.00 - 15.25%
Original Term to Maturity
Weighted Average Original Term to Maturity .... 352 months
Range of Original Terms to Maturity ........... 60 - 360 months
Remaining Term to Maturity
Weighted Average Remaining Term to Maturity ... 331 months
Range of Remaining Term to Maturity ........... 44 - 356 months
Percentage of Fixed Rate Mortgage Loans ........... 21.98%
Percentage of Adjustable Rate Mortgage Loans ...... 78.02%
Percentage of First Lien Mortgage Loans ........... 100%
Percentage of Second Lien Mortgage Loans .......... 0%
PRINCIPAL BALANCES OF THE GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
RANGE OF GROUP I AGGREGATE UNPAID GROUP I AGGREGATE
PRINCIPAL BALANCES ($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- - ---------------------------- ---------------------- --------------------------- --------------------------
<S> <C> <C> <C>
619.48 - 50,000 238 $8,882,370.26 9.74%
50,000.01 - 100,000 509 36,962,006.76 40.54
100,000.01 - 150,000 239 28,951,645.08 31.75
150,000.01 - 200,000 75 12,762,625.24 14.00
200,000.01 - 225,639 17 3,618,043.86 3.97
---------------------- --------------------------- --------------------------
TOTAL 1,078 $91,176,691.20 100.00%
====================== =========================== ==========================
</TABLE>
As of the Cut-Off Date, the average Principal Balance of the Group I Mortgage
Loans was approximately $84,579.
S-31
<PAGE>
MORTGAGE INTEREST RATES OF THE GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
RANGE OF MORTGAGE GROUP I AGGREGATE UNPAID GROUP I AGGREGATE
INTEREST RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- - ---------------------------- ---------------------- ------------------------ --------------------------
<S> <C> <C> <C>
Less than or equal to 5.000 1 $19,940.76 0.02%
5.001 - 6.000 8 838,414.94 0.92
6.001 - 7.000 26 2,634,518.67 2.89
7.001 - 8.000 304 28,423,579.50 31.17
8.001 - 9.000 386 33,067,295.74 36.27
9.001 - 10.000 163 13,271,553.41 14.56
10.001 - 11.000 116 8,569,998.27 9.40
11.001 - 12.000 41 2,241,036.22 2.46
12.001 - 13.000 21 1,357,179.41 1.49
13.001 - 14.000 9 608,460.69 0.67
14.001 - 15.000 2 119,233.77 0.13
15.001 - 15.250 1 25,479.82 0.03
====================== ======================== ==========================
TOTAL 1,078 $91,176,691.20 100.00%
====================== ======================== ==========================
</TABLE>
As of the Cut-Off Date, the weighted average Mortgage Interest Rate of the
Group I Mortgage Loans was approximately 8.73% per annum.
ORIGINAL TERMS TO MATURITY OF THE GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
ORIGINAL TERM NUMBER OF GROUP I AGGREGATE UNPAID GROUP I AGGREGATE
TO MATURITY (MOS.) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- - ---------------------------- ---------------------- --------------------------- --------------------------
<S> <C> <C> <C>
60 14 $1,341,886.87 1.47%
84 1 97,339.90 0.11
120 3 161,486.96 0.18
180 20 1,145,857.46 1.26
240 4 153,867.31 0.17
300 4 270,254.70 0.30
302 1 65,398.21 0.07
348 2 148,914.26 0.16
359 1 55,557.70 0.06
360 1,028 87,736,127.83 96.23
====================== =========================== ==========================
TOTAL 1,078 $91,176,691.20 100.00%
====================== =========================== ==========================
</TABLE>
As of the Cut-Off Date, the weighted average original term to maturity of the
Group I Mortgage Loans was approximately 352 months.
S-32
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
OF THE GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
GROUP I AGGREGATE UNPAID GROUP I AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------- ---------------------- --------------------------- --------------------------
<S> <C> <C> <C>
Alabama 17 $972,731.86 1.07%
Alaska 5 584,361.93 0.64
Arizona 13 1,153,826.93 1.27
Arkansas 1 73,213.92 0.08
California 80 8,908,298.79 9.77
Colorado 19 1,697,137.11 1.86
Connecticut 15 1,077,653.26 1.18
Delaware 1 81,549.30 0.09
District of Columbia 4 316,166.55 0.35
Florida 74 5,544,280.37 6.08
Georgia 26 2,367,137.51 2.60
Hawaii 2 237,961.93 0.26
Idaho 7 554,139.20 0.61
Illinois 31 3,007,386.56 3.30
Indiana 20 1,799,859.83 1.97
Iowa 1 69,607.35 0.08
Kansas 3 257,571.26 0.28
Kentucky 3 187,993.90 0.21
Louisiana 10 703,158.70 0.77
Maine 7 449,182.88 0.49
Maryland 20 1,820,848.70 2.00
Massachusetts 22 2,105,762.47 2.31
Michigan 347 28,311,967.73 31.05
Minnesota 3 383,350.47 0.42
Mississippi 2 134,582.40 0.15
Missouri 11 709,347.45 0.78
Montana 1 75,111.68 0.08
Nevada 5 387,026.93 0.42
New Hampshire 18 1,401,695.63 1.54
New Jersey 10 918,469.10 1.01
New Mexico 19 1,946,195.62 2.13
New York 27 2,361,629.55 2.59
North Carolina 16 1,381,810.75 1.52
Ohio 55 4,099,026.12 4.50
Oklahoma 3 143,808.99 0.16
Oregon 5 501,787.16 0.55
Pennsylvania 11 931,750.30 1.02
Rhode Island 21 1,839,726.81 2.02
South Carolina 22 1,475,430.18 1.62
Tennessee 9 571,585.99 0.63
Texas 66 5,252,220.27 5.76
Utah 7 833,079.17 0.91
Vermont 1 49,959.51 0.05
Virginia 15 1,359,776.59 1.49
Washington 17 1,758,461.80 1.93
West Virginia 2 164,765.51 0.18
Wisconsin 4 214,295.18 0.24
====================== =========================== ==========================
TOTAL 1,078 $91,176,691.20 100.00%
====================== =========================== ==========================
</TABLE>
No more than 0.62% of the Group I Mortgage Loans will be secured by Mortgaged
Properties located in any one zip code area.
S-33
<PAGE>
TYPES OF MORTGAGED PROPERTIES OF THE GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
GROUP I AGGREGATE UNPAID GROUP I AGGREGATE
TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
Condominium 78 $5,490,506.74 6.02%
Duplex 44 3,320,247.41 3.64
Manufactured Home 14 955,798.98 1.05
Other 5 268,013.34 0.29
PUD 30 2,645,918.65 2.90
Single Family 874 75,739,874.33 83.07
Townhouse 7 629,212.59 0.69
Triplex 26 2,127,119.16 2.33
====================== =========================== =========================
TOTAL 1,078 $91,176,691.20 100.00%
====================== =========================== =========================
</TABLE>
OCCUPANCY STATUS OF THE GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
GROUP I AGGREGATE UNPAID GROUP I AGGREGATE
OCCUPANCY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
Non-Owner Occupied 207 $14,005,560.25 15.36%
Owner Occupied 871 77,171,130.95 84.64
====================== =========================== =========================
TOTAL 1,078 $91,176,691.20 100.00%
====================== =========================== =========================
</TABLE>
DOCUMENTATION TYPES OF THE GROUP I MORTGAGE LOANS (FLAGSTAR LOANS)
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
GROUP I GROUP I AGGREGATE
MORTGAGE LOANS AGGREGATE UNPAID PRINCIPAL BALANCE
DOCUMENTATION TYPES (FLAGSTAR LOANS) PRINCIPAL BALANCE (FLAGSTAR LOANS)
- - ---------------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
Full 391 $32,614,887.62 51.40%
No Income 348 29,980,033.22 47.25
No Income/No Asset 11 857,430.04 1.35
====================== =========================== =========================
TOTAL 750 $63,452,350.88 100.00%
====================== =========================== =========================
</TABLE>
S-34
<PAGE>
PURPOSE OF THE GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
GROUP I AGGREGATE UNPAID GROUP I AGGREGATE
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
Debt Consolidation 24 $2,214,496.55 2.43%
Equity-Takeout Refinance 236 19,242,839.24 21.10
Purchase 682 56,258,951.42 61.70
Rate and Term Refinance 132 13,251,279.49 14.53
Unknown 4 209,124.50 0.23
---------------------- --------------------------- -------------------------
TOTAL 1,078 $91,176,691.20 100.00%
====================== =========================== =========================
</TABLE>
GROUP I MORTGAGE LOAN RISK CATEGORIES (FLAGSTAR LOANS)
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
GROUP I GROUP I AGGREGATE
MORTGAGE LOANS AGGREGATE UNPAID PRINCIPAL BALANCE
RISK CATEGORIES (FLAGSTAR LOANS) PRINCIPAL BALANCE (FLAGSTAR LOANS)
- - ---------------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
A 381 $33,438,437.82 52.70%
A- 201 17,526,570.67 27.62
B 95 7,400,740.91 11.66
C 56 3,881,246.48 6.12
D 17 1,205,355.00 1.90
---------------------- --------------------------- -------------------------
TOTAL 750 $63,452,350.88 100.00%
====================== =========================== =========================
</TABLE>
GROUP I MORTGAGE LOAN RISK CATEGORIES (NON-FLAGSTAR LOANS)
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
GROUP I GROUP I AGGREGATE
MORTGAGE LOANS AGGREGATE UNPAID PRINCIPAL BALANCE
RISK CATEGORIES (NON-FLAGSTAR LOANS) PRINCIPAL BALANCE (NON-FLAGSTAR LOANS)
- - ---------------------------- ------------------------- --------------------------- -------------------------
<S> <C> <C> <C>
A 95 $ 8,424,636.89 30.39%
A- 35 2,706,488.62 9.76
B 63 5,191,218.29 18.72
C 49 3,967,422.83 14.31
D 86 7,434,573.69 26.82
------------------------- --------------------------- -------------------------
TOTAL 328 $27,724,340.32 100.00%
========================= =========================== =========================
</TABLE>
S-35
<PAGE>
PREPAYMENT PENALTY PERIOD FOR THE GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
GROUP I AGGREGATE UNPAID GROUP I AGGREGATE
YEARS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- - ---------------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
No prepayment penalty 1,063 $90,093,484.82 98.81%
2 6 574,934.35 0.63
3 6 323,731.57 0.36
5 3 184,540.46 0.20
---------------------- --------------------------- -------------------------
TOTAL 1,078 $91,176,691.20 100.00%
====================== =========================== =========================
</TABLE>
As of the Cut-Off Date, the weighted average prepayment penalty period of the
Group I Mortgage Loans with prepayment penalties was approximately 2.81 years.
CURRENT LOAN-TO-VALUE RATIOS OF THE GROUP I MORTGAGE LOANS (FLAGSTAR LOANS)
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE PRINCIPAL
RANGE OF CURRENT GROUP I BALANCE OF GROUP I
LOAN-TO-VALUE RATIOS* MORTGAGE LOANS AGGREGATE UNPAID MORTGAGE LOANS
(%) (FLAGSTAR LOANS) PRINCIPAL BALANCE (FLAGSTAR LOANS)
- - ---------------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
18.52 - 20.00 1 $51,490.73 0.08%
20.01 - 30.00 8 352,429.62 0.56
30.01 - 40.00 17 874,172.41 1.38
40.01 - 50.00 34 2,417,026.08 3.81
50.01 - 60.00 70 5,602,066.54 8.83
60.01 - 70.00 160 13,230,133.75 20.85
70.01 - 80.00 365 33,172,758.83 52.28
80.01 - 90.00 80 6,485,745.19 10.22
90.01 - 94.60 15 1,266,527.73 2.00
---------------------- --------------------------- -------------------------
TOTAL 750 $63,452,350.88 100.00%
====================== =========================== =========================
</TABLE>
As of the Cut-Off Date the weighted average current Loan-to-Value Ratio for
the Group I Mortgage Loans (Flagstar Loans) was 70.87%.
*The current Loan-To-Value Ratio for a Flagstar Loan is calculated by dividing
the Principal Balance of such Mortgage Loan as of the Cut-Off Date by the
lesser of (a) appraised value of the related Mortgaged Property as shown on an
appraisal obtained in connection with and prior to the origination of such
Mortgage Loan and (b) the purchase price for such Mortgaged Property
ascertained at the time of the origination of such Mortgage Loan.
S-36
<PAGE>
CURRENT LOAN-TO-VALUE RATIOS OF THE GROUP I MORTGAGE LOANS
(NON-FLAGSTAR LOANS)
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF GROUP I
RANGE OF CURRENT GROUP I AGGREGATE PRINCIPAL
LOAN-TO-VALUE RATIOS* MORTGAGE LOANS AGGREGATE UNPAID BALANCE
(%) (NON-FLAGSTAR LOANS) PRINCIPAL BALANCE (NON-FLAGSTAR LOANS)
- - ----------------------- -------------------------- --------------------------- -------------------------
<S> <C> <C> <C>
0.50 - 10.00 2 $32,891.64 0.12%
20.01 - 30.00 4 101,387.48 0.37
30.01 - 40.00 1 24,527.29 0.09
40.01 - 50.00 4 338,644.41 1.22
50.01 - 60.00 11 705,133.59 2.54
60.01 - 70.00 27 1,710,329.74 6.17
70.01 - 80.00 57 4,646,667.54 16.76
80.01 - 90.00 55 4,959,975.42 17.89
90.01 - 100.00 92 8,853,239.15 31.93
100.01 - 110.00 42 3,456,254.78 12.47
110.01 - 120.00 10 976,824.32 3.52
120.01 - 130.00 8 693,725.24 2.50
130.01 - 140.00 3 214,537.83 0.77
140.01 - 150.00 2 213,215.82 0.77
150.01 - 160.00 2 143,558.69 0.52
160.01 - 170.00 1 127,935.43 0.46
170.01 - 180.00 3 196,042.44 0.71
180.01 - 190.00 1 103,446.98 0.37
Greater than 200.00 3 226,002.53 0.82
- - ----------------------- -------------------------- --------------------------- -------------------------
TOTAL 328 $27,724,340.32 100.00%
========================== =========================== =========================
</TABLE>
As of the Cut-Off Date the weighted average current Loan-to-Value Ratio for
the Group I Mortgage Loans (Non-Flagstar Loans) was 92.41%.
*The current Loan-To-Value Ratio for a Non-Flagstar Loan is calculated by
dividing the Principal Balance of such Mortgage Loan as of the Cut-Off Date by
the low review value shown in a broker's price opinion obtained in connection
with and prior to the acquisition of such Mortgage Loan by the Contributor.
S-37
<PAGE>
DISTRIBUTION OF GROUP I ADJUSTABLE RATE MORTGAGE LOANS
BY GROSS MARGINS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE PRINCIPAL
GROUP I ADJUSTABLE BALANCE OF GROUP I
RANGE OF RATE AGGREGATE UNPAID ADJUSTABLE RATE
GROSS MARGINS (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- - ---------------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
Unknown 3 $126,347.90 0.18%
1.751 - 2.000 8 663,162.72 0.93
2.001 - 2.250 3 243,805.75 0.34
2.251 - 2.500 7 468,545.19 0.66
2.501 - 2.750 55 5,639,422.48 7.93
2.751 - 3.000 79 8,567,195.23 12.04
3.001 - 3.250 8 542,313.72 0.76
3.251 - 3.500 83 7,505,238.38 10.55
3.501 - 3.750 5 362,010.47 0.51
3.751 - 4.000 64 5,926,271.23 8.33
4.251 - 4.500 9 893,478.39 1.26
4.501 - 4.750 24 1,772,037.97 2.49
4.751 - 5.000 430 35,816,316.58 50.35
5.251 - 5.500 15 1,009,138.40 1.42
5.501 - 5.750 2 108,280.46 0.15
5.751 - 6.000 3 338,037.07 0.48
6.001 - 6.250 3 213,038.29 0.30
6.251 - 6.500 3 179,170.73 0.25
7.001 - 7.250 2 90,583.62 0.13
7.251 - 7.500 2 109,399.95 0.15
7.751 - 8.000 2 132,315.35 0.19
8.251 - 8.500 2 266,134.18 0.37
8.501 - 8.750 1 42,317.76 0.06
9.251 - 9.300 1 120,109.27 0.17
---------------------- --------------------------- -------------------------
TOTAL 814 $71,134,671.09 100.00%
====================== =========================== =========================
</TABLE>
As of the Cut-Off Date the weighted average Gross Margin for the Group I
Adjustable Rate Mortgage Loans was 4.30% (excluding Mortgage Loans with
unknown Gross Margins).
S-38
<PAGE>
DISTRIBUTION OF GROUP I ADJUSTABLE RATE MORTGAGE LOANS
BY MAXIMUM RATE
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE PRINCIPAL
GROUP I ADJUSTABLE BALANCE OF GROUP I
RANGE OF RATE AGGREGATE UNPAID ADJUSTABLE RATE
MAXIMUM RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- - ---------------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
No Maximum Rate 1 $95,547.63 0.13%
6.001 - 7.000 1 34,766.93 0.05
8.001 - 9.000 2 180,0421.31 0.25
9.001 - 10.000 3 169,945.20 0.24
10.001 - 11.000 17 1,660,385.09 2.33
11.001 - 12.000 30 3,068,423.70 4.31
12.001 - 13.000 20 2,510,245.07 3.53
13.001 - 14.000 204 19,789,411.00 27.82
14.001 - 15.000 282 24,023,399.08 33.77
15.001 - 16.000 119 9,539,364.32 13.41
16.001 - 17.000 79 6,336,515.94 8.91
17.001 - 18.000 36 2,055,833.18 2.89
18.001 - 19.000 10 737,789.20 1.04
19.001 - 20.000 5 448,587.25 0.63
20.001 - 21.000 4 441,636.17 0.62
21.001 - 21.725 1 42,779.02 0.06
---------------------- --------------------------- -------------------------
TOTAL 814 $71,134,671.09 100.00%
====================== =========================== =========================
</TABLE>
As of the Cut-Off Date the weighted average Maximum Rate for the Group I
Adjustable Rate Mortgage Loans was 14.55% (excluding the Mortgage Loans with
no Maximum Rate).
DISTRIBUTION OF GROUP I ADJUSTABLE RATE MORTGAGE LOANS
BY MINIMUM RATE
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE PRINCIPAL
GROUP I ADJUSTABLE BALANCE OF GROUP I
RANGE OF RATE AGGREGATE UNPAID ADJUSTABLE RATE
MAXIMUM RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- - ---------------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
No Minimum Rate 3 $126,347.90 0.18%
1.001 - 2.000 6 415,454.26 0.58
2.001 - 3.000 127 13,194,878.16 18.55
3.001 - 4.000 56 5,175,441.73 7.28
4.001 - 5.000 340 27,569,053.15 38.76
5.001 - 6.000 10 611,883.91 0.86
6.001 - 7.000 2 91,199.49 0.13
7.001 - 8.000 81 8,234,584.88 11.58
8.001 - 9.000 92 7,864,770.66 11.06
9.001 - 10.000 49 4,014,253.85 5.64
10.001 - 11.000 32 2,870,977.85 4.04
11.001 - 12.000 9 516,781.40 0.73
12.001 - 13.000 2 101,548.64 0.14
13.001 - 14.000 4 304,716.19 0.43
14.001 - 14.725 1 42,779.02 0.06
---------------------- --------------------------- -------------------------
TOTAL 814 $71,134,671.09 100.00%
====================== =========================== =========================
</TABLE>
As of the Cut-Off Date the weighted average Minimum Rate for the Group I
Adjustable Rate Mortgage Loans was 5.79%.
S-39
<PAGE>
LOAN INDEX OF THE GROUP I ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE PRINCIPAL
GROUP I ADJUSTABLE BALANCE OF GROUP I
RATE AGGREGATE UNPAID ADJUSTABLE RATE
INITIAL PERIOD/INDEX MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- - ---------------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
10yr Fixed;1yr TBILL 1 $213,100.95 0.30%
1yr Fixed;1yr TBILL 338 29,518,846.45 41.50
2yr Fixed;1yr TBILL 15 1,479,304.20 2.08
2yr Fixed;6mo LIBOR ARM 8 671,057.50 0.94
3yr Fixed;1yr TBILL 274 23,887,094.92 33.58
3yr Fixed;3yr TBILL 13 1,155,499.24 1.62
3yr Fixed;6mo LIBOR ARM 1 111,769.52 0.16
4yr Fixed;1yr TBILL 7 423,004.89 0.59
5yr Fixed;1yr TBILL 146 12,741,939.37 17.91
6 Month LIBOR ARM 6 401,517.80 0.56
6 Month;1yr TBILL 1 95,547.63 0.13
6 Month;6Mo TBILL 3 368,811.16 0.52
6yr Fixed;1yr TBILL 1 67,177.46 0.09
---------------------- --------------------------- -------------------------
TOTAL 814 $71,134,671.09 100.00%
====================== =========================== =========================
</TABLE>
INITIAL PERIODIC RATE CAP OF THE GROUP I ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE PRINCIPAL
GROUP I ADJUSTABLE BALANCE OF GROUP 1
INITIAL PERIODIC RATE RATE AGGREGATE UNPAID ADJUSTABLE RATE
CAP (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- - ---------------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
0.000% 3 $103,069.63 0.14%
1.000 55 5,006,858.97 7.04
1.500 5 347,122.03 0.49
2.000 583 49,778,940.04 69.98
2.500 3 264,842.16 0.37
3.000 11 1,147,070.47 1.61
4.000 148 13,855,483.68 19.48
4.750 1 42,687.52 0.06
5.000 1 74,149.32 0.10
5.250 1 170,810.35 0.24
6.000 3 343,636.92 0.48
---------------------- --------------------------- -------------------------
TOTAL 814 $71,134,671.09 100.00%
====================== =========================== =========================
</TABLE>
As of the Cut-Off Date the weighted average initial periodic rate cap on the
Group I Adjustable Rate Mortgage Loans was 2.36%.
S-40
<PAGE>
PERIODIC RATE CAP OF THE GROUP I ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE PRINCIPAL
GROUP I ADJUSTABLE BALANCE OF GROUP I
RATE AGGREGATE UNPAID ADJUSTABLE RATE
PERIODIC RATE CAP (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- - ---------------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
0.000% 2 $89,011.20 0.13%
0.750 1 82,657.46 0.12
1.000 65 5,950,870.26 8.37
1.500 5 384,573.84 0.54
2.000 734 64,002,230.97 89.97
2.500 3 264,842.16 0.37
3.000 1 87,397.96 0.12
3.500 1 27,854.14 0.04
5.000 1 74,422.75 0.10
5.250 1 170,810.35 0.24
---------------------- --------------------------- -------------------------
TOTAL 814 $71,134,671.09 100.00%
====================== =========================== =========================
</TABLE>
As of the Cut-Off Date the weighted average periodic rate cap for the Group I
Adjustable Rate Mortgage Loans was 1.92%.
S-41
<PAGE>
NEXT ADJUSTMENT DATES FOR THE GROUP I ADJUSTABLE RATE MORTGAGE LOANS
NEXT ADJUSTMENT DATE NUMBER OF AGGREGATE UNPAID PERCENTAGE OF
11/1/98 51 $4,121,525.57 5.79%
12/1/98 22 1,794,364.24 2.52
1/1/99 40 3,606,260.33 5.07
2/1/99 34 3,189,042.35 4.48
2/2/99 1 54,008.41 0.08
3/1/99 29 3,002,682.16 4.22
3/15/99 1 42,114.74 0.06
3/25/99 1 61,256.74 0.09
4/1/99 33 2,932,977.76 4.12
4/15/99 2 144,016.51 0.20
4/23/99 1 77,480.25 0.11
5/1/99 8 706,687.96 0.99
6/1/99 5 389,217.21 0.55
7/1/99 37 3,361,886.52 4.73
7/15/99 1 94,202.77 0.13
8/1/99 27 2,100,832.43 2.95
8/17/99 1 100,547.89 0.14
9/1/99 23 2,323,287.87 3.27
9/7/99 1 14,058.43 0.02
10/1/99 50 4,245,098.92 5.97
11/1/99 1 186,843.45 0.26
12/1/99 14 1,269,591.72 1.78
3/1/00 1 127,935.43 0.18
4/1/00 1 125,725.52 0.18
5/1/00 2 209,500.85 0.29
6/1/00 3 238,837.17 0.34
7/1/00 1 88,523.51 0.10
8/1/00 5 383,061.24 0.54
9/1/00 18 1,432,230.98 2.01
10/1/00 28 2,639,875.60 3.71
11/1/00 32 3,031,543.92 4.26
12/1/00 22 1,715,904.34 2.41
1/1/01 60 5,511,962.08 7.75
2/1/01 31 2,771,490.56 3.90
3/1/01 33 2,788,963.86 3.92
4/1/01 37 2,754,411.98 3.87
5/1/01 3 194,713.39 0.27
6/1/01 1 70,251.67 0.10
7/1/01 1 176,822.31 0.25
8/1/01 1 64,365.47 0.09
10/1/01 1 42,779.02 0.06
11/1/01 1 57,251.92 0.08
12/1/01 6 365,752.97 0.51
5/1/02 1 42,625.83 0.06
8/1/02 3 172,976.22 0.24
9/1/02 15 1,242,316.64 1.75
10/1/02 22 1,869,071.26 2.63
11/1/02 25 2,079,267.46 2.92
12/1/02 19 1,655,512.75 2.33
1/1/03 25 2,541,681.77 3.57
2/1/03 10 860,631.86 1.21
3/1/03 13 970,529.22 1.36
4/1/03 8 829,891.65 1.17
12/1/03 1 67,177.46 0.09
8/1/05 1 213,100.95 0.30
----------- ------------------ -------------------
TOTAL 814 $71,134,671.09 100.00%
=========== ================== ===================
S-42
<PAGE>
SUMMARY OF CHARACTERISTICS OF THE GROUP II MORTGAGE LOANS
Aggregate Number of Mortgage Loans .................. 730
Principal Balance
Aggregate Principal Balance ..................... $91,001,412.48
Average Principal Balance ....................... $124,659.47
Range of Principal Balances ..................... $3,930.49 - $992,366.26
Mortgage Interest Rates
Weighted Average Mortgage Interest Rate ......... 8.77%
Range of Mortgage Interest Rates ................ 3.00 - 15.50%
Original Term to Maturity
Weighted Average Original Term to Maturity ...... 347 months
Range of Original Terms to Maturity ............. 60 - 360 months
Remaining Term to Maturity
Weighted Average Remaining Term to Maturity ..... 323 months
Range of Remaining Term to Maturity ............. 45 - 354 months
Percentage of Fixed Rate Mortgage Loans ............. 22.39%
Percentage of Adjustable Rate Mortgage Loans ........ 77.61%
Percentage of First Lien Mortgage Loans ............. 99.78%
Percentage of Second Lien Mortgage Loans ............ 0.22%
PRINCIPAL BALANCES OF THE GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
RANGE OF GROUP II AGGREGATE UNPAID GROUP II AGGREGATE
PRINCIPAL BALANCES ($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- - ------------------------------ ---------------------- ------------------------- ------------------------
<S> <C> <C> <C>
3,930.00 - 50,000 156 $5,767,001.73 6.34%
50,000.01 - 100,000 253 18,553,083.64 20.39
100,000.01 - 150,000 137 16,608,257.09 18.25
150,000.01 - 200,000 41 6,898,388.51 7.58
200,000.01 - 250,000 48 11,058,773.22 12.15
250,000.01 - 300,000 42 11,622,454.98 12.77
300,000.01 - 350,000 28 9,036,812.76 9.93
350,000.01 - 400,000 13 4,866,817.59 5.35
400,000.01 - 450,000 4 1,690,413.96 1.86
450,000.01 - 500,000 2 920,838.74 1.01
500,000.01 - 550,000 3 1,611,019.20 1.77
600,000.01 - 650,000 1 631,197.15 0.69
700,000.01 - 750,000 1 743,987.65 0.82
950,000.01 - 992,366 1 992,366.26 1.09
---------------------- ------------------------- ------------------------
TOTAL 730 $91,001,412.48 100.00%
====================== ========================= ========================
</TABLE>
As of the Cut-Off Date, the average Principal Balance of the Group II Mortgage
Loans was approximately $124,659.
S-43
<PAGE>
MORTGAGE INTEREST RATES OF THE GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
RANGE OF MORTGAGE INTEREST GROUP II AGGREGATE UNPAID GROUP II AGGREGATE
RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- - ------------------------------ ---------------------- ------------------------- ------------------------
<S> <C> <C> <C>
Less than or equal to 5.000 2 $15,484.84 0.02%
5.001 - 6.000 1 214,681.30 0.24
6.001 - 7.000 7 2,550,610.08 2.80
7.001 - 8.000 125 21,862,188.96 24.02
8.001 - 9.000 327 42,106,696.27 46.27
9.001 - 10.000 115 11,334,051.64 12.45
10.001 - 11.000 93 7,491,695.99 8.23
11.001 - 12.000 34 3,542,208.89 3.89
12.001 - 13.000 15 732,561.73 0.81
13.001 - 14.000 8 1,050,829.20 1.15
14.001 - 15.000 1 46,879.98 0.05
15.001 - 15.500 2 53,523.60 0.06
---------------------- ------------------------- ------------------------
TOTAL 730 $91,001,412.48 100.00%
====================== ========================= ========================
</TABLE>
As of the Cut-Off Date, the weighted average Mortgage Interest Rate of the
Group II Mortgage Loans was approximately 8.77% per annum.
ORIGINAL TERMS TO MATURITY OF THE GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
ORIGINAL TERM GROUP II AGGREGATE UNPAID GROUP II AGGREGATE
TO MATURITY (MOS.) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- - ------------------------------ ---------------------- ------------------------- ------------------------
<S> <C> <C> <C>
60 8 $757,867.11 0.83%
180 34 4,778,910.68 5.25
240 9 774,235.11 0.85
298 1 45,546.69 0.05
300 4 220,379.66 0.24
354 1 52,302.00 0.06
360 673 84,372,171.23 92.72
---------------------- ------------------------- ------------------------
TOTAL 730 $91,001,412.48 100.00%
====================== ========================= ========================
</TABLE>
As of the Cut-Off Date, the weighted average original term to maturity of the
Group II Mortgage Loans was approximately 347 months.
S-44
<PAGE>
GEOGRAPHIC DISTRIBUTION OF PROPERTIES OF THE GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
GROUP II AGGREGATE UNPAID GROUP II AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------- ---------------------- --------------------------- --------------------------
<S> <C> <C> <C>
Alabama 6 $836,741.41 0.92%
Alaska 1 233,327.97 0.26
Arizona 10 2,219,320.64 2.44
Arkansas 1 281,355.71 0.31
California 52 9,727,283.53 10.69
Colorado 13 3,227,752.22 3.55
Connecticut 16 2,676,975.98 2.94
District of Columbia 3 672,457.00 0.74
Florida 47 3,772,055.51 4.15
Georgia 17 2,402,346.11 2.64
Hawaii 1 233,505.61 0.26
Idaho 3 482,065.39 0.53
Illinois 24 3,082,250.16 3.39
Indiana 6 451,541.79 0.50
Iowa 2 161,515.19 0.18
Kansas 4 337,672.85 0.37
Kentucky 2 202,190.55 0.22
Louisiana 6 397,856.37 0.44
Maine 9 1,218,213.89 1.34
Maryland 7 1,064,791.74 1.17
Massachusetts 23 4,178,328.19 4.59
Michigan 211 20,021,055.56 22.00
Minnesota 4 268,472.72 0.30
Mississippi 3 170,369.88 0.19
Missouri 7 529,446.27 0.58
Montana 2 259,887.36 0.29
Nebraska 1 330,500.52 0.36
Nevada 6 1,111,049.64 1.22
New Hampshire 11 1,040,045.96 1.14
New Jersey 15 2,987,170.38 3.28
New Mexico 16 1,899,791.59 2.09
New York 29 4,191,893.09 4.61
North Carolina 11 1,241,209.99 1.36
Ohio 51 4,337,884.92 4.77
Oklahoma 2 321,547.70 0.35
Oregon 2 367,987.11 0.40
Pennsylvania 4 452,580.98 0.50
Rhode Island 12 1,814,639.94 1.99
South Carolina 30 4,757,842.52 5.23
Tennessee 4 875,813.15 0.96
Texas 27 3,654,672.60 4.02
Utah 7 509,288.00 0.56
Virginia 4 459,349.96 0.50
Washington 12 1,101,624.57 1.21
West Virginia 1 38,783.42 0.04
Wisconsin 3 283,151.32 0.31
Wyoming 2 115,805.52 0.13
---------------------- --------------------------- --------------------------
TOTAL 730 $91,001,412.48 100.00%
====================== =========================== ==========================
</TABLE>
No more than 1.11% of the Group II Mortgage Loans will be secured by Mortgaged
Properties located in any one zip code area.
S-45
<PAGE>
TYPES OF MORTGAGED PROPERTIES OF THE GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
GROUP II AGGREGATE UNPAID GROUP II AGGREGATE
TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
Condominium 47 $4,426,820.47 4.86%
Duplex 37 2,980,822.52 3.28
Manufactured Home 8 528,801.39 0.58
Other 2 102,947.12 0.11
PUD 26 5,375,580.58 5.91
Single Family 594 75,357,485.66 82.81
Triplex 16 2,228,954.74 2.45
---------------------- --------------------------- -------------------------
TOTAL 730 $91,001,412.48 100.00%
====================== =========================== =========================
</TABLE>
OCCUPANCY STATUS OF THE GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
GROUP II AGGREGATE UNPAID GROUP II AGGREGATE
OCCUPANCY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
Non-Owner Occupied 134 $13,794,498.40 15.16%
Owner Occupied 596 77,206,914.08 84.84
---------------------- --------------------------- -------------------------
TOTAL 730 $91,001,412.48 100.00%
====================== =========================== =========================
</TABLE>
DOCUMENTATION TYPES OF THE GROUP II MORTGAGE LOANS (FLAGSTAR LOANS)
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
GROUP II GROUP II AGGREGATE
MORTGAGE LOANS AGGREGATE UNPAID PRINCIPAL BALANCE
DOCUMENTATION TYPE (FLAGSTAR LOANS) PRINCIPAL BALANCE (FLAGSTAR LOANS)
- - ---------------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
Full 273 $31,299,421.60 53.97%
No Income 218 25,361,037.41 43.73
No Income/No Asset 10 1,337,053.82 2.31
---------------------- --------------------------- -------------------------
TOTAL 501 $57,997,512.83 100.00%
====================== =========================== =========================
</TABLE>
S-46
<PAGE>
PURPOSE OF THE GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
GROUP II AGGREGATE UNPAID GROUP II AGGREGATE
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
Consolidation 1 $41,453.62 0.05%
Construction 1 297,082.04 0.33
Debt Consolidation 16 1,904,589.66 2.09
Equity-Takeout 158 19,598,471.06 21.54
Refinance
Purchase 440 50,606,325.21 55.61
Rate and Term 113 18,527,559.14 20.36
Refinance
Unknown 1 25,931.75 0.03
---------------------- --------------------------- -------------------------
TOTAL 730 $91,001,412.48 100.00%
====================== =========================== =========================
</TABLE>
GROUP II MORTGAGE LOAN RISK CATEGORIES (FLAGSTAR LOANS)
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
GROUP II GROUP II AGGREGATE
MORTGAGE LOANS AGGREGATE UNPAID PRINCIPAL BALANCE
RISK CATEGORIES (FLAGSTAR LOANS) PRINCIPAL BALANCE (FLAGSTAR LOANS)
- - ---------------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
A 229 $28,100,417.53 48.45%
A- 148 18,521,020.98 31.93
B 73 7,254,207.43 12.51
C 20 1,394,519.77 2.40
D 31 2,727,347.12 4.70
---------------------- --------------------------- -------------------------
TOTAL 501 $57,997,512.83 100.00%
====================== =========================== =========================
</TABLE>
GROUP II MORTGAGE LOAN RISK CATEGORIES (NON-FLAGSTAR LOANS)
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
GROUP II GROUP II AGGREGATE
MORTGAGE LOANS AGGREGATE UNPAID PRINCIPAL BALANCE
RISK CATEGORIES (NON-FLAGSTAR LOANS) PRINCIPAL BALANCE (NON-FLAGSTAR LOANS)
- - ---------------------------- ------------------------- --------------------------- -------------------------
<S> <C> <C> <C>
A 75 $13,299,281.56 40.30%
A- 19 2,294,391.34 6.95
B 52 6,283,464.76 19.04
C 39 5,290,600.23 16.03
D 44 5,836,161.76 17.68
------------------------- --------------------------- -------------------------
TOTAL 229 $33,003,899.65 100.00%
========================= =========================== =========================
</TABLE>
S-47
<PAGE>
PREPAYMENT PENALTY PERIOD FOR THE GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
GROUP II AGGREGATE UNPAID GROUP II AGGREGATE
YEARS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- - ---------------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
No prepayment penalty 707 $88,598,043.37 97.36%
1 1 11,666.39 0.01
2 8 877,640.52 0.96
3 11 1,008,933.77 1.11
5 3 505,128.43 0.56
---------------------- --------------------------- -------------------------
TOTAL 730 $91,001,412.48 100.00%
====================== =========================== =========================
</TABLE>
As of the Cut-Off Date the weighted average prepayment penalty period of the
Group II Mortgage Loans with prepayment penalties was approximately 3.05
years.
CURRENT LOAN-TO-VALUE RATIOS OF THE GROUP II MORTGAGE LOANS (FLAGSTAR LOANS)
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF GROUP II
RANGE OF CURRENT GROUP II AGGREGATE PRINCIPAL
LOAN-TO-VALUE RATIOS MORTGAGE LOANS AGGREGATE UNPAID BALANCE
(%) (FLAGSTAR LOANS) PRINCIPAL BALANCE (FLAGSTAR LOANS)
- - ---------------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
16.94 - 20.00 1 $49,958.82 0.09%
20.01 - 30.00 3 107,550.85 0.19
30.01 - 40.00 10 766,116.89 1.32
40.01 - 50.00 20 2,290,366.70 3.95
50.01 - 60.00 37 3,911,815.87 6.74
60.01 - 70.00 114 14,267,380.65 24.60
70.01 - 80.00 255 30,168,737.22 52.02
80.01 - 90.00 49 4,973,716.39 8.58
90.01 - 100.00 11 1,332,812.22 2.30
150.01 - 158.36 1 129,057.22 0.22
---------------------- --------------------------- -------------------------
TOTAL 501 $57,997,512.83 100.00%
====================== =========================== =========================
</TABLE>
As of the Cut-Off Date the weighted average current Loan-to-Value ratio for
the Group II Mortgage Loans (Flagstar Loans) was 71.40%.
*The current Loan-To-Value Ratio for a Flagstar Loan is calculated by dividing
the Principal Balance of such Mortgage Loan as of the Cut-Off Date by the
lesser of (a) appraised value of the related Mortgaged Property as shown on an
appraisal obtained in connection with and prior to the origination of such
Mortgage Loan and (b) the purchase price for such Mortgaged Property
ascertained at the time of the origination of such Mortgage Loan.
S-48
<PAGE>
CURRENT LOAN-TO-VALUE RATIOS OF THE GROUP II MORTGAGE LOANS (NON-FLAGSTAR LOANS)
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE PRINCIPAL
GROUP II BALANCE OF GROUP II
RANGE OF CURRENT MORTGAGE LOANS AGGREGATE UNPAID MORTGAGE LOANS
LOAN-TO-VALUE RATIOS (%) (NON-FLAGSTAR LOANS) PRINCIPAL BALANCE (NON-FLAGSTAR LOANS)
- - -------------------------- ------------------------- -------------------------- -------------------------
<S> <C> <C> <C>
7.37 - 10.00 1 $11,062.42 0.03%
20.01 - 30.00 2 35,067.85 0.11
30.01 - 40.00 3 636,032.45 1.93
40.01 - 50.00 6 1,098,071.55 3.33
50.01 - 60.00 15 1,444,883.46 4.38
60.01 - 70.00 28 3,887,485.00 11.78
70.01 - 80.00 35 7,240,513.82 21.94
80.01 - 90.00 51 8,474,164.98 25.68
90.01 - 100.00 48 5,744,533.27 17.41
100.01 - 110.00 15 1,771,040.05 5.37
110.01 - 120.00 13 1,500,218.78 4.55
120.01 - 130.00 3 154,407.40 0.47
130.01 - 140.00 1 107,592.89 0.33
140.01 - 150.00 3 509,749.87 1.54
150.01 - 160.00 3 203,594.38 0.62
180.01 - 190.00 1 95,378.66 0.29
Greater than 200.00 1 90,102.82 0.27
------------------------- -------------------------- -------------------------
TOTAL 229 $33,003,899.65 100.00%
========================= ========================== =========================
</TABLE>
As of the Cut-Off Date the weighted average current Loan-to-Value ratio for
the Group II Mortgage Loans (Non-Flagstar Loans) was 83.63%.
*The current Loan-To-Value Ratio for a Non-Flagstar Loan is calculated by
dividing the Principal Balance of such Mortgage Loan as of the Cut-Off Date by
the low review value shown in a broker's price opinion obtained in connection
with and prior to the acquisition of such Mortgage Loan by the Contributor.
S-49
<PAGE>
DISTRIBUTION OF GROUP II ADJUSTABLE RATE MORTGAGE LOANS
BY GROSS MARGINS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE PRINCIPAL
GROUP II BALANCE OF GROUP II
RANGE OF ADJUSTABLE RATE AGGREGATE UNPAID ADJUSTABLE RATE
GROSS MARGINS (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- - ---------------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
2.000 2 $445,713.83 0.63%
2.001 - 2.250 1 236,426.87 0.33
2.251 - 2.500 3 571,490.25 0.81
2.501 - 2.750 34 6,635,189.15 9.40
2.751 - 3.000 74 13,281,761.98 18.81
3.001 - 3.250 5 755,373.35 1.07
3.251 - 3.500 54 5,958,311.85 8.44
3.501 - 3.750 6 241,776.94 0.34
3.751 - 4.000 47 6,033,572.61 8.54
4.251 - 4.500 5 504,281.25 0.71
4.501 - 4.750 17 1,266,666.48 1.79
4.751 - 5.000 274 31,182,547.55 44.15
5.251 - 5.500 10 466,935.75 0.66
5.501 - 5.750 2 375,972.46 0.53
5.751 - 6.000 1 324,261.14 0.46
6.001 - 6.250 3 395,818.81 0.56
6.251 - 6.500 2 120,067.46 0.17
6.501 - 6.750 3 446,301.97 0.63
6.751 - 7.000 1 111,274.94 0.16
7.001 - 7.250 1 22,598.48 0.03
7.251 - 7.500 1 34,890.47 0.05
7.501 - 7.750 3 280,577.09 0.40
7.751 - 8.000 2 543,649.77 0.77
8.001 - 8.250 2 388,681.13 0.55
---------------------- --------------------------- -------------------------
TOTAL 553 $70,624,141.58 100.00%
====================== =========================== =========================
</TABLE>
As of the Cut-Off Date the weighted average Gross Margin for the Group II
Adjustable Rate Mortgage Loans was 4.20%.
S-50
<PAGE>
DISTRIBUTION OF GROUP II ADJUSTABLE RATE MORTGAGE LOANS
BY MAXIMUM RATE
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE PRINCIPAL
GROUP II ADJUSTABLE BALANCE OF GROUP II
RANGE OF MAXIMUM RATE AGGREGATE UNPAID ADJUSTABLE RATE
RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- - ---------------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
8.500 - 9.000 1 $104,965.84 0.15%
9.001 - 10.000 1 48,725.58 0.07
10.001 - 11.000 4 1,393,373.10 1.97
11.001 - 12.000 10 1,847,041.77 2.62
12.001 - 13.000 14 3,629,395.40 5.14
13.001 - 14.000 102 17,459,573.31 24.72
14.001 - 15.000 223 26,267,548.76 37.19
15.001 - 16.000 93 9,927,378.87 14.06
16.001 - 17.000 60 5,532,363.08 7.83
17.001 - 18.000 28 2,750,619.26 3.89
18.001 - 19.000 12 1,282,267.00 1.82
19.001 - 20.000 1 214,531.70 0.30
20.001 - 21.000 3 114,631.95 0.16
21.001 - 21.875 1 51,725.96 0.07
---------------------- --------------------------- -------------------------
TOTAL 553 $70,624,141.58 100.00%
====================== =========================== =========================
</TABLE>
As of the Cut-Off Date the weighted average Maximum Rate for the Group II
Adjustable Rate Mortgage Loans was 14.61%.
DISTRIBUTION OF GROUP II ADJUSTABLE RATE MORTGAGE LOANS
BY MINIMUM RATE
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE PRINCIPAL
GROUP II ADJUSTABLE BALANCE OF GROUP II
RANGE OF MINIMUM RATE AGGREGATE UNPAID ADJUSTABLE RATE
RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- - ---------------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
2.250 - 3.000 97 $17,816,887.12 25.23%
3.001 - 4.000 38 4,478,655.05 6.34
4.001 - 5.000 209 22,792,739.50 32.27
5.001 - 6.000 7 578,940.77 0.82
6.001 - 7.000 5 1,269,024.18 1.80
7.001 - 8.000 33 5,379,223.41 7.62
8.001 - 9.000 82 9,727,844.19 13.77
9.001 - 10.000 36 3,990,516.47 5.65
10.001 - 11.000 31 2,665,518.83 3.77
11.001 - 12.000 9 1,604,734.19 2.27
12.001 - 13.000 3 205,425.92 0.29
13.001 - 14.000 2 67,751.97 0.10
14.001 - 15.000 1 46,879.98 0.07
---------------------- --------------------------- -------------------------
TOTAL 553 $70,624,141.58 100.00%
====================== =========================== =========================
</TABLE>
As of the Cut-Off Date the weighted average Minimum Rate for the Group II
Adjustable Rate Mortgage Loans was 5.77%.
S-51
<PAGE>
LOAN INDEX OF THE GROUP II ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE PRINCIPAL
GROUP II ADJUSTABLE BALANCE OF GROUP II
RATE AGGREGATE UNPAID ADJUSTABLE RATE
INITIAL PERIOD/INDEX MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- - ---------------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
1yr Fixed;1yr TBILL 224 $26,627,316.15 37.70%
2yr Fixed;1yr TBILL 9 2,093,942.77 2.96
2yr Fixed;6mo LIBOR ARM 10 1,219,866.21 1.73
3yr Fixed;1yr TBILL 182 24,566,327.95 34.78
3yr Fixed;3yr TBILL 6 961,218.98 1.36
3yr Fixed;6mo LIBOR ARM 3 138,554.78 0.20
4yr Fixed;1yr TBILL 3 157,460.83 0.22
5yr Fixed;1yr TBILL 105 12,898,380.63 18.26
6 Month LIBOR ARM 5 800,363.13 1.13
6 Month;6Mo TBILL 1 214,531.70 0.30
7yr Fixed;1yr TBILL 4 886,485.61 1.26
7yr Fixed;5yr TBILL 1 59,692.84 0.08
---------------------- --------------------------- -------------------------
TOTAL 553 $70,624,141.58 100.00%
====================== =========================== =========================
</TABLE>
INITIAL PERIODIC RATE CAPS OF THE GROUP II ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE PRINCIPAL
GROUP II ADJUSTABLE BALANCE OF GROUP II
INITIAL PERIODIC RATE RATE AGGREGATE UNPAID ADJUSTABLE RATE
CAP (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- - ---------------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
1.000 12 $1,285,177.54 1.82%
1.500 3 771,189.23 1.09
2.000 411 51,282,945.98 72.61
3.000 12 1,161,669.20 1.64
4.000 106 13,981,345.00 19.80
5.000 2 396,018.20 0.56
5.250 2 566,376.25 0.80
6.000 4 1,004,634.64 1.42
8.000 1 174,785.54 0.25
---------------------- --------------------------- -------------------------
TOTAL 553 $70,624,141.58 100.00%
====================== =========================== =========================
</TABLE>
As of the Cut-Off Date the weighted average initial periodic rate cap on the
Group II Adjustable Rate Mortgage Loans was 2.50%.
S-52
<PAGE>
PERIODIC RATE CAPS OF THE GROUP II ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE PRINCIPAL
NUMBER OF BALANCE OF GROUP II
GROUP II ADJUSTABLE AGGREGATE UNPAID ADJUSTABLE RATE
PERIODIC RATE CAP (%) RATE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- - ---------------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
1.000 21 $2,148,476.62 3.04%
1.500 6 1,137,160.10 1.61
2.000 519 65,761,299.44 93.11
3.000 2 325,729.61 0.46
3.500 1 114,441.15 0.16
5.250 2 566,376.25 0.80
6.000 1 395,872.87 0.56
8.000 1 174,785.54 0.25
---------------------- --------------------------- -------------------------
TOTAL 553 $70,624,141.58 100.00%
====================== =========================== =========================
</TABLE>
As of the Cut-Off Date the weighted average periodic rate cap for the Group II
Adjustable Rate Mortgage Loans was 2.03%.
S-53
<PAGE>
NEXT ADJUSTMENT DATES FOR THE GROUP II ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE PRINCIPAL
GROUP II ADJUSTABLE BALANCE OF GROUP II
RATE AGGREGATE UNPAID ADJUSTABLE RATE
NEXT ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- - ---------------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C>
11/1/98 19 $2,492,929.27 3.53%
11/15/98 2 107,148.25 0.15
12/1/98 27 3,428,030.71 4.85
1/1/99 34 3,289,313.30 4.66
1/22/99 1 51,725.96 0.07
2/1/99 22 3,759,911.17 5.32
3/1/99 19 1,750,201.33 2.48
4/1/99 17 2,300,806.23 3.26
4/27/99 1 17,964.55 0.03
5/1/99 5 1,145,565.74 1.62
5/15/99 1 104,777.84 0.15
6/1/99 5 262,028.28 0.37
7/1/99 17 2,076,798.83 2.94
7/28/99 1 132,064.93 0.19
8/1/99 15 1,794,375.67 2.54
9/1/99 27 3,043,641.25 4.31
9/4/99 1 216,591.74 0.31
9/28/99 1 243,464.49 0.34
10/1/99 31 3,978,083.16 5.63
12/1/99 10 2,185,436.42 3.09
2/1/00 1 70,284.16 0.10
4/1/00 1 51,442.35 0.07
8/1/00 5 491,468.59 0.70
9/1/00 14 1,102,150.19 1.56
10/1/00 17 2,285,392.68 3.24
11/1/00 13 5,185,878.57 7.34
12/1/00 21 2,837,584.65 4.02
1/1/01 32 4,024,212.74 5.70
2/1/01 20 2,264,488.14 3.21
3/1/01 20 3,513,900.65 4.98
4/1/01 24 2,981,478.39 4.22
7/1/01 1 58,016.38 0.08
10/1/01 1 239,533.46 0.34
11/17/01 1 59,692.84 0.08
12/1/01 3 157,460.83 0.22
8/1/02 4 489,134.06 0.69
9/1/02 8 490,081.36 0.69
10/1/02 17 1,905,102.90 2.70
11/1/02 23 2,988,307.07 4.23
12/1/02 11 1,720,613.84 2.44
1/1/03 20 3,125,842.80 4.43
2/1/03 11 841,917.83 1.19
3/1/03 5 587,054.98 0.83
4/1/03 5 370,588.27 0.52
8/1/03 1 78,448.31 0.11
9/1/04 1 323,299.42 0.46
---------------------- --------------------------- -------------------------
TOTAL 553 $70,624,141.58 100.00%
====================== =========================== =========================
</TABLE>
S-54
<PAGE>
UNDERWRITING STANDARDS
The Mortgage Loans will be acquired by the Depositor on the Closing
Date from OAIC Mortgage Residential Securities Holdings, LLC ("the
Transferor") pursuant to an Ownership Transfer Agreement (the "Ownership
Transfer Agreement"), dated as of October 1, 1998 by and between the Depositor
and the Transferor. The Transferor will have acquired the Mortgage Loans on
the Closing Date from the Contributor pursuant to a Mortgage Loan Contribution
Agreement (the "Mortgage Loan Contribution Agreement"), dated as of October 1,
1998 by and between the Transferor and the Contributor. The Contributor in
turn will have acquired the Mortgage Loans directly or indirectly from various
originators.
Flagstar Mortgage Loans
Approximately 66.67% of the Mortgage Loans, by aggregate principal
balance as of the Cut-Off Date (the "Flagstar Loans"), were acquired by the
Contributor from Flagstar Bank, FSB ("Flagstar") in various transactions from
March 1998 to July 1998. The Flagstar Loans were originated in accordance with
the underwriting standards of Flagstar. Certain information about the
underwriting standards of Flagstar, including Flagstar's risk grade
categories, was obtained by the Contributor from Flagstar. Such information
can be found in Annex B attached hereto.
Non-Flagstar Mortgage Loans
Approximately 33.33% of the Mortgage Loans, by aggregate principal
balance as of the Cut-Off Date (the "Non-Flagstar Loans"), were acquired by
the Contributor from various originators from September 1997 to October 1998.
The Non-Flagstar Loans consist of one- to four-family, first lien mortgage
loans which were intended by the related originator to conform with FNMA,
FHLMC, GNMA or other conduit standards but subsequently were discovered not to
meet the originally intended FNMA, FHLMC, GNMA or other conduit market
parameters, as applicable, due to errors in relevant underwriting
documentation or credit deterioration of the obligor. The Contributor placed
the Non-Flagstar Loans into various credit grade categories (the "Ocwen Credit
Grade") based on a combination of FICO scores and payment histories.
First, the Contributor assigned a FICO grade (a "FICO Grade") to
each Non-Flagstar Mortgage Loan based on the following FICO scores:
- - ------------------------------------------------------------------------------
FICO Score FICO Grade
- - ------------------------------------------------------------------------------
greater than or equal to 660 A
- - ------------------------------------------------------------------------------
659-620 A-
- - ------------------------------------------------------------------------------
619-580 B
- - ------------------------------------------------------------------------------
579-540 C
- - ------------------------------------------------------------------------------
539-500 D
- - ------------------------------------------------------------------------------
less than 500 D-
- - ------------------------------------------------------------------------------
S-55
<PAGE>
second, the Contributor assigned a mortgage grade (a "Mortgage Grade") to each
Non-Flagstar Mortgage Loan based on the following mortgage payment histories:
<TABLE>
<S> <C>
- - ----------------------------------------------------------------------------------------------------------------
Mortgage Payment History (Past 12 months) Mortgage Grade
- - ----------------------------------------------------------------------------------------------------------------
A maximum of one 30-day late payment and no 60-day late payments A
- - ----------------------------------------------------------------------------------------------------------------
Two 30-day late payments and no 60-day late payments A-
- - ----------------------------------------------------------------------------------------------------------------
Three or more 30-day late payments or one 60-day late payment and no 90-day late payments B
- - ----------------------------------------------------------------------------------------------------------------
Two 60-day late payments or one 90-day late payment and no 120-day late payments
and not C currently 60 days or more past due
- - ----------------------------------------------------------------------------------------------------------------
Three or more 60-day late payments or two or more 90-day late payments or currently 60 days D
past due
- - ----------------------------------------------------------------------------------------------------------------
Currently 90 or more days past due D-
- - ----------------------------------------------------------------------------------------------------------------
</TABLE>
S-56
<PAGE>
Finally, the Contributor assigned an Ocwen Credit Grade to each
Non-Flagstar Mortgage Loan based a combination of the FICO Grade and Mortgage
Grade for such Mortgage Loan:
<TABLE>
<CAPTION>
Mortgage Ocwen Ocwen
FICO Grade Grade Credit Grade FICO Grade FICO Grade Credit Grade
- - ----------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C>
A A A C A B
- - ----------------------------------------- --------------------------------------------
A A- A- C A- B
- - ----------------------------------------- --------------------------------------------
A B A- C B B
- - ----------------------------------------- --------------------------------------------
A C B C C C
- - ----------------------------------------- --------------------------------------------
A D C C D D
- - ----------------------------------------- --------------------------------------------
A D- D C D- D-
- - ----------------------------------------- --------------------------------------------
A- A A D A B
- - ----------------------------------------- --------------------------------------------
A- A- A- D A- C
- - ----------------------------------------- --------------------------------------------
A- B B D B C
- - ----------------------------------------- --------------------------------------------
A- C B D C C
- - ----------------------------------------- --------------------------------------------
A- D C D D D
- - ----------------------------------------- --------------------------------------------
A- D- D D D- D-
- - ----------------------------------------- --------------------------------------------
B A A- D- A C
- - ----------------------------------------- --------------------------------------------
B A- A- D- A- C
- - ----------------------------------------- --------------------------------------------
B B B D- B D
- - ----------------------------------------- --------------------------------------------
B C C D- C D
- - ----------------------------------------- --------------------------------------------
B D C D- D D
- - ----------------------------------------- --------------------------------------------
B D- D D- D- D-
- - ----------------------------------------- --------------------------------------------
</TABLE>
PREPAYMENT AND YIELD CONSIDERATIONS
General
The weighted average life of, and, if purchased at other than par,
the yield to maturity on, each Class of Notes will relate to the rate of
payment of principal of the Mortgage Loans, including, for this purpose,
prepayments, liquidations due to defaults, casualties and condemnations, and
repurchases of Mortgage Loans from each Group, whether optional or required,
by the Servicer or the Contributor. The actual rate of Prepayments of each
Group of Mortgage Loans is influenced by a variety of economic, tax,
geographic, demographic, social, legal and other factors and has fluctuated
considerably in recent years. In addition, the rate of Prepayments may differ
among pools of mortgage loans at any time because of specific factors relating
to the mortgage loans in the particular pool, including, among other things,
the age of the mortgage loans, the geographic locations of the properties
securing the loans and the extent of the mortgagors' equity in such
properties, and changes in the mortgagors' housing needs, job transfers and
unemployment.
As with fixed rate obligations generally, the rate of prepayment on
a pool of mortgage loans with fixed rates is affected by prevailing market
rates for mortgage loans of a comparable term and risk level. When the market
interest rate is below the mortgage coupon, mortgagors may have an increased
incentive to refinance their mortgage loans. Depending on prevailing market
rates, the future outlook for market rates and economic conditions generally,
some mortgagors may sell or refinance Mortgaged Properties in order to realize
their equity in the Mortgaged Properties, to meet cash flow needs or to make
other investments. As is the case with fixed rate mortgage loans,
S-57
<PAGE>
adjustable rate mortgage loans may be subject to a greater rate of Prepayments
in a declining interest rate environment. For example, if prevailing interest
rates fall appreciably, adjustable rate mortgage loans are likely to be
subject to a higher prepayment rate than if prevailing interest rates remain
constant because the availability of fixed rate mortgage loans at competitive
interest rates may encourage mortgagors to refinance their adjustable rate
mortgage loans to "lock in" a lower fixed interest rate.
The effective yield of each Class of Notes will be affected by the
rate and timing of payments of principal on the Mortgage Loans in the Group
securing such Notes (including, for this purpose, prepayments and amounts
received by virtue of refinancings, liquidations of Mortgage Loans due to
defaults, casualties, condemnations, and repurchases, whether optional or
required, by the Servicer or the Contributor), the amount and timing of
mortgagor delinquencies and defaults resulting in realized losses, and the
application of related Excess Cash on such Notes. Such yield may be adversely
affected by a higher or lower than anticipated rate of principal payments
(including Prepayments) on the related Mortgage Loans. The rate of Principal
Payments on such Mortgage Loans will in turn be affected by the amortization
schedules of such Mortgage Loans, the rate and timing of Prepayments thereon
by the mortgagors, liquidations of defaulted Mortgage Loans and optional or
required repurchases of related Mortgage Loans as described herein. The timing
of changes in the rate of prepayments, liquidations and repurchases of the
Mortgage Loans may, and the timing of Realized Losses could, significantly
affect the yield to an investor, even if the average rate of Principal
Payments experienced over time is consistent with an investor's expectation.
Since the rate and timing of Principal Payments on the Mortgage Loans will
depend on future events and on a variety of factors (as described more fully
herein), no assurance can be given as to such rate or the timing of
Prepayments on the Notes.
Because all amounts available for payment on the related Notes after
payments in respect of interest on such Notes, including all or a portion of
the Excess Cash for the related Group, are applied as reductions of the
related Note Balance, the weighted average life of such Notes will also be
influenced by the amount of Excess Cash so applied. Because Excess Cash for a
Group attributable to the overcollateralization feature is derived from
interest collections on the related Mortgage Loans and will be applied to
reduce the Note Balance for the related Class, the aggregate payments in
reduction of the related Note Balance on a Payment Date will be at times
greater than the aggregate amount of principal payments (including
Prepayments) on the related Mortgage Loans payable on such Payment Date until
the Required Overcollateralization Amount for such Group is reached and
assuming an Overcollateralization Deficit for such Group does not occur. As a
consequence, Excess Cash in a Group available for payment in reduction of the
Note Balance for the related Class of Notes will increase in proportion to the
outstanding related Note Balance over time in the absence of offsetting
Realized Losses for the Mortgage Loans in such Group.
Excess Cash for a Group will be paid on the related Notes in
reduction of the related Note Balance on each Payment Date to the extent the
then applicable Required Overcollateralization Amount for such Group exceeds
the related Overcollateralization Amount on such Payment Date. Excess Cash for
such Group may be used to fund the Liquidity Accounts and the Reserve Account
and to pay any Basis Risk Shortfall; and, thereafter, will be released to the
holder of the Equity Certificates. If a Note is purchased at other than par,
its yield to maturity will be affected by the rate at which the related Excess
Cash is paid to the Noteholders. If the actual rate of related Excess Cash
payments on such Class of Notes applied in reduction of the related Note
Balance is slower than the rate anticipated by an investor who purchases a
Note at a discount, the actual yield to such investor will be lower than such
investor's anticipated yield. If the actual rate of related Excess Cash
payments applied in reduction of the related Note Balance is faster than the
rate anticipated by an investor who purchases a Note at a premium, the actual
yield to such investor will be lower than such investor's anticipated yield.
The amount of related Excess Cash on any Payment Date will be affected by,
among other things, the actual amount of interest received, collected or
recovered in respect of the related Mortgage Loans during the related Due
Period and such amount will be influenced by changes in the weighted average
of the Mortgage Interest Rates resulting from prepayment and liquidations of
the related Mortgage Loans. The amount of related Excess Cash paid to the
Noteholders of a Class of Notes applied to the related Note Balance on each
Payment Date will be based on the Required Overcollateralization Amount. The
Indenture generally provides that the Required Overcollateralization Amount
for a Group may, over time, decrease, or increase, subject to certain floors,
caps and triggers, including triggers that allow the related Required
Overcollateralization Amount to decrease or "step down" based on the
performance on the Mortgage Loans in such Group with respect to certain tests
specified in the Indenture based on delinquency rates. Any increase in the
Required
S-58
<PAGE>
Overcollateralization Amount for a Group may result in an accelerated
amortization until such Required Overcollateralization Amount is reached.
Conversely, any decrease in the Required Overcollateralization Amount for a
Group will result in a decelerated amortization of the Notes until such
Required Overcollateralization Amount is reached.
The Mortgage Loans generally may be prepaid in full or in part at
any time, although some have prepayment fees or penalties. The Mortgage Loans
generally are not assumable and the related Mortgage Note will be due on sale,
in which case the Servicer shall enforce any due-on-sale clause contained in
any Mortgage Note or Mortgage, to the extent permitted under applicable law
and governmental regulations; provided, however, if the Servicer determines
that it is reasonably likely that the mortgagor will bring, or if any
mortgagor does bring legal action to declare invalid or otherwise avoid
enforcement of a due-on-sale clause contained in any Mortgage Note or
Mortgage, the Servicer shall not be required to enforce the due-on-sale clause
or to contest such action.
The rate of defaults on the Mortgage Loans will also affect the rate
and timing of Principal Payments on the Mortgage Loans. See "Risk Factors"
herein and in the Prospectus. The rate of default on Mortgage Loans that are
refinance or limited documentation mortgage loans, and on Mortgage Loans with
high Loan-to-Value Ratios, may be higher than for other types of Mortgage
Loans. As a result of the underwriting standards applicable to the Mortgage
Loans, the Mortgage Loans are likely to experience rates of delinquency,
foreclosure, bankruptcy and loss that are higher, and that may be
substantially higher, than those experienced by mortgage loans underwritten in
accordance with the standards applied by FNMA and FHLMC mortgage loan purchase
programs. See "Underwriting Guidelines." In addition, because of such
underwriting criteria and their likely effect on the delinquency, foreclosure,
bankruptcy and loss experience of the Mortgage Loans, the Mortgage Loans will
generally be serviced in a manner intended to result in a faster exercise of
remedies, which may include foreclosure, in the event Mortgage Loan
delinquencies and defaults occur, than would be the case of the Mortgage Loans
were serviced in accordance with such other programs. Furthermore, the rate
and timing of prepayments, defaults and liquidations on the Mortgage Loans
will be affected by the general economic condition of the region of the
country in which the related Mortgaged Properties are located. The risk of
delinquencies and loss is greater and 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. To the
extent that the locations of the Mortgaged Properties are concentrated in a
given region, the risk of delinquencies, loss and involuntary prepayments
resulting from adverse economic conditions in such region or from other
factors, such as fires, storms, landslides and mudflows and earthquakes, is
increased. Certain information regarding the location of the Mortgaged
Properties is set forth under "Description of the Mortgage Loans--Mortgage
Loan Characteristics" herein. See "Risk Factors--Risks Associated with
Geographic Concentration of the Mortgage Properties" herein.
Certain of the Mortgage Loans are Balloon Loans. Balloon Loans
involve a greater degree of risk than fully amortizing loans because the
ability of the borrower to make a Balloon Payment typically will depend upon
his or her ability either to refinance the loan or to sell the related
Mortgaged 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 the attempted sale or refinancing, the
borrower's equity in the related Mortgaged Property, the financial condition
of the borrower and operating history of the related Mortgaged Property, tax
laws, prevailing economic conditions and the availability of credit for real
estate projects generally.
Other factors affecting prepayment of Mortgage Loans include changes
in mortgagors' housing needs, job transfers, unemployment and mortgagors' net
equity in the Mortgaged Properties. Since the rate of payment of principal of
each Class of Notes will depend on the rate of payment (including prepayments)
of the principal of the Mortgage Loans of the related Group, the actual
maturity of the Notes could occur significantly earlier than the Stated
Maturity Date. See "--Weighted Average Life" herein.
In addition, the yield to maturity of each Class of Notes will
depend on the price paid by the holders of such Notes and the related Note
Interest Rate. The extent to which the yield to maturity of a Note is
sensitive to prepayments will depend upon the degree to which it is purchased
at a discount or premium.
Prepayments of principal on the Mortgage Loans will generally be
passed through to the Indenture Trustee and included in the Available Funds
for such Group in the month following the month of receipt thereof by the
Servicer. Any prepayment of a Mortgage Loan or liquidation of a Mortgage Loan
(by foreclosure proceedings or by
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<PAGE>
virtue of the repurchase of a Mortgage Loan) may result in payments on the
Notes in the related Class of amounts that otherwise would be paid in
amortized increments over the remaining term of such Mortgage Loan.
To the extent that Prepayments with respect to the Mortgage Loans
result in prepayments on the related Notes during periods of generally lower
interest rates, Noteholders may be unable to reinvest such Prepayments in
securities having a yield and rating comparable to such Notes.
The yield on the Notes may be affected by any delays in receipt of
payments thereon as described under "Description of the Notes--Book-Entry
Registration and Definitive Notes" herein and "Risk Factors--Book Entry
Registration" and "Description of the Securities--Book-Entry Registration of
Securities" in the Prospectus.
The yield on the Notes may also be affected by a redemption of the
Notes as described under " Description of the Notes--Optional Redemption of
the Class A-1 and Class A-2 Notes" herein.
Weighted Average Life
"Weighted average life" refers to the average amount of time that
will elapse from the date of issuance of a security until each dollar of
principal of such security will be repaid to the investor. The weighted
average lives of each Class of Notes will be influenced by the rate at which
principal on the related Mortgage Loans is paid, which may be in the form of
scheduled payments or prepayments (including prepayments of principal by the
borrower as well as amounts received by virtue of repurchases, condemnation,
insurance or foreclosure with respect to the related Mortgage Loans), and the
timing thereof.
The weighted average life of each Class of Notes also will be
influenced by the overcollateralization of the Notes because interest
collections are applied as principal payments to the Notes until the
outstanding related Note Balance is less than the Aggregate Principal Balance
of the Mortgage Loans in the related Group by an amount equal to the related
Required Overcollateralization Amount. These prepayments have the effect of
accelerating the amortization of the Notes, thereby shortening their
respective weighted average life.
The model used in this Prospectus Supplement (the "Prepayment
Assumption") represents an assumed rate of prepayment each month relative to
the then outstanding principal balance of a pool of mortgage loans for the
life of such mortgage loans. The Prepayment Assumption does not purport to be
a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans. With respect to the Mortgage Loans, the Prepayment Assumption
assumes constant prepayment rates ("CPR") of 25% per annum of the then
outstanding Principal Balance of the Mortgage Loans for the life of the
Mortgage Loans.
The tables following the next paragraph indicates the percentage of
the initial Note Balance that would be outstanding after each of the dates
shown at various percentages of CPR and the corresponding weighted average
lives of the Notes. Each table is based on the following assumptions (the
"Modeling Assumptions"): (i) the pool consists of Mortgage Loans in the
related Group with the characteristics set forth in the table below, (ii)
payments on such Notes are received, in cash, on the 25th day of each month,
commencing in November 1998 in accordance with the priorities described
herein, (iii) the Mortgage Loans in the related Group prepay at the percentage
CPR indicated, (iv) the Notes are not redeemed on the Initial Redemption Date
(other than as set forth in the footnotes to the table), (v) no defaults or
delinquencies occur in the payment by mortgagors of principal and interest on
the related Mortgage Loans and no shortfalls due to the application of the
Relief Act are incurred, (vi) none of the Contributor, the Servicer or any
other person purchases any Mortgage Loan from the related Group pursuant to
any obligation or option under the Mortgage Loan Contribution Agreement, the
Ownership Transfer Agreement, the Servicing Agreement or other documents,
(vii) scheduled monthly payments on each Mortgage Loan are received on the
first day of each month commencing in November 1998, and are computed prior to
giving effect to any prepayments received in the current month, (viii)
prepayments representing payment in full of individual Mortgage Loans are
received on the last day of each month commencing in October 1998, and include
30 days' interest thereon, (ix) the scheduled monthly payment for each
Mortgage Loan is calculated based on its Principal Balance, Mortgage Interest
Rate, and remaining amortization term such that the Mortgage Loan will
amortize in amounts sufficient to repay the remaining Principal Balance of
such Mortgage Loan by its remaining amortization term, (x)
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<PAGE>
One-Month LIBOR remains constant at 5.27781%, (xi) the Notes are purchased on
November 13, 1998, (xii) the overcollateralization levels are set initially as
specified in the Indenture and thereafter increase and decrease in accordance
with the provisions of the Indenture, (xiii) the Mortgage Interest Rate for
each Adjustable Rate Mortgage Loan is adjusted on its next rate Adjustment
Date and on subsequent rate Adjustment Dates (if necessary) to equal the sum
of (a) the assumed level of the applicable index and (b) the Gross Margin
(such sum being subject to the applicable caps and floors), (xiv) the indices
for purposes of the Adjustable Rate Mortgage Loans remain constant at the
following rates: 6 Month LIBOR = 5.19094%, 6 Month CMT = 4.64%, 1 Year CMT =
4.53%, 3 Year CMT = 4.55%, 5 Year CMT = 4.48%, and (xv) the Owner Trustee Fee
is assumed to be $4,000 per year, distributed on a monthly basis.
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<PAGE>
Assumed Group I Mortgage Loan Characteristics
<TABLE>
<CAPTION>
Months to Rate
Principal Current Current Next Rate Change Gross
Balance Loan Rate Net Loan Adjustment Frequency Margin Lifetime Lifetime
Description ($) (%) Rate (%) Date (Months) (%) Cap (%) Floor (%)
- - ------------- ------------- --------- -------- ---------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed 963,937.44 8.31375 7.92500 N/A N/A N/A N/A N/A
Fixed 17,431,937.79 8.72255 8.33380 N/A N/A N/A N/A N/A
Fixed - 1,646,144.88 8.50056 8.11181 N/A N/A N/A N/A N/A
Balloon
ARM 401,517.80 11.77312 11.38437 3 6 6.19233 16.29711 8.61994
ARM 29,518,846.45 8.80448 8.41573 6 12 4.03189 14.32905 5.53175
ARM 1,479,304.20 8.33733 7.94858 13 12 3.88571 14.25812 5.80489
ARM 23,887,094.92 8.75321 8.36446 26 12 4.47703 14.76282 6.32923
ARM 1,155,499.24 8.52697 8.13822 24 36 3.16550 14.40969 3.72248
ARM 423,004.89 8.58664 8.19789 38 12 5.00000 14.58664 5.00000
ARM 12,741,939.37 8.48931 8.10056 49 12 4.60604 14.47692 5.35339
ARM 67,177.46 9.75000 9.36125 62 12 5.00000 15.75000 5.00000
ARM 213,100.95 7.87500 7.48625 82 12 2.75000 12.87500 2.75000
ARM 95,547.63 7.75000 7.36125 6 6 2.50000 No 2.50000
Lifetime
Cap
ARM 368,811.16 8.01909 7.63034 3 6 2.82304 16.87157 2.82304
ARM 671,057.50 11.09577 10.70702 10 6 6.49715 17.19013 10.05800
ARM 111,769.52 9.75000 9.36125 28 6 4.00000 15.75000 9.75000
</TABLE>
- - -------------------------
(1) The remaining amortizing term is 346 months.
<TABLE>
<CAPTION>
Initial Subsequent Original Remaining
Periodic Periodic Months to Months to
Description Cap (%) Cap (%) Maturity Maturity Index
- - ------------- ---------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Fixed N/A N/A 170 148 N/A
Fixed N/A N/A 359 322 N/A
Fixed - N/A N/A 87 73(1) N/A
Balloon
ARM 1.22459 1.22459 360 329 6 Month LIBOR
ARM 1.85425 1.85425 359 339 1 Year CMT
ARM 2.69156 1.92079 358 345 1 Year CMT
ARM 2.56689 2.00935 360 349 1 Year CMT
ARM 2.19024 2.19024 342 253 3 Year CMT
ARM 2.00000 2.00000 360 350 1 Year CMT
ARM 2.34482 1.99832 359 348 1 Year CMT
ARM 2.00000 2.00000 360 351 1 Year CMT
ARM 3.00000 2.00000 360 322 1 Year CMT
ARM 1.00000 1.00000 360 222 1 Year CMT
ARM 1.00000 1.00000 360 235 6 Month CMT
ARM 1.08949 1.08949 355 330 6 Month LIBOR
ARM 2.00000 2.00000 360 352 6 Month LIBOR
</TABLE>
<PAGE>
Assumed Group II Mortgage Loan Characteristics
<TABLE>
<CAPTION>
Months to Rate
Principal Current Current Next Rate Change Gross
Balance Loan Rate Net Loan Adjustment Frequency Margin Lifetime Lifetime
Description ($) (%) Rate (%) Date (Months) (%) Cap (%) Floor (%)
- - ------------- ------------- --------- -------- ---------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed 3,943,675.18 8.09657 7.70782 N/A N/A N/A N/A N/A
Fixed 15,215,620.33 8.71795 8.32920 N/A N/A N/A N/A N/A
Fixed-Balloon 1,217,975.39 8.21447 7.82572 N/A N/A N/A N/A N/A
ARM 800,363.13 12.56325 12.17450 6 6 7.10652 17.46638 10.83615
ARM 26,627,316.15 9.01570 8.62695 6 12 3.88862 14.60416 5.30999
ARM 2,093,942.77 8.16336 7.77461 14 12 4.14355 14.16336 5.43917
ARM 24,566,327.95 8.80158 8.41283 26 12 4.43637 14.72731 6.39384
ARM 961,218.98 8.43971 8.05096 14 36 3.45170 13.48044 3.45170
ARM 157,460.83 9.87494 9.48619 38 12 5.00000 15.87494 5.00000
ARM 12,898,380.63 8.25776 7.86901 49 12 4.18027 14.06338 5.24803
ARM 886,485.61 7.60090 7.21215 55 12 2.72729 13.23620 3.50413
ARM 59,692.84 10.25000 9.86125 37 84 3.00000 16.00000 6.00000
ARM 214,531.70 7.75000 7.36125 4 6 2.50000 19.25000 2.50000
ARM 1,219,866.21 11.09323 10.70448 8 6 6.71033 17.60985 9.60982
ARM 138,554.78 10.60000 10.21125 23 6 4.75000 17.10000 10.60000
</TABLE>
- - -------------------------
(1) The remaining amortizing term is 341 months.
<TABLE>
<CAPTION>
Initial Subsequent Original Remaining
Periodic Periodic Months to Months to
Description Cap (%) Cap (%) Maturity Maturity Index
- - ------------- ---------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Fixed N/A N/A 180 141 N/A
Fixed N/A N/A 354 326 N/A
Fixed-Balloon N/A N/A 105 86(1) N/A
ARM 1.27920 1.27920 360 342 6 Month LIBOR
ARM 2.08070 2.08070 360 325 1 Year CMT
ARM 2.34114 2.00000 329 319 1 Year CMT
ARM 2.55205 2.00000 360 350 1 Year CMT
ARM 2.33887 2.33887 352 270 3 Year CMT
ARM 2.00000 2.00000 360 350 1 Year CMT
ARM 2.59921 2.12270 360 348 1 Year CMT
ARM 3.27060 2.00000 360 331 1 Year CMT
ARM 2.00000 2.00000 360 229 5 Year CMT
ARM 1.00000 1.00000 360 232 6 Month CMT
ARM 2.32716 1.28291 357 338 6 Month LIBOR
ARM 3.00000 1.00000 360 347 6 Month LIBOR
</TABLE>
<PAGE>
There will be discrepancies between the characteristics of the
actual Mortgage Loans and the characteristics assumed in preparing the table.
Any such discrepancy may have an effect upon the percentages of the initial
Note Balance outstanding (and the weighted average life) of the Notes set
forth in the table. In addition, since the actual Mortgage Loans will have
characteristics that differ from those assumed in preparing the table set
forth below the Notes may mature earlier or later than indicated by the table.
Based on the foregoing assumptions, the table indicates the weighted average
life of the Notes and sets forth the percentages of the initial Note Balance
that would be outstanding after each of the Payment Dates shown, at various
percentages of CPR. Variations in the prepayment experience and the balance of
the related Mortgage Loans that prepay may increase or decrease the
percentages of initial Note Balances (and weighted average lives) shown in the
following table. Such variations may occur even if the average prepayment
experience of all such Mortgage Loans equals any of the specified percentages
of CPR.
CLASS A-1 NOTES
PERCENT OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING AT
THE FOLLOWING PERCENTAGES OF CPR
Payment Date 0% 12% 18% 25% 35% 45% 50%
- - ------------- ----- ----- ------ ----- ---- ---- -----
Initial
Percentage 100% 100% 100% 100% 100% 100% 100%
Oct. 1999 97% 84% 78% 71% 61% 51% 45%
Oct. 2000 94% 71% 61% 49% 35% 23% 18%
Oct. 2001 93% 61% 48% 36% 23% 14% 10%
Oct. 2002 92% 52% 38% 27% 15% 8% 5%
Oct. 2003 91% 44% 31% 20% 10% 4% 3%
Oct. 2004 89% 38% 25% 15% 6% 2% 1%
Oct. 2005 86% 32% 20% 11% 4% 1% 0%
Oct. 2006 84% 28% 16% 8% 2% 0% 0%
Oct. 2007 82% 24% 13% 6% 1% 0% 0%
Oct. 2008 80% 21% 10% 4% 1% 0% 0%
Oct. 2009 78% 18% 8% 3% 0% 0% 0%
Oct. 2010 76% 15% 7% 2% 0% 0% 0%
Oct. 2011 73% 13% 5% 1% 0% 0% 0%
Oct. 2012 70% 11% 4% 1% 0% 0% 0%
Oct. 2013 67% 9% 3% 0% 0% 0% 0%
Oct. 2014 64% 8% 3% 0% 0% 0% 0%
Oct. 2015 61% 7% 2% 0% 0% 0% 0%
Oct. 2016 57% 5% 1% 0% 0% 0% 0%
Oct. 2017 53% 5% 1% 0% 0% 0% 0%
Oct. 2018 48% 4% 1% 0% 0% 0% 0%
Oct. 2019 43% 3% 0% 0% 0% 0% 0%
Oct. 2020 39% 2% 0% 0% 0% 0% 0%
Oct. 2021 34% 2% 0% 0% 0% 0% 0%
Oct. 2022 29% 1% 0% 0% 0% 0% 0%
Oct. 2023 23% 1% 0% 0% 0% 0% 0%
Oct. 2024 17% 0% 0% 0% 0% 0% 0%
Oct. 2025 10% 0% 0% 0% 0% 0% 0%
Oct. 2026 4% 0% 0% 0% 0% 0% 0%
Oct. 2027 0% 0% 0% 0% 0% 0% 0%
Oct. 2028 0% 0% 0% 0% 0% 0% 0%
Weighted
Average Life
to Maturity(1) 17.82 6.06 4.21 3.00 2.03 1.46 1.24
Weighted
Average Life
to Call(1)(2) 4.67 3.37 2.86 2.39 1.66 1.19 1.03
(1) The weighted average life is determined by (a) multiplying the amount of
each principal payment by the number of years from the Closing Date to
the related Payment Date; (b) adding the results; and (c) dividing the
sum by the original Note Balance.
(2) The weighted average life to call assumes that the optional redemption is
exercised on the Initial Redemption Date.
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<PAGE>
CLASS A-2 NOTES
PERCENT OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING AT
THE FOLLOWING PERCENTAGES OF CPR
Payment Date 0% 12% 18% 25% 35% 45% 50%
- - ------------ ----- ----- ----- ---- ----- ----- -----
Initial
Percentage 100% 100% 100% 100% 100% 100% 100%
Oct. 1999 97% 84% 78% 71% 61% 50% 45%
Oct. 2000 94% 71% 60% 49% 35% 23% 18%
Oct. 2001 93% 60% 47% 36% 23% 14% 10%
Oct. 2002 91% 51% 38% 26% 15% 8% 5%
Oct. 2003 90% 43% 30% 20% 10% 4% 3%
Oct. 2004 88% 38% 25% 14% 6% 2% 1%
Oct. 2005 86% 32% 20% 11% 4% 1% 0%
Oct. 2006 83% 27% 16% 8% 2% 0% 0%
Oct. 2007 80% 24% 12% 6% 1% 0% 0%
Oct. 2008 78% 20% 10% 4% 1% 0% 0%
Oct. 2009 75% 17% 8% 3% 0% 0% 0%
Oct. 2010 73% 15% 6% 2% 0% 0% 0%
Oct. 2011 70% 13% 5% 1% 0% 0% 0%
Oct. 2012 67% 11% 4% 1% 0% 0% 0%
Oct. 2013 65% 9% 3% 0% 0% 0% 0%
Oct. 2014 61% 8% 2% 0% 0% 0% 0%
Oct. 2015 58% 6% 2% 0% 0% 0% 0%
Oct. 2016 54% 5% 1% 0% 0% 0% 0%
Oct. 2017 50% 4% 1% 0% 0% 0% 0%
Oct. 2018 45% 3% 0% 0% 0% 0% 0%
Oct. 2019 41% 3% 0% 0% 0% 0% 0%
Oct. 2020 36% 2% 0% 0% 0% 0% 0%
Oct. 2021 32% 1% 0% 0% 0% 0% 0%
Oct. 2022 26% 1% 0% 0% 0% 0% 0%
Oct. 2023 21% 0% 0% 0% 0% 0% 0%
Oct. 2024 14% 0% 0% 0% 0% 0% 0%
Oct. 2025 7% 0% 0% 0% 0% 0% 0%
Oct. 2026 4% 0% 0% 0% 0% 0% 0%
Oct. 2027 0% 0% 0% 0% 0% 0% 0%
Oct. 2028 0% 0% 0% 0% 0% 0% 0%
Weighted
Average Life
to Maturity(1) 17.27 5.98 4.17 2.98 2.03 1.45 1.24
Weighted
Average Life
to Call(1)(2) 4.64 3.35 2.85 2.38 1.66 1.19 1.03
(1) The weighted average life is determined by (a) multiplying the amount of
each principal payment by the number of years from the Closing Date to
the related Payment Date; (b) adding the results; and (c) dividing the
sum by the original Note Balance.
(2) The weighted average life to call assumes that the optional redemption is
exercised on the Initial Redemption Date.
There is no assurance that prepayments of the Mortgage Loans will
conform to any of the levels of the Prepayment Assumption indicated in the
tables above, or to any other level, or that the actual weighted average life
of the Notes will conform to any of the weighted average lives set forth in
the tables above. Furthermore, the information contained in the tables with
respect to the weighted average life of the Notes is not necessarily
indicative of the weighted average life that might be calculated or projected
under different or varying prepayment assumptions.
The characteristics of the Mortgage Loans will differ from those
assumed in preparing the tables above. In addition, it is unlikely that any
Mortgage Loan will prepay at any constant percentage until maturity or that
all of the
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<PAGE>
Mortgage Loans will prepay at the same rate. The timing of changes in the rate
of prepayments may significantly affect the actual yield to maturity to
investors, even if the average rate of Prepayments is consistent with the
expectations of investors.
THE SERVICING AGREEMENT
The summaries of certain provisions of the Servicing Agreement set
forth below and in other places in this Prospectus Supplement, 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, a copy of which the
Depositor will provide (without exhibits) without charge upon written request
addressed to the Depositor.
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 Mortgage 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.
Assignment. On the date of issuance of the Notes, it is anticipated
that all of the Mortgage Loans will be serviced by the Servicer. The Servicer
may not assign its obligations under the Servicing Agreement, in whole or in
part, unless it shall have first obtained the written consent of the Indenture
Trustee and the Note Insurer; provided, however, that any assignee must meet
the eligibility requirements for a successor Servicer set forth in the
Servicing Agreement.
The Notes will not represent an interest in or obligation of, nor
are the Mortgage Loans guaranteed by, the Indenture Trustee, the Depositor,
the Contributor, the Transferor or the Servicer, except as described herein,
or any of their affiliates.
The Servicer is required to service the Mortgage Loans in accordance
with the Servicing Agreement, the terms of the respective Mortgage Loans, and
in the same manner in which it services and administers similar mortgage loans
for its own portfolio, giving due consideration to customary and usual
standards of practice of prudent mortgage lenders and loan servicers
administering similar mortgage loans.
The Servicer may retain from the interest portion of each monthly
payment a fee equal to 0.375% per annum of the Principal Balance of the
related Mortgage Loan (the "Servicing Fee") with respect to each Group. In
addition, the Servicer will be entitled to retain additional servicing
compensation in the form of prepayment charges, release fees, bad check
charges, assumption fees, late payment charges, prepayment penalties, or any
other servicing-related fees, Net Liquidation Proceeds not required to be
deposited in the Principal and Interest Account pursuant to the Servicing
Agreement, and similar items.
The Servicer is required to make reasonable efforts to collect all
payments called for under the terms and provisions of the Mortgage Loans, and,
to the extent such procedures are consistent with the Servicing Agreement and
the terms and provisions of any applicable insurance policy, to follow
collection procedures consistent with the applicable servicing standards.
Consistent with the foregoing, the Servicer may in its discretion waive or
permit to be waived any late payment charge, prepayment charge, assumption fee
or any penalty interest in connection with the prepayment of a Mortgage Loan
or any other fee or charge which the Servicer would be entitled to retain as
additional servicing compensation. In the event the Servicer consents to the
deferment of the due dates for payments due on a Note, the Servicer will
nonetheless be required to make payment of any required Delinquency Advances
with respect to the interest payments so extended to the same extent as if the
interest portion of such installment were due, owing and delinquent and had
not been deferred.
Principal and Interest Account. The Servicer is required to create,
or cause to be created, in the name of the Indenture Trustee, at one or more
depository institutions, which institutions may be affiliates of the Servicer,
a principal and interest account maintained as a trust account in the trust
department of such institution (the "Principal
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<PAGE>
and Interest Account"). All funds in the Principal and Interest Account are
required to be held (i) uninvested, or (ii) invested in Eligible Investments.
Any investment of funds in the Principal and Interest Account must mature or
be withdrawable at par on or prior to the immediately succeeding Monthly
Remittance Date. Any investment earnings on funds held in the Principal and
Interest Account are for the account of, and any losses therein are also for
the account of, and must be promptly replenished by, the Servicer.
"Eligible Investments" are the following:
(a) direct general obligations of, or obligations fully
and unconditionally guaranteed as to the timely payment of principal
and interest by, the United States or any agency or instrumentality
thereof, provided such obligations are backed by the full faith and
credit of the United States, FHLMC senior debt obligations, and FNMA
senior debt obligations, but excluding any of such securities whose
terms do not provide for payment of a fixed dollar amount upon
maturity or call for redemption;
(b) Federal Housing Administration debentures;
(c) FHLMC participation certificates which guaranty timely
payment of principal and interest;
(d) Consolidated senior debt obligations of any Federal
Home Loan Banks;
(e) FNMA mortgage-backed securities (other than stripped
mortgage securities which are valued greater than par on the portion
of unpaid principal);
(f) Certificates of deposit and time deposits (having
original maturities of not more than 365 days) of any domestic bank,
the short-term debt obligations of which have been rated A-1 by
Standard & Poor's and P-1 by Moody's;
(g) Deposits of any bank or savings and loan association
(the long-term deposit rating of which is Baa3 or better by Moody's
and BBB by Standard & Poor's) which has combined capital, surplus
and undivided profits of at least $50,000,000 which deposits are
insured by the FDIC and held up to the limits insured by the FDIC;
and
(h) Any other investment permitted by each of the Rating
Agencies, the Note Insurer and the majority holder of Equity
Certificates.
No instrument described above shall evidence either the right to
receive (a) only interest with respect to the obligations underlying such
instrument or (b) both principal and interest payments derived from
obligations underlying such instrument and the interest and principal payments
with respect to such instrument shall provide a yield to maturity at par
greater than 120% of the yield to maturity at par of the underlying
obligations. Furthermore, all Eligible Investments shall mature at par on or
prior to the next succeeding Payment Date unless otherwise specified in the
Indenture and none may be purchased at a price greater than par if such
instrument may be prepaid or called at a price less than its purchase price
prior to Stated Maturity Date.
The Servicer is required to deposit, or cause to be deposited, to
the Principal and Interest Account, within one business day following receipt,
all principal and interest due on the Mortgage Loans on or after the Cut-Off
Date, including any Prepayments, the proceeds of any liquidation of a Mortgage
Loan net of expenses and unreimbursed Delinquency Advances ("Net Liquidation
Proceeds"), any income from REO Properties and Delinquency Advances, but net
of (i) Net Liquidation Proceeds to the extent that such Net Liquidation
Proceeds exceed the sum of (a) the Principal Balance of the related Mortgage
Loan immediately prior to liquidation, (b) accrued and unpaid interest on such
Mortgage Loan (net of the related Servicing Fee) to the date of such
liquidation, (c) any Realized Losses during the related Due Period, and (d)
any related Servicing Advances, (ii) principal (including Prepayments)
collected and interest due on the Mortgage Loans prior to the Cut-Off Date
excluding payments received and applied prior to the Cut-Off Date which are
applicable to periods on and after the Cut-Off Date, (iii) reimbursements for
Delinquency Advances and Servicing Advances to the extent provided below, and
(iv) reimbursement for amounts deposited in the Principal and Interest Account
representing payments of principal
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<PAGE>
and/or interest on a Note by a Mortgagor which are subsequently returned by a
depository institution as unpaid (all such net amounts being referred to
herein as the "Daily Collections").
The Servicer may make withdrawals for its own account from the
Principal and Interest Account for the following purposes:
(i) on each Monthly Remittance Date, to pay itself the related Servicing
Fee;
(ii) to withdraw investment earnings on amounts on deposit in the
Principal and Interest Account;
(iii) to withdraw amounts that have been deposited to the Principal and
Interest Account in error;
(iv) to reimburse itself for unrecovered Delinquency Advances and Servicing
Advances;
(v) to clear and terminate the Principal and Interest Account following the
termination of the Trust; and
(vi) to reimburse the Servicer for expenses incurred by or reimbursable to
the Servicer to the extent provided in the Servicing Agreement.
The Servicer will remit to the Indenture Trustee for deposit in the
Note Account the Daily Collections allocable to a Due Period not later than
the related Monthly Remittance Date, and Loan Purchase Prices and Substitution
Amounts two Business Days following the related repurchase or substitution, as
the case may be.
Delinquency Advances. On each Monthly Remittance Date, the Servicer
shall be required to remit to the Indenture Trustee for deposit to the Note
Account out of the Servicer's own funds any delinquent payment of interest
with respect to each delinquent Mortgage Loan, which payment was not received
on or prior to the related Monthly Remittance Date and was not theretofore
advanced by the Servicer. Such amounts of the Servicer's own funds so
deposited are "Delinquency Advances." The Servicer may reimburse itself on any
Business Day for any Delinquency Advances paid from the Servicer's own funds,
from collections on any Mortgage Loan in each Group that are not required to
be distributed on the Payment Date occurring during the month in which such
reimbursement is made (such amount to be replaced on future dates to the
extent necessary).
Notwithstanding the foregoing, in the event that the Servicer
determines in its reasonable business judgment in accordance with the
servicing standards of the Servicing Agreement that any proposed Delinquency
Advance if made would not be recoverable, the Servicer shall not be required
to make such Delinquency Advances with respect to such Mortgage Loan. To the
extent that the Servicer previously has made Delinquency Advances with respect
to a Mortgage Loan that the Servicer subsequently determines to be
nonrecoverable, the Servicer shall be entitled to reimbursement for such
aggregate unreimbursed Delinquency Advances as provided above or may withdraw
such amounts from the Principal and Interest Account. The Servicer shall give
written notice of such determination as to why such amount is or would or may
withdraw such amounts from the principal and Interest Account be
nonrecoverable to the Indenture Trustee and the Note Insurer.
Servicing Advances. The Servicer will be required to pay all "out of
pocket" costs and expenses incurred in the performance of its servicing
obligations, including, but not limited to, (i) expenditures in connection
with a foreclosed Mortgage Loan prior to the liquidation thereof, including,
without limitation, expenditures for real estate property taxes, hazard
insurance premiums, property restoration or preservation ("Preservation
Expenses"), (ii) the cost of any enforcement or judicial proceedings,
including foreclosures and (iii) the cost of the management and liquidation of
Mortgaged Property (including broker's fees) acquired in satisfaction of the
related Mortgage, except to the extent that the Servicer in its reasonable
business judgment determines that any such proposed amount would not be
recoverable. Such costs and expenses will constitute "Servicing Advances." The
Servicer may recover a Servicing Advance to the extent permitted by the
Mortgage Loans or, if not theretofore recovered from the Mortgagor on whose
behalf such Servicing Advance was made, from Liquidation Proceeds realized
upon the liquidation of the related Mortgage Loan or from certain amounts on
deposit in the Note Account as provided in the Servicing Agreement. In the
event a Servicing Advance previously made is deemed to be nonrecoverable, the
Servicer may withdraw such amounts from the Principal and Interest Account.
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Compensating Interest. A full month's interest at the Mortgage
Interest Rate will be due on the outstanding Principal Balance of each
Mortgage Loan as of the beginning of each Due Period. If a full or partial
prepayment of a Mortgage Loan occurs during any calendar month, any difference
between the interest collected from the Mortgagor in connection with such
payoff and the full month's interest at the Mortgage Interest Rate that would
be due on the related due date for such Mortgage Loan (such difference, the
"Compensating Interest") (but not in excess of one-half of the aggregate
Servicing Fee for the related Due Period), will be required to be deposited to
the Principal and Interest Account (or if such difference is an excess, the
Servicer shall retain such excess) on the next succeeding Monthly Remittance
Date by the Servicer and shall be included in the Monthly Remittance Amount to
be made available to the Indenture Trustee on the next succeeding Monthly
Remittance Date.
Delinquent Mortgage Loans. The Servicer, and in the absence of the
exercise thereof by the Servicer, the Note Insurer will have the right and the
option, but not the obligation, to purchase for its own account any Mortgage
Loan which becomes delinquent as to two consecutive monthly installments or
any Mortgage Loan as to which enforcement proceedings have been brought by the
Servicer ("Defaulted Mortgage Loans"); provided, that the Servicer must, if it
elects to purchase such Mortgage Loans, purchase the most delinquent Mortgage
Loans first unless the Note Insurer otherwise consents. The purchase price for
any such Mortgage Loan is equal to the Loan Purchase Price thereof, which
purchase price shall be deposited in the Principal and Interest Account.
Hazard Insurance. The Servicer will be required to cause hazard
insurance to be maintained with respect to the related Mortgaged Property and
to advance sums on account of the premiums therefor if not paid by the
Mortgagor if permitted by the terms of such Mortgage Loan.
Releases of Mortgages, Alterations, Removal, Demolition or Divisions
of Properties. The Servicer will have the right under the Servicing Agreement
(upon receiving the consent of the Note Insurer) to accept applications of
Mortgagors for consent to (i) partial releases of Mortgages, (ii) alterations
and (iii) removal, demolition or division of Mortgaged Properties. No
application for approval may be considered by the Servicer unless: (i) the
provisions of the related Note and Mortgage have been complied with; (ii) the
loan-to-value ratio and debt-to-income ratio after any release does not exceed
the loan-to-value ratio and debt-to-income ratio of such Note on the Cut-Off
Date and any increase in the loan-to-value shall not exceed 5% unless approved
in writing by the Note Insurer; and (iii) the lien priority of the related
Mortgage is not affected.
Certain Rights of the holder of the Equity Certificates Related to
Foreclosure and the Servicer. Certain rights in connection with foreclosure of
Defaulted Mortgage Loans will be granted to the holder of the Equity
Certificates (the "Directing Holder"), which is expected to be the Transferor
or an affiliate of the Transferor. Such rights will include (i) the right to
recommend foreclosure or alternatives to foreclosure for Defaulted Mortgage
Loans, which recommendation the Servicer shall follow to the extent consistent
with the applicable servicing standard set forth in the Servicing Agreement,
and (ii) in the event that the Servicer fails to comply with its obligations
to follow such recommendations of the Directing Holder with respect to any
Defaulted Mortgage Loan, the right to purchase Defaulted Mortgage Loans,
provided, that the Directing Holder must, if it elects to purchase such
Defaulted Mortgage Loans, purchase the most delinquent Mortgage Loans first
unless the Note Insurer otherwise consents. The purchase price for any such
Mortgage Loan is equal to the Loan Purchase Price thereof, which purchase
price shall be deposited in the Principal and Interest Account.
The Directing Holder will also have the right to terminate the
rights and obligations of the Servicer under the Servicing Agreement without
cause and to appoint a successor servicer, provided that (i) such successor is
acceptable to the Note Insurer, (ii) such successor has been rated in the
highest servicer rating category by Standard & Poor's Rating Services, a
divison of The McGraw-Hill Companies, Inc. and (iii) a letter is provided to
the Indenture Trustee from each Rating Agency to the effect that such
termination and appointment will not result in the qualification, reduction or
withdrawal of the ratings that would then be applicable to the Notes in the
absence of the Note Insurance Policy.
The rights of the Directing Holder may be transferred to any future
holder of the Equity Certificates if, prior to such transfer, (i) the Servicer
and the Note Insurer consent thereto in their sole discretion and (ii) a
letter is provided to the Indenture Trustee from each Rating Agency to the
effect that the transfer of such rights to the proposed transferee will not
result in the qualification, reduction or withdrawal of the ratings that would
then be applicable to the Notes in the absence of the Note Insurance Policy.
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Amendment. The Servicer shall not agree to any modification, waiver
or amendment of any provision of any Mortgage Loan unless, in the Servicer's
good faith judgment, such modification, waiver or amendment would minimize the
loss that might otherwise be experienced with respect to such Mortgage Loan
and only in the event of a payment default with respect to such Mortgage Loan
or in the event that a payment default with respect to such Mortgage Loan is
reasonably foreseeable by the Servicer. Notwithstanding anything set forth in
the Servicing Agreement to the contrary, the Servicer shall be permitted to
modify, waive or amend any provision of a Mortgage Loan if required by statute
or a court of competent jurisdiction to do so.
The Servicer shall provide written notice to the Indenture Trustee
and the Note Insurer prior to the execution of any modification, waiver or
amendment of any provision of any Mortgage Loan; provided that if the Note
Insurer does not object in writing to the modification, waiver or amendment
specified in such notice within five Business Days after its receipt thereof,
the Servicer may effectuate such modification, waiver or amendment and shall
deliver to the Custodian, on behalf of the Indenture Trustee for deposit in
the related Mortgage File, an original counterpart of the agreement relating
to such modification, waiver or amendment, promptly following the execution
thereof.
Sub-Servicing Agreements. The Servicer, with the consent of the Note
Insurer, except as provided below, will be permitted under the Servicing
Agreement to enter into servicing agreements (the "Sub-Servicing Agreements")
with other qualified servicers (the "Sub-Servicers") for any servicing and
administration of Mortgage Loans with any institution that (x) is in
compliance with the laws of each state necessary to enable it to perform its
obligations under such Sub-Servicing Agreement, (y) has experience servicing
mortgage loans that are similar to the Mortgage Loans and (z) has equity of
not less than $5,000,000 (as determined in accordance with generally accepted
accounting principles).
With the consent of the Note Insurer, the Servicer may enter into
Sub-Servicing Agreements with Sub-Servicers with respect to the servicing of
the Mortgage Loans; provided that the Servicer will not need the consent of
the Note Insurer to enter into Sub-Servicing Agreement with an affiliate of
the Servicer. Notwithstanding any Sub-Servicing Agreement, the Servicer will
not be relieved of its obligations under the Servicing Agreement and the
Servicer will be obligated to the same extent and under the same terms and
conditions as if it alone were servicing and administering the Mortgage Loans.
The Servicer shall be entitled to enter into any agreement with a Sub-Servicer
for indemnification of the Servicer by such Sub-Servicer and nothing contained
in such Sub-Servicing Agreement shall be deemed to limit or modify the
Servicing Agreement. Any Sub-Servicing Agreement entered into by the Servicer
must provide that if the Servicer is removed as servicer, the Indenture
Trustee may (i) with the consent of the Note Insurer, retain the services of
the Sub-Servicer under the Sub-Servicing Agreement, or (ii) terminate the
services of the Sub-Servicer without penalty, if so required by the Note
Insurer.
Indemnification. The Servicer has agreed to indemnify and hold the
Indenture Trustee and the Note Insurer harmless against any and all claims,
losses, penalties, fines, forfeitures, legal fees and related costs,
judgments, and any other costs, fees and expenses that the Indenture Trustee
and the Note Insurer may sustain in any way related to the failure of the
Servicer to perform its duties and service the Mortgage Loans in compliance
with the terms of the Servicing Agreement except as may be limited in the
Servicing Agreement. The Servicer shall immediately notify the Indenture
Trustee and the Note Insurer if a claim is made by a third party with respect
to the Servicing Agreement, and the Servicer shall, with the consent of the
Note Insurer, assume the defense of any such claim and pay all expenses in
connection therewith, including reasonable counsel fees, and promptly pay,
discharge and satisfy any judgment or decree which may be entered against the
Servicer, the Indenture Trustee and the Note Insurer in respect of such claim.
The Indenture Trustee shall reimburse the Servicer for all amounts advanced by
it pursuant to the preceding sentence prior to any payments on the Notes,
except when a final nonappealable adjudication determines that the claim
relates directly to the failure of the Servicer to perform its duties in
compliance with the Servicing Agreement. The indemnification provisions shall
survive the termination of the Servicing Agreement and the payment of the
outstanding Notes and the Equity Certificates.
Reports by the Servicer. The Servicer will be required to deliver to
the Indenture Trustee, the Note Insurer, and the Rating Agencies on or before
April 30 of each year, commencing in 1999: (1) an officers' certificate
stating, as to each signer thereof, that (i) a review of the activities of the
Servicer during such preceding calendar year and of
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performance under the Servicing Agreement has been made under such officers'
supervision, and (ii) to the best of such officers' knowledge, based on such
review, the Servicer has fulfilled all its obligations under the Servicing
Agreement for such year, or, if there has been a default in the fulfillment of
all such obligation, specifying each such default known to such officers and
the nature and status thereof including the steps being taken by the Servicer
to remedy such default and (2) a letter or letters of a firm of independent,
nationally recognized certified public accountants reasonably acceptable to
the Note Insurer stating that such firm has examined the Servicer's overall
servicing operations in accordance with the requirements of the Uniform Single
Attestation Program for Mortgage Bankers, and stating such firm's conclusions
relating thereto.
Removal and Resignation of Servicer. The Note Insurer (or, the
Noteholders, with the consent of the Note Insurer) will have the right,
pursuant to the Servicing Agreement, to remove the Servicer upon the
occurrence of certain events (collectively, the "Servicer Termination Events")
including, without limitation: (a) certain acts of bankruptcy or insolvency on
the part of the Servicer; (b) certain failures on the part of the Servicer to
perform its obligations under the Servicing Agreement (including certain
performance tests related to the delinquency rate and cumulative losses of the
Mortgage Loans); or (c) the failure to cure material breaches of the
Servicer's representations in the Servicing Agreement.
The Servicer is not permitted to resign from the obligations and
duties imposed on it under the Servicing Agreement except upon determination
that its duties thereunder are no longer permissible under applicable law or
are in material conflict by reason of applicable law with any other activities
carried on by it, the other activities of the Servicer so causing such
conflict being of a type and nature carried on by the Servicer on the date of
the Servicing Agreement. Any such determination permitting the resignation of
the Servicer is required to be evidenced by an opinion of counsel to such
effect which shall be delivered, and reasonably acceptable, to the Indenture
Trustee and the Note Insurer.
Upon removal or resignation of the Servicer, the Indenture Trustee
will assign such duties to another party. Any successor Servicer is required
to (i) be a housing and home finance institution, bank or mortgage servicing
institution which has been designated as an approved seller-servicer by FNMA
or FHLMC for first and second lien mortgage loans, (ii) have equity of not
less than $5,000,000 as determined in accordance with generally accepted
accounting principles, and (iii) be acceptable to the Note Insurer.
No removal or resignation of the Servicer will become effective
until a successor Servicer shall have assumed the Servicer's responsibilities
and obligations in accordance with the Servicing Agreement.
THE NOTE INSURER
The information set forth in this section has been provided by
Financial Security Assurance Inc. (the "Note Insurer"). No representation is
made by the Underwriter, the Transferor, the Servicer, the Depositor 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.
General
The Note Insurer is a monoline insurance company incorporated in
1984 under the laws of the State of New York. The Note Insurer is licensed to
engage in financial guaranty insurance business in all 50 states, the District
of Columbia and Puerto Rico.
The Note Insurer and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of a
trust's securities --thereby enhancing the credit rating of those securities
- - --in consideration for the payment of a premium to the insurer. The Note
Insurer and its subsidiaries principally insure asset-backed, collateralized
and municipal securities. Asset-backed securities are generally supported by
residential mortgage loans, consumer or trade receivables, securities or other
assets having an ascertainable cash flow or market value. Collateralized
securities include public utility first mortgage bonds and sale/leaseback
obligation bonds. Municipal securities consist largely of general obligation
bonds, special revenue
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bonds and other special obligations of state and local governments. The Note
Insurer insures both newly issued securities sold in the primary market and
outstanding securities sold in the secondary market that satisfy the Note
Insurer's underwriting criteria.
The Note Insurer is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed
company. Major shareholders of Holdings include Fund American Enterprises
Holdings, Inc., MediaOne Capital Corporation, The Tokio Marine and Fire
Insurance Co., Ltd. and EXEL Limited. No shareholder of Holdings is obligated
to pay any debt of the Note Insurer or any claim under any insurance policy
issued by the Note Insurer or to make any additional contribution to the
capital of the Note Insurer.
The principal executive offices of the Note Insurer are located at
350 Park Avenue, New York, New York 10022, and its telephone number at that
location is (212) 826-0100.
Reinsurance
Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written or reinsured from third parties by the Note Insurer
or any of its domestic or Bermuda operating insurance company subsidiaries are
generally reinsured among such companies on an agreed-upon percentage
substantially proportional to their respective capital, surplus and reserves,
subject to applicable statutory risk limitations. In addition, the Note
Insurer reinsures a portion of its liabilities under certain of its financial
guaranty insurance policies with other reinsurers under various treaties and
on a transaction-by-transaction basis. Such reinsurance is utilized by the
Note Insurer as a risk management device and to comply with certain statutory
and rating agency requirements; it does not alter or limit the Note Insurer's
obligations under any financial guaranty insurance policy.
Ratings
The Note Insurer's insurance financial strength is rated "Aaa" by
Moody's. The Note Insurer's insurer financial strength is rated "AAA" by
Standard & Poor's and Standard & Poor's (Australia) Pty. Ltd. The Note
Insurer's claims-paying ability is rated "AAA" by Fitch IBCA, Inc. and Japan
Rating and Investment Information, Inc. Such ratings reflect only the views of
the respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by such
rating agencies.
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Capitalization
The following table sets forth the capitalization of the Note
Insurer and its wholly owned subsidiaries on the basis of generally accepted
accounting principles as of September 30, 1998, as well as such capitalization
as adjusted to give effect to certain transactions entered into during
November 1998:
<TABLE>
<CAPTION>
September 30, 1998
Actual As Adjusted (1)
(Unaudited)
(In thousands)
----------------------------
<S> <C> <C>
Deferred Premium Revenue (net of prepaid
reinsurance premiums) ........................... $ 480,089 $ 480,089
---------- ----------
Surplus Notes ...................................... 50,000 130,000
---------- ----------
Minority Interest .................................. -- 20,000
---------- ----------
Shareholder's Equity:
Common Stock ....................................... 15,000 15,000
Additional Paid-In Capital ......................... 614,787 684,787
Accumulated Other Comprehensive Income
(net of deferred income taxes) .................. 41,923 41,923
Accumulated Earnings ............................... 326,145 326,145
---------- ----------
Total Shareholder's Equity ......................... 997,855 1,067,855
---------- ----------
Total Deferred Premium Revenue, Surplus
Notes, Minority Interest and Shareholder's
Equity........................................... $1,527,944 $1,697,944
========== ==========
</TABLE>
----------------------------
(1)Adjusted to give effect to the November 1998 (a) purchase by Holdings
of $80 million of surplus notes from the Note Insurer in connection
with the formation of a new indirect Bermuda subsidiary of the Note
Insurer, initially capitalized with $100 million, including a $20
million minority interest owned by EXEL Limited, and (b) contribution
by Holdings to the capital of the Note Insurer of approximately $70
million, representing a portion of the proceeds from the sale by
Holdings of $100 million of 6.950% Senior Quarterly Income Debt
Securities due 2098.
For further information concerning the Note Insurer, see the
Consolidated Financial Statements of the Note Insurer and subsidiaries, and
the notes thereto incorporated herein by reference. The Note Insurer's
financial statements are included as exhibits in the Annual Reports on Form
10-K and the Quarterly Reports on Form 10-Q filed with the Securities and
Exchange Commission (the "Commission") and may be reviewed at the EDGAR web
site maintained by the Commission and at Holding's website,
http://www.FSA.com. Copies of the statutory quarterly and annual statements
filed with the State of New York Insurance Department by the Note Insurer are
available upon request to the State of New York Insurance Department.
Incorporation of Certain Documents by Reference
The consolidated financial statements of the Note Insurer and
subsidiaries included as an exhibit to the Annual Report on Form 10-K for the
period ended December 31, 1997 and the unaudited financial statements of the
Note Insurer and subsidiaries for the quarter ended September 30, 1998
included as an exhibit to the Quarterly Report on Form 10-Q for the period
ended September 30, 1998, each of which have been filed with the Securities
and Exchange Commission by Holdings, are hereby incorporated by reference in
this Prospectus Supplement.
All financial statements of the Note Insurer and subsidiaries
included in documents filed by Holdings pursuant to Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Notes
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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 Depositor will provide without charge to any person to whom this
Prospectus Supplement is delivered, upon oral or written request of such
person, a copy of any or all of the foregoing financial statements
incorporated by reference. Requests for such copies should be directed to the
Depositor at 600 Steamboat Road, Greenwich, Connecticut 06830.
Insurance Regulation
The Note Insurer is licensed and subject to regulation as a
financial guaranty insurance corporation under the laws of the State of New
York, its state of domicile. In addition, the Note Insurer and its insurance
subsidiaries are subject to regulation by insurance laws of the various other
jurisdictions in which they are licensed to do business. As a financial
guaranty insurance corporation licensed to do business in the State of New
York, the Note Insurer is subject to Article 69 of the New York Insurance Law
which, among other things, limits the business of each such insurer to
financial guaranty insurance and related lines, requires that each such
insurer maintain a minimum surplus to policyholders, establishes contingency,
loss and unearned premium reserve requirements for each such insurer, and
limits the size of individual transactions ("single risks") and the volume of
transactions ("aggregate risks") that may be underwritten by each such
insurer. Other provisions of the New York Insurance Law, applicable to
non-life insurance companies such as the Note Insurer, regulate, among other
things, permitted investments, payment of dividends, transactions with
affiliates, mergers, consolidations, acquisitions or sales of assets and
incurrence of liability for borrowings.
The 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 information regarding the Note Insurer set forth or incorporated under the
heading "The Note Insurer" herein.
THE NOTE INSURANCE POLICY
The following summary of the terms of the Note Insurance Policy does
not purport to be complete and is qualified in its entirety by reference to
the Note Insurance Policy, a copy of which is available from the Depositor.
Simultaneously with the issuance of the Notes, the Note Insurer will
issue a note insurance policy (the "Note Insurance Policy") to the Indenture
Trustee for the benefit of the Noteholders. Under the Note Insurance Policy,
the Note Insurer will irrevocably and unconditionally guaranty payment on each
Payment Date to the Indenture Trustee for the benefit of the Noteholders of an
amount equal to the Note Interest plus any Overcollateralization Deficit for
such Payment Date calculated in accordance with the original terms of the
Notes when issued and without regard to any amendment or modification of the
Notes or the Indenture except amendments or modifications to which the Note
Insurer has given its prior written consent. The amount of the Insured
Payment, if any, made by the Note Insurer to the Noteholders under the Note
Insurance Policy on each Payment Date is the sum (without duplication) of (i)
any shortfall in the amount required to pay the Overcollateralization Deficit
for such Payment Date from a source other than the Note Insurance Policy, (ii)
any shortfall in the amount required to pay Note Interest for such Payment
Date from a source other than the Note Insurance Policy, and (iii) on the
Stated Maturity Date, without duplication, the outstanding Principal Balance
on the Notes. Payments which become due on an accelerated basis as a result of
(a) a default by the Trust, (b) an election by the Trust to pay principal on
an accelerated basis or (c) any other cause do not constitute "Insured
Payments," unless the Note Insurer elects, in its sole discretion, to pay such
principal due upon acceleration, together with any accrued interest to the
date of acceleration. The effect of the Note Insurance Policy is to guaranty
the timely payment of interest on, and the ultimate principal amount of the
Notes. Notwithstanding the foregoing, the Note Insurer is permitted at its
sole option, but is not required, to pay any losses in connection with the
liquidation of a Mortgage Loan in accordance with the Note Insurance Policy.
Payment of claims under the Note Insurance Policy will be made by
the Note Insurer following Receipt by the Note Insurer of the appropriate
notice for payment on the later to occur of (a) 12:00 noon, New York City
time,
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on the second Business Day following Receipt of such notice for payment, and
(b) 12:00 noon, New York City time, on the relevant Payment Date.
If any payment of an amount guaranteed by the Note Insurer pursuant
to the Note Insurance Policy is avoided as a preference payment under
applicable bankruptcy, insolvency, receivership or similar law the Note
Insurer will pay such amount out of the funds of the Note Insurer on the later
of (a) the date when due to be paid pursuant to the Order referred to below or
(b) the first to occur of (i) the fourth Business Day following Receipt by the
Note Insurer from the Indenture Trustee of (A) a certified copy of the order
(the "Order") of the court or other governmental body which exercised
jurisdiction to the effect that a Noteholder is required to return principal
or interest distributed with respect to a Note during the term of the Note
Insurance Policy because such payments were avoidable preferences under
applicable bankruptcy law, (B) a certificate of the Noteholder that the Order
has been entered and is not subject to any stay, and (C) an assignment duly
executed and delivered by the Noteholder, in such form as is reasonably
required by the Note Insurer and provided to the Noteholder 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, or (ii) the date of Receipt by the Note Insurer from the Indenture
Trustee of the items referred to in clauses (A), (B) and (C) above if, at
least four Business Days prior to such date of Receipt, the Note Insurer shall
have Received written notice from the Indenture Trustee that such items were
to be delivered on such date and such date was specified in such notice. Such
payment shall be disbursed to the receiver, conservator, debtor-in-possession
or trustee in bankruptcy named in the Order and not to the Indenture Trustee
or any Noteholder directly (unless a Noteholder has previously paid such
amount to the receiver, conservator, debtor-in-possession or trustee in
bankruptcy named in the Order, in which case such payment shall be disbursed
to the Indenture Trustee for distribution to such Noteholder upon proof of
such payment reasonably satisfactory to the Note Insurer).
The terms "Receipt" and "Received," with respect to the Note
Insurance Policy, means actual delivery to the Note Insurer and to its fiscal
agent appointed by the Note Insurer at its option, if any, prior to 12:00
p.m., New York City time, on a Business Day; delivery either on a day that is
not a Business Day or after 12:00 p.m., New York City time, shall be deemed to
be Receipt on the next succeeding Business Day. If any notice or certificate
given under the Note Insurance Policy by the Indenture Trustee is not in
proper form or is not properly completed, executed or delivered, it shall be
deemed not to have been Received, and the Note Insurer or the fiscal agent
shall promptly so advise the Indenture Trustee and the Indenture Trustee may
submit an amended notice.
Under the Note Insurance Policy, "Business Day" means any day other
than (i) a Saturday or Sunday or (ii) a day on which banking institutions in
The City of New York, New York are authorized or obligated by law or executive
order to be closed.
The Note Insurer's obligations under the Note Insurance Policy in
respect of Insured Payments shall be discharged to the extent funds are
transferred to the Indenture Trustee as provided in the Note Insurance Policy,
whether or not such funds are properly applied by the Indenture Trustee.
The Note Insurer shall be subrogated to the rights of each
Noteholder to receive payments of principal and interest, as applicable, with
respect to payments on the Notes to the extent of any payment by the Note
Insurer under the Note Insurance Policy. To the extent the Note Insurer makes
Insured Payments, either directly or indirectly (as by paying through the
Indenture Trustee), to the Noteholders, the Note Insurer will be subrogated to
the rights of the Noteholders, as applicable, with respect to such Insured
Payment, shall be deemed to the extent of the payments so made to be a
registered Noteholder for purposes of payment and shall receive all future
payments of principal and interest, as applicable, until all such Insured
Payments by the Note Insurer have been fully reimbursed, provided that the
Noteholders have received the full amount of the payments of principal and
interest, as applicable.
Claims under the Note Insurance Policy will rank equally with any
other unsecured and unsubordinated obligations of the Note Insurer except for
certain obligations in respect of tax and other payments to which preference
is or may become afforded by statute. The terms of the Note Insurance Policy
cannot be modified, altered or affected by any other agreement or instrument,
or by the merger, consolidation or dissolution of the Servicer. The Note
Insurance Policy by its terms may not be canceled or revoked prior to payment
in full of the Notes. The Note Insurance Policy is governed by the laws of the
State of New York.
S-75
<PAGE>
The Note Insurance Policy is not covered by the property/casualty
insurance security fund specified in Article 76 of the New York Insurance Law.
The Note Insurance Policy is not covered by the Florida Insurance Guaranty
Association created under Part II of Chapter 631 of the Florida Insurance
Code. In the event the Note Insurer were to become insolvent, any claims
arising under the Note Insurance Policy are excluded from coverage by the
California Insurance Guaranty Association, established pursuant to Article
14.2 of Chapter 1 of part 2 of Division 1 of the California Insurance Code.
PURSUANT TO THE TERMS OF THE INDENTURE, UNLESS A NOTE INSURER
DEFAULT EXISTS, THE NOTE INSURER SHALL BE DEEMED TO BE THE NOTEHOLDER FOR
CERTAIN PURPOSES (OTHER THAN WITH RESPECT TO PAYMENT ON THE NOTES), WILL BE
ENTITLED TO EXERCISE ALL RIGHTS OF THE NOTEHOLDER THEREUNDER, WITHOUT THE
CONSENT OF SUCH NOTEHOLDERS AND THE NOTEHOLDERS MAY EXERCISE SUCH RIGHTS ONLY
WITH THE PRIOR WRITTEN CONSENT OF THE NOTE INSURER. IN ADDITION, THE NOTE
INSURER WILL HAVE CERTAIN ADDITIONAL RIGHTS AS A THIRD PARTY BENEFICIARY TO
THE INDENTURE.
The Note Insurer does not accept any responsibility for the accuracy
of 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 Note Insurer set forth under the heading "The
Note Insurer" herein. Additionally, the Note Insurer makes no representation
regarding the Notes or the advisability of investing in the Notes.
The Trust, the Contributor, the Transferor, the Depositor, the
Servicer and the Note Insurer will enter into an Insurance and Indemnity
Agreement (the "Insurance Agreement") pursuant to which the Trust, the
Contributor, the Transferor and the Servicer will agree to reimburse with
interest the Note Insurer for amounts paid pursuant to claims under the
Policy. The Trust, the Contributor, the Transferor and the Servicer will
further agree to pay the Note Insurer all reasonable charges and expenses
which the Note Insurer may pay or incur relative to any amounts paid under the
Note Insurance Policy or otherwise in connection with the Notes and to
indemnify the Note Insurer against certain liabilities. Except to the extent
provided therein, amounts owing under the Insurance Agreement will be secured
by, and payable solely from, the Trust Estate. An "event of default" under the
Insurance Agreement will constitute an Event of Default under the Indenture
and will allow the Note Insurer, among other things, to direct the Indenture
Trustee to declare the principal of and interest on the Notes immediately due
and payable and to declare amounts owed to the Note Insurer immediately due
and payable. An "event of default" under the Insurance Agreement includes (i)
a failure by the Trust, the Contributor, the Transferor, the Depositor or the
Servicer to pay when due any amount owed under the Insurance Agreement, (ii)
the occurrence of an Event of Default under the Indenture or under certain
other documents, (iii) the inaccuracy or incompleteness in any material
respect of any representation or warranty by the Trust, the Contributor, the
Transferor, the Depositor or the Servicer in the Insurance Agreement, or under
certain other documents, (iv) the failure by the Trust, the Contributor, the
Transferor, the Depositor or the Servicer to perform or comply with any
material covenant or agreement in the Insurance Agreement, the Indenture, or
under certain other documents (in certain cases only if such failure remains
unremedied thirty days after notice thereof), (v) a finding or a ruling by a
governmental authority or agency that the Insurance Agreement or the Indenture
are not binding on the Trust, and (vi) the failure by the Trust, the
Contributor, the Depositor or the Servicer to pay its debts in general or the
occurrence of certain events of insolvency or bankruptcy with respect to the
Trust, the Contributor, the Transferor, the Depositor or the Servicer.
Note Insurance Policy Does Not Apply to Prepayment Risk
In general, the protection afforded by the Note Insurance Policy is
protection for credit risk and not for prepayment risk. A claim may not be
made under the Note Insurance Policy, in an attempt to guarantee or insure
that any particular rate of prepayment is experienced by the Trust Estate.
S-76
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
In the opinion of Brown & Wood LLP, counsel to 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 as 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 Offered Securities.
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 Offered Securities
without regard to the ERISA considerations described below, subject to other
applicable Federal and state law. However, any such governmental or church
plan which is qualified under section 401(a) of the Code and exempt from
taxation under section 501(a) of the Code is subject to the prohibited
transaction rules set forth in section 503 of the Code. Any Plan fiduciary
which proposes to cause a Plan to acquire any of the Offered Securities should
consult with its counsel with respect to the potential consequences under
ERISA, and the Code, of the Plan's acquisition and ownership of the Offered
Securities. See "ERISA Considerations" in the Prospectus. Investments by Plans
are also subject to ERISA's general fiduciary requirements, including the
requirement of investment prudence and diversification and the requirement
that a Plan's investments be made in accordance with the documents governing
the Plan.
Prohibited Transactions
General
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions (including loans) involving a Plan
and its assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes certain excise taxes (or, in
some cases, a civil penalty may be assessed pursuant to section 502(i) of
ERISA) on parties in interest which engage in non-exempt prohibited
transactions.
S-77
<PAGE>
Plan Asset Regulation
The United States Department of Labor ("Labor") has issued final
regulations concerning the definition of what constitutes the assets of a Plan
for purposes of ERISA and the prohibited transaction provisions of the Code
(the "Plan Asset Regulation"). The Plan Asset Regulation describes the
circumstances under which the assets of an entity in which a Plan invests will
be considered to be "plan assets" such that any person who exercises control
over such assets would be subject to ERISA's fiduciary standards. Under the
Plan Asset Regulation, generally when a Plan invests in another entity, the
Plan's assets do not include, solely by reason of such investment, any of the
underlying assets of the entity. However, the Plan Asset Regulation provides
that, if a Plan acquires an "equity interest" in an entity that is neither a
"publicly-offered security" (as defined therein) nor a security issued by an
investment company registered under the Investment Company Act of 1940, the
assets of the entity will be treated as assets of the Plan investor unless
certain exceptions apply. If the Notes were deemed to be equity interests and
no statutory, regulatory or administrative exemption applies, the Trust could
be considered to hold plan assets by reason of a Plan's investment in the
Notes. Such plan assets would include an undivided interest in any assets held
by the Trust. In such an event, the Servicer and other persons, in providing
services with respect to the Trust's assets, may be parties in interest with
respect to such Plans, subject to the fiduciary responsibility provisions of
Title I of ERISA, including the prohibited transaction provisions of section
406 of ERISA, and section 4975 of the Code with respect to transactions
involving the Trust's assets. Under the Plan Asset Regulation, the term
"equity interest" is defined as any interest in an entity other than an
instrument that is treated as indebtedness under "applicable local law" and
which has no "substantial equity features." Although the Plan Asset Regulation
is silent with respect to the question of which law constitutes "applicable
local law" for this purpose, Labor has stated that these determinations should
be made under the state law governing interpretation of the instrument in
question. In the preamble to the Plan Asset Regulation, Labor declined to
provide a precise definition of what features are equity features or the
circumstances under which such features would be considered "substantial,"
noting that the question of whether a Plan's interest has substantial equity
features is an inherently factual one, but that in making a determination it
would be appropriate to take into account whether the equity features are such
that a Plan's investment would be a practical vehicle for the indirect
provision of investment management services. Brown & Wood LLP ("ERISA
Counsel") has rendered its opinion that the Notes will be classified as
indebtedness without substantial equity features for ERISA purposes. ERISA
Counsel's opinion is based upon the terms of the Notes, the opinion of Tax
Counsel that the Notes will be classified as debt instruments for Federal
income tax purposes and the ratings which have been assigned to the Notes.
However, if contrary to ERISA Counsel's opinion the Notes are deemed to be
equity interests in the Trust and no statutory, regulatory or administrative
exemption applies, the Trust could be considered to hold plan assets by reason
of a Plan's investment in the Notes.
Review by Plan Fiduciaries
Any Plan fiduciary considering whether to purchase any Notes on
behalf of a Plan should consult with its counsel regarding the applicability
of the fiduciary responsibility and prohibited transaction provisions of ERISA
and the Code to such investment. Among other things, before purchasing any
Notes, a fiduciary of a Plan should make its own determination as to whether
the Trust, as obligor on the Notes, is a party in interest with respect to the
Plan, the availability of the exemptive relief provided in the Plan Asset
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 Financial Security Assurance Inc.
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.
S-78
<PAGE>
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. The Underwriter may effect such transactions
by selling Notes to or through dealers and such dealers may receive from the
Underwriter, for which they act as agent, compensation in the form of
underwriting discounts, concessions or commissions. The Underwriter and any
dealers that participate with the Underwriter in the distribution of such
Notes may be deemed to be underwriters, and any discounts, commissions or
concessions received by them, and any profits on resale of the Notes purchased
by them, may be deemed to be underwriting discounts and commissions under the
Securities Act of 1933, as amended (the "Act").
The Depositor has been advised by the Underwriter that it intends to
make a market in the 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 has agreed to indemnify the Underwriter against, or
make contributions to the Underwriter with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
LEGAL INVESTMENT MATTERS
Neither the Class A-1 Notes nor the Class A-2 Notes will constitute
"mortgage related securities" under the Secondary Mortgage Market Enhancement
Act. Accordingly, many institutions with legal authority to invest in
"mortgage related securities" may not be legally authorized to invest in the
Class A-1 or the Class A-2 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
Contributor and the Transferor by Thacher Proffitt & Wood, New York, New York
and on behalf of the Depositor and the Underwriter by Brown & Wood LLP, New
York, New York.
RATINGS
It is a condition to the issuance of the Notes that each of the
Class A-1 Notes and Class A-2 Notes be rated "Aaa" by Moody's Investors
Service, Inc. and "AAA" by Standard & Poor's Rating Services, a division of
The McGraw-Hill Companies, Inc. (together, the "Rating Agencies")
The ratings on the Notes address the likelihood of the receipt by
the holders of the Notes of all payments on the 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 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 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 Loans or the application of Excess Spread as
described herein, or in the event that the Trust is terminated prior to the
Final Maturity Date of the Classes of Notes.
S-79
<PAGE>
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 such Notes.
S-80
<PAGE>
INDEX OF DEFINED TERMS
Administrative Fee Amount.............................................S-19
Aggregate Principal Balance...........................................S-30
Aggregate Risks.......................................................S-74
Available Funds.......................................................S-19
Available Funds Interest .............................................S-21
Available Funds Interest Rate.........................................S-21
Basis Risk Shortfall..................................................S-21
Beneficial Owners.....................................................S-13
Book-Entry Notes......................................................S-13
Business Day....................................................S-21, S-75
Cedel Participants....................................................S-15
Citibank..............................................................S-14
Code..................................................................S-77
Commission............................................................S-73
Compensating Interest.................................................S-69
Contributor...........................................................S-17
Cooperative...........................................................S-15
CPR...................................................................S-60
Daily Collections.....................................................S-68
Defaulted Mortgage Loans..............................................S-69
Delinquency Advances..................................................S-68
Depositor.......................................................S-13, S-29
Directing Holder......................................................S-69
Due Period............................................................S-21
Eligible Investments..................................................S-67
Equity Certificates...................................................S-29
ERISA.................................................................S-77
ERISA Counsel.........................................................S-78
Euroclear Operator....................................................S-15
Euroclear Participants................................................S-15
European Depositaries.................................................S-14
Event of Default......................................................S-76
Excess Cash...........................................................S-21
Excess Cash Payment...................................................S-21
Exchange Act..........................................................S-73
Federal Reserve Board.................................................S-15
FICO Grade............................................................S-55
Final Certification...................................................S-18
Final Recovery Determination..........................................S-21
Financial Intermediary................................................S-14
Flagstar..............................................................S-55
Flagstar Loans........................................................S-55
Global Securities......................................................A-1
Group.................................................................S-13
Group I Aggregate Principal Balance...................................S-30
Group II Aggregate Principal Balance..................................S-30
Holdings..............................................................S-72
HUD...................................................................S-30
Indenture Trustee.....................................................S-13
Indenture Trustee Fee.................................................S-28
Index Counterparty....................................................S-21
Initial Redemption Date...............................................S-27
Insurance Agreement...................................................S-76
Insurance Proceeds....................................................S-20
S-81
<PAGE>
Insured Payment..................................................S-21
Interest Determination Date......................................S-23
Interest Period..................................................S-21
Labor............................................................S-78
LIBOR Business Day...............................................S-24
LIBOR Rate.......................................................S-21
Liquidated Loan..................................................S-21
Liquidation Proceeds.......................................S-20, S-21
Liquidity Account................................................S-25
Margin...........................................................S-21
Modeling Assumptions.............................................S-60
Monthly Principal................................................S-22
Monthly Remittance Date..........................................S-24
Morgan...........................................................S-14
Mortgage File....................................................S-18
Mortgage Grade...................................................S-56
Mortgage Loan Contribution Agreement.............................S-55
Mortgage Loans...................................................S-13
Mortgaged Properties.............................................S-13
Mortgage Related Securities......................................S-79
Net Liquidation Proceeds...................................S-20, S-67
Non-Flagstar Loans...............................................S-55
Non-U.S. Person...................................................A-4
Note Account.....................................................S-24
Note Balance.....................................................S-22
Note Insurance Policy............................................S-74
Note Insurer.....................................................S-71
Note Insurer Default.............................................S-22
Note Interest....................................................S-22
Note Interest Rate...............................................S-22
Noteholder.......................................................S-14
Ocwen............................................................S-29
Ocwen Credit Grade...............................................S-55
One-Month LIBOR............................................S-22, S-24
Order............................................................S-75
Overcollateralization Amount.....................................S-22
Overcollateralization Deficiency Amount..........................S-22
Overcollateralization Deficit....................................S-22
Overcollateralization Reduction Amount...........................S-22
Overcollateralization Step-Down Trigger..........................S-25
Owner Trustee....................................................S-13
Ownership Transfer Agreement.....................................S-55
Participants.....................................................S-15
Parties in Interest..............................................S-77
Payment Date.....................................................S-18
Percentage Interest..............................................S-18
Plan.............................................................S-77
Plan Asset Regulation............................................S-78
Plan Assets......................................................S-78
Premium Amount...................................................S-23
Prepayment.......................................................S-23
Prepayment Assumption............................................S-60
Preservation Expenses............................................S-68
Principal and Interest Account...................................S-66
Principal Balance................................................S-23
Principal Remittance Amount......................................S-23
S-82
<PAGE>
Rating Agencies..................................................S-79
Realized Loss....................................................S-26
Reference Banks..................................................S-24
Relevant Depositary..............................................S-14
Required Liquidity Account Balance...............................S-23
Required Liquidity Account Deposit...............................S-23
Required Overcollateralization Amount............................S-23
Reserve Account..................................................S-25
Reserve Interest Rate............................................S-24
Rules............................................................S-14
Schedule of Mortgage Loans.......................................S-17
Servicer.........................................................S-29
Servicer Termination Events......................................S-71
Servicing Advances...............................................S-68
Servicing Fee....................................................S-66
Single Risks.....................................................S-74
Sub-Servicers....................................................S-70
Sub-Servicing Agreements.........................................S-70
Substitution Amount..............................................S-18
Swap Agreement...................................................S-23
Tax Counsel......................................................S-77
Telerate Page 3750...............................................S-24
Terms and Conditions.............................................S-15
Transferor.................................................S-29, S-55
Trust............................................................S-13
Trust Agreement..................................................S-13
Trust Estate.....................................................S-13
Underwriter......................................................S-29
U.S. Person.......................................................A-3
Voting Interests.................................................S-29
Weighted Average Life............................................S-60
S-83
<PAGE>
ANNEX A
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Ocwen
Mortgage Loan Asset Backed Notes, Series 1998-OAC1 (the "Global Securities"),
will be available only in book-entry form. Investors in the Global Securities
may hold such Global Securities through DTC, Cedel or Euroclear. The Global
Securities will be traceable as home market instruments in both the European
and U.S. domestic markets. Initial settlement and all secondary trades will
settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (I.E., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between participants of Cedel or
Euroclear and Participants holding Notes will be effected on a
delivery-against-payment basis through the Relevant Depositaries of Cedel and
Euroclear (in such capacity) and as Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede, as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect participants in DTC. As a result, Cedel and Euroclear will
hold positions on behalf of their participants through their Relevant
Depositaries, which in turn will hold such positions in accounts as
Participants.
Investors selecting to hold their Global Securities through DTC will
follow DTC settlement practice. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the
settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Because the purchaser determines the place of delivery, it is
important to establish at the time of the trade where both the purchaser's and
seller's accounts are located to ensure that settlement can be made on the
desired value date.
Trading between Participants. Secondary market trading between Participants
will be settled using the procedures applicable to prior asset-backed Note
issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market trading
between Cedel Participants or Euroclear Participants will be settled using the
Procedures applicable to conventional eurobonds in same day funds.
A-1
<PAGE>
Trading between DTC Seller and CEDEL or Euroclear Participants. When Global
Securities are to be transferred from the account of a Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel Participant or
Euroclear Participant at least one Business Day prior to settlement. Cedel or
Euroclear will instruct the respective Depositary, as the case may be, to
receive the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment
date to and excluding the settlement date, on the basis of the actual number
of days in such accrual period and a year assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. Payment will
then be made by the respective Depositary to the Participant's account against
delivery of the Global Securities. After settlement has been completed, the
Global Securities will be credited to the respective clearing system and by
the clearing system, in accordance with its usual procedures, to the Cedel
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (I.E., the trade
fails), the Cedel or Euroclear cash debt will be valued instead as of the
actual settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of
credit to them, Cedel Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, Cedel Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day,
assuming they clear the overdraft when the Global Securities are credited to
their accounts. However, interest on the Global Securities would accrue from
the value date. Therefore, in many cases the investment income on the Global
Securities earned during that one-day period may substantially reduce or
offset the amount of such overdraft charges, although this result will depend
on each Cedel Participant's or Euroclear Participant's particular cost of
funds.
Because the settlement is taking place during New York business
hours, Participants can employ their usual procedures for sending Global
Securities to the respective European Depositary for the benefit of Cedel
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the Participants a
cross-market transaction will settle no differently than a trade between two
Participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to time zone
differences in their favor, Cedel Participants and Euroclear Participants may
employ their customary procedures for transactions in which Global Securities
are to be transferred by the respective clearing system, through the
respective Depositary, to a Participant. The seller will send instructions to
Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one Business Day prior to settlement. In these cases, Cedel or Euroclear
will instruct the Relevant Depositary, as appropriate, to deliver the Global
Securities to the Participant's account against payment. Payment will include
interest accrued on the Global Securities from and including the last coupon
payment to and excluding the settlement date on the basis of the actual number
of days in such accrual period and a year assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. The payment
will then be reflected in the account of the Cedel Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the Cedel
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back
valuation will extinguish any overdraft incurred over that one-day period. If
settlement is not completed on the intended value date (I.E., the trade
fails), receipt of the cash proceeds in the Cedel Participant's or Euroclear
Participant's account would instead be valued as of the actual settlement
date.
Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail
on the
A-2
<PAGE>
sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the purchase side
of the day trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a Participant no later
than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their Cedel or Euroclear account in order
to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the Participant is at least one day
prior to the value date for the sale to the Cedel Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Cedel or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies
to payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course
of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemptions for non-U.S. Persons (Form W-8). Beneficial
owners of Global Securities that are Non-U.S. Persons can obtain a
complete exemption from the withholding tax by filing a signed Form
W-8 (Certificate of Foreign Status). If the information shown on
Form W-8 changes, a new Form W-8 must be filed within 30 days of
such change.
Exemptions for non-U.S. Persons with Effectively Connected
Income (Form 4224). A non-U.S. Person, including a non U.S.
corporation or bank with a U.S. branch, for which the interest
income is effectively connected with its conduct of a trade or
business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of
Tax on Income Effectively Connected with the Conduct of a Trade of
Business in the United States).
Exemption or Reduced Rate for Non-U.S. Persons Resident in
Treaty Countries (Form 01). Non-U.S. Persons residing in a country
that has a tax treaty with the United States can obtain an exemption
or reduced tax rate depending on the treaty terms) by filing Form
1001 (Ownership, Exemption or Reduced Rate Certificate). If the
treaty provides only for a reduced rate, withholding tax will be
imposed at that rate unless the filer alternatively files Form W-8.
Form 1001 may be filed by the beneficial owners or their agents.
Exemptions for U.S. Persons (Form W-9). U.S. Persons can
obtain a complete exemption from the withholding tax by filing Form
W-9 (Payer's Request for Taxpayer Identification Number and
Certification).
U.S. Federal Income Tax Reporting Procedure. The
beneficial owner of a Global Security or, in the case of a Form 1001
or a Form 4224 filer, his agent, files by submitting the appropriate
form to the person through whom it holds (the clearing agency, in
the case of persons holding directly on the books of the clearing
agency). Form W-8 and Form 1001 are effective for three calendar
years, and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of
the United States or any political subdivision thereof, (iii) an estate that
is subject to United States federal income tax, regardless of the source of
its income or (iv) a trust if (a) a court in the United States is able to
exercise primary supervision over the administration of the trust, and (b) one
or more United States
A-3
<PAGE>
persons have the authority to control all substantial decisions of the trust.
The term "Non-U.S. Person" means any person who is not a U.S. Person. This
summary does not deal with all aspects of U.S. federal income tax withholding
that may be relevant to foreign holders of Global Securities or with the
application of recently issued Treasury Regulations relating to tax
documentation requirements that are generally effective with respect to
payments made after December 31, 1999. Investors are advised to consult their
own tax advisors for specific tax advice concerning their holding and
disposing of Global Securities.
A-4
<PAGE>
ANNEX B
Flagstar Bank, FSB
- - -------------------------------------------------------------------------------
SECTION V. PRODUCT DESCRIPTIONS
- - -------------------------------------------------------------------------------
PORTFOLIO PORTFOLIO I DOCUMENT# 5501
A- Credits REV. DATE 12/10/97
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------------
LTV MAXIMUM LOAN AMOUNT
------------------------------------------------------------------------------------------------------
PROPERTY DOC. PRIMARY 2ND INV. PRIMARY
TYPES LEVEL
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
300K (is less than or equal to) 95% LTV
400K (is less than or equal to) 90% LTV
SF
2 FAMILY FULL/ALT 90(1) 80 75 500K (is less than or equal to) 80% LTV
CONDO
PUD ----------------------------------------------------------------------------------------------------------------
NIV/NIQ 75(1) 75(1) 70 500K
80 75 75
3-4 FAMILY FULL/ALT 500K
RURAL
NIV/NIQ 70 70 70 500K
- - ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------------
CASH-OUT LIMITS
- - ----------------------------------------------------------------------------------------------------------------------------------
2ND INV. PRIMARY 2ND INV.
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
200K (is less than or equal to) 80%(2) LTV 200K
SF
2 FAMILY 500K 500K 300K (is less than or equal to) 75% LTV 200k (less than or equal to) 70%
CONDO ----------------------------------------------------------------------------------------------------------------
PUD 500K 500K 200K 200K 200K
200K
3-4 FAMILY 500K 500K 200K 200K (less than or equal to) 70%
RURAL 500K 500K 200K 200K 200K
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
o Maximum debt ratio 50%
o MORTGAGE CREDIT- No more than 2x30 in last 12 months on any property
o MAJOR CONSUMER CREDIT- No more than 30 days delinquent on any account in
last 12 months; overall good credit.
o MINOR CONSUMER CREDIT- No more than 30 days delinquent on any account in
last 12 months EXCEPT for isolated minor occurrences up to 60 days
delinquent with compensating factors; overall, no more than 25% of credit
accounts delinquent in last 12 months.
o No charge-offs, repossessions, collections, credit-related judgements or
liens in last 12 months EXCEPT for isolated minor occurrences (disputed
medical collections less than $500) with compensating factors.
o Collection accounts and charge-offs need not be paid off. Liens and
judgements do need to be paid off.
o Bankruptcy/Foreclosure over 24 months old with compensating factors and
excellent re-established credit (several major trades opened with no
delinquencies; no mortgage lates.
o All credit must be current at application
NOTES: 1. Maximum LTV may be increased 5% with approval of Flagstar Bank
"Management Committee"
2. Debt consolidation cash-out refinance may go up to 85% LTV
The dollar amounts listed in the CASH-OUT LIMITS section refer only to
cash back to borrower.
B-1
<PAGE>
- - ------------------------------------------------------------------------------
Flagstar Bank, FSB
- - ------------------------------------------------------------------------------
SECTION V. PRODUCT DESCRIPTIONS
- - ------------------------------------------------------------------------------
PORTFOLIO PORTFOLIO PLUS DOCUMENT# 5500
A Credits REV. DATE 12/10/97
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------------
LTV MAXIMUM LOAN AMOUNT
----------------------------------------------------------------------------------------------------------
PROPERTY DOC. PRIMARY 2ND INV. PRIMARY SECOND
TYPE LEVEL
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
300K (less than or equal to) 95% 400K (less than or equal to) 90%
400K (less than or equal to) 90% 500K (less than or equal to) 80%
500K (less than or equal to) 80% 650K (less than or equal to) 75%
650K (less than or equal to) 75% 1 Million (less than or equal to) 70%
SF FULL/ALT 95 90 80 1 Million (less than or equal to) 70%
2 FAMILY
CONDO
PUD ---------------------------------------------------------------------------------------------------------------
NIV/NIQ 75(1) 75(1) 75 500K
400K (less than or equal to) 90%
3-4 FAMILY FULL/ALT
RURAL 90 75 75 500K (less than or equal to) 80% 500K
NIV/NIQ 70 70 70 500K 500K
- - ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------------
CASH-OUT LIMITS
- - ----------------------------------------------------------------------------------------------------------------------------------
INV. PRIMARY 2ND INV.
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
500K 200K(2) 200K 200K
(less than or equal to) 80% (less than or equal to) 80% (less than or equal to) 80% (less than or equal to) 70%
650K 500K 500K
SF (less than or equal to) 70% 75% (less than or equal to) 75%
2 FAMILY (less than)
CONDO ---------------------------------------------------------------------------------------------------------------------
PUD 500K 250K 250K 200K
(less than or equal to) 70%
250K (less than or equal to) 200K
3-4 FAMILY 500K 75% 250K (less than or equal to) 70%
RURAL 500K 250K 250K 200K
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
o Maximum debt ratio is 50%
o MORTGAGE CREDIT- No more than 0x30 in the last 12 months on any property
o MAJOR CONSUMER CREDIT- No more than 1x30 in last 12 months; 2x30 in last
24 months
o MINOR CONSUMER CREDIT- No more than 2x30 in last 12 months; 3x30 in last
24 months
o No charge-offs, repossessions, credit-related judgements, or liens in
last 24 months EXCEPT for isolated minor occurrences (medical collections
less than $500) with compensating factors--ALL CREDIT MUST BE CURRENT AT
TIME OF APPLICATION; overall credit must be excellent
o Collection accounts and charge-offs need not be paid off. Liens and
judgements do need to be paid off.
o Bankruptcy/Foreclosure over 36 months old with compensating factors and
excellent re-established credit (several major trades open with no
delinquencies; no mortgage lates.)
NOTES: 1. Maximum LTV may be increased 5% with approval of Flagstar Bank
"Management Committee"
2. Debt consolidation cash-out refinance may go up to 90% LTV
The dollar amounts listed in the CASH-OUT LIMITS section refer only to cash
back to borrower.
B-2
<PAGE>
-------------------------------------------------------------------------------
Flagstar Bank, FSB
-------------------------------------------------------------------------------
SECTION V. PRODUCT DESCRIPTIONS
-------------------------------------------------------------------------------
PORTFOLIO PORTFOLIO II DOCUMENT# 5502
B Credits
REV. DATE 12/10/97
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------------
LTV MAXIMUM LOAN AMOUNT CASH-OUT LIMITS
------------------------------ ------------------------------ ----------------------------------
PROPERTY DOC. PRIMARY 2ND INV. PRIMARY 2ND INV PRIMARY 2ND INV
TYPES LEVEL
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SF FULL/ALT 80(1) 70 70 500K 500K 500K 150K 150K 150K
2 FAMILY ----------------------------------------------------------------------------------------------------------------
CONDO
PUD
NIV/NIQ 75 70 70 500K 500K 500K 150K 150K 150K
3-4 FAMILY FULL/ALT 70 70 70 500K 500K 500K 150K 150K 150K
RURAL
NIV/NIQ 70 70 70 500K 500K 500K 150K 150K 150K
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
o Maximum debt ratio is 50%
o MORTGAGE CREDIT- No more than 3x30 or 1x60 in last 12 months on subject
property
o MAJOR CONSUMER CREDIT- No more than 60 days delinquent on any account in
last 12 months; overall credit is average
0 MINOR CONSUMER CREDIT- No more than 60 days delinquent on any account in
last 12 months EXCEPT for isolated occurrences up to 90 days delinquent
with compensating factors.
o Collection accounts and charge-offs need not be paid off. Liens and
judgements do need to be paid off.
o Bankruptcy/Foreclosure over 24 months old with compensating factors and
good re-established credit (some major trades open with only minor
delinquencies; no mortgage lates).
o Mortgages, and most major and minor consumer credit, must be current at
time of application; remainder of major and minor consumer credit no more
than 30 days delinquent at application and must be brought current or
paid off at closing.
NOTES: 1. Maximum LTV may be increased 5% with approval of Flagstar Bank
"Management Committee"
The dollar amounts listed in the CASH-OUT LIMITS section refer only
to cash back to borrower.
B-3
<PAGE>
-------------------------------------------------------------------------------
Flagstar Bank, FSB
-------------------------------------------------------------------------------
SECTION V. PRODUCT DESCRIPTIONS
-------------------------------------------------------------------------------
PORTFOLIO PORTFOLIO III DOCUMENT# 5503
C Credits
REV. DATE 12/10/97
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------------
LTV MAXIMUM LOAN AMOUNT CASH-OUT LIMITS
------------------------------ ------------------------------ ----------------------------------
PROPERTY DOC. PRIMARY 2ND INV. PRIMARY 2ND INV PRIMARY 2ND INV
TYPES LEVEL
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SF FULL/ALT 75 65 60 400K 400K 400K 100K 100K 100K
2 FAMILY -------------------------------------------------------------------------------------------------------------
CONDO
PUD
NIV/NIQ 70 60 60 400K 400K 400K 100K 100K 100K
3-4 FAMILY FULL/ALT 60 60 60 400K 400K 400K 100K 100K 100K
RURAL
NIV/NIQ 60 60 60 400K 400K 400K 100K 100K 100K
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
o Maximum debt ratio is 50%
o MORTGAGE CREDIT - No more than 5x30 or 2x60 in last 12 months on subject
property
o MAJOR CONSUMER CREDIT - No more than 90 days delinquent on any account in
last 12 months; overall credit is fair
o MINOR CONSUMER CREDIT - No more than 90 days delinquent on any account in
last 12 months EXCEPT for isolated minor occurrences over 90 days
delinquent with compensating factors.
o Collection accounts and charge-offs need not be paid off. Liens and
judgements do need to be paid off.
o Bankruptcy/Foreclosure over 12 months old with only some or no
re-established credit
o Mortgage cannot be deliquent at time of application
The dollar amounts listed in the CASH-OUT LIMITS section refer only
to cash back to borrower.
B-4
<PAGE>
-------------------------------------------------------------------------------
Flagstar Bank, FSB
-------------------------------------------------------------------------------
SECTION V. PRODUCT DESCRIPTIONS
-------------------------------------------------------------------------------
PORTFOLIO PORTFOLIO IV DOCUMENT# 5504
D Credits
REV. DATE 12/10/97
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------------
LTV MAXIMUM LOAN AMOUNT CASH-OUT LIMITS
------------------------------ ----------------------------- -----------------------------------
PROPERTY DOC. PRIMARY 2ND INV. PRIMARY 2ND INV PRIMARY 2ND INV
TYPES LEVEL
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SF FULL/ALT 65(1) 60 60 400K 250K 250K 50K N/A N/A
2 FAMILY
CONDO
PUD ---------------------------------------------------------------------------------------------------------------
NIV/NIQ 60(1) 60 60 400K 250K 250K N/A N/A N/A
3-4 FAMILY FULL/ALT 60 60 60 400K 250K 250K N/A N/A N/A
RURAL
NIV/NIQ 60 60 60 400K 250K 250K N/A N/A N/A
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
o Maximum debt ratio is 50%
o MORTGAGE CREDIT- No more than 2 months contractually delinquent (up to 89
days) at closing
o MAJOR CONSUMER CREDIT - Applicant is sporadic in some or all areas with a
disregard for timely payments or credit standing
o MINOR CONSUMER CREDIT - Applicant is sporadic in some or all areas with a
disregard for timely payments or credit standing
o Collection accounts and charge-offs need not be paid off. Liens and
judgements do need to be paid off.
o Any Bankruptcy within the last 12 months must be discharged prior to
application and Foreclosure within the last 12 months must be completed
prior to application
o All debts must be consolidated before any cash back to the borrower is
allowed.
o Borrower must show some ability of making timely payments
NOTES: 1. Maximum LTV may be increased 5% with approval of Flagstar
Bank "Management Committee"
The dollar amounts listed in the CASH-OUT LIMITS section refer only
to cash back to borrower.
B-5
<PAGE>
PROSPECTUS
ASSET BACKED SECURITIES
(ISSUABLE IN SERIES)
FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
This Prospectus relates to the issuance of Asset Backed Certificates
(the "Certificates") and the Asset Backed Notes (the "Notes" and, together with
the Certificates, the "Securities"), which may be sold from time to time in one
or more series (each, a "Series") by Financial Asset Securities Corp. (the
"Depositor") on terms determined at the time of sale and described in this
Prospectus and the related Prospectus Supplement. The Securities of a Series
will evidence beneficial ownership of a trust fund (a "Trust Fund"). As
specified in the related Prospectus Supplement, the Trust Fund for a Series of
Securities will include certain assets (the "Trust Fund Assets") which will
primarily consist of (i) closed-end and/or revolving home equity loans (the
"Home Equity Loans") secured 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.
2
<PAGE>
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".
3
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement with respect to the Series offered thereby and to the related
Agreement (as such term is defined below) which will be prepared in connection
with each Series of Securities. Unless otherwise specified, capitalized terms
used and not defined in this Summary of Terms have the meanings given to them in
this Prospectus and in the related Prospectus Supplement.
Title of Securities................. Asset Backed Certificates (the
"Certificates") and Asset Backed Notes
(the "Notes" and, together with the
Certificates, the "Securities"), which
are issuable in Series.
Depositor........................... Financial Asset Securities Corp., a
Delaware 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
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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-
BackedSecurities.............. 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
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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
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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,
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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
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<PAGE>
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
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<PAGE>
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
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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
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<PAGE>
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
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<PAGE>
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 SecuritiesnGeneral"
and "ERISA Considerations".
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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.
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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 n
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.
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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.
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<PAGE>
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,
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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
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that originally anticipated or the likelihood of early optional termination of
the Series of Securities. Such rating shall not be deemed a recommendation to
purchase, hold or sell Securities, inasmuch as it does not address market price
or suitability for a particular investor. Such rating will not address the
possibility that prepayment at higher or lower rates than anticipated by an
investor may cause such investor to experience a lower than anticipated yield or
that an investor purchasing a Security at a significant premium might fail to
recoup its initial investment under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect
for any given period of time or that it may not be lowered or withdrawn entirely
by the Rating Agency in the future if in its judgment circumstances in the
future so warrant. In addition to being lowered or withdrawn due to any erosion
in the adequacy of the value of the Trust Fund Assets or any credit enhancement
with respect to a Series, such rating might also be lowered or withdrawn, among
other reasons, because of an adverse change in the financial or other condition
of a credit enhancement provider or a change in the rating of such credit
enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a class of Securities will be determined on the basis of
criteria established by each Rating Agency rating classes of such Series. Such
criteria are sometimes based upon an actuarial analysis of the behavior of
similar loans in a larger group. Such analysis is often the basis upon which
each Rating Agency determines the amount of credit enhancement required with
respect to each such class. There can be no assurance that the historical data
supporting any such actuarial analysis will accurately reflect future experience
nor any assurance that the data derived from a large pool of similar loans
accurately predicts the delinquency, foreclosure or loss experience of any
particular pool of Loans. No assurance can be given that the values of any
Properties have remained or will remain at their levels on the respective dates
of origination of the related Loans. If the residential real estate markets
should experience an overall decline in property values such that the
outstanding principal balances of the Loans in a particular Trust Fund and any
secondary financing on the related Properties become equal to or greater than
the value of the Properties, the rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry. In addition, adverse economic conditions (which may or may not affect
real property values) may affect the timely payment by mortgagors of scheduled
payments of principal and interest on the Loans and, accordingly, the rates of
delinquencies, foreclosures and losses with respect to any Trust Fund. To the
extent that such losses are not covered by credit enhancement, such losses will
be borne, at least in part, by the holders of one or more classes of the
Securities of the related Series. See "Rating".
BOOK-ENTRY REGISTRATION
If issued in book-entry form, such registration may reduce the
liquidity of the Securities in the secondary trading market since investors may
be unwilling to purchase Securities for which they cannot obtain physical
certificates. Since transactions in Securities can be effected only through the
Depository Trust Company ("DTC"), participating organizations ("Participants"),
Financial Intermediaries and certain banks, the ability of a Securityholder to
pledge a Security to persons or entities that do not participate in the DTC
system, or otherwise to take actions in respect of such Securities, may be
limited due to lack of a physical certificate representing the Securities.
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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
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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 ProgramnUnderwriting 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
- - ----------
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.
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to Loans serviced by the Master Servicer through a Sub-Servicer, the Master
Servicer will remain liable for its servicing obligations under the related
Agreement as if the Master Servicer alone were servicing such Loans.
As used herein, "Agreement" means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and with
respect to a Series of Notes, the Indenture and the Servicing Agreement, as the
context requires.
If so specified in the related Prospectus Supplement, a Trust Fund
relating to a Series of Securities may be a business trust formed under the laws
of the state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a "Trust Agreement") between the Depositor and the trustee of
such Trust Fund.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding of the related Trust Fund Assets and other assets
contemplated herein and in the related Prospectus Supplement and the proceeds
thereof, issuing Securities and making payments and distributions thereon and
certain related activities. No Trust Fund is expected to have any source of
capital other than its assets and any related credit enhancement.
Unless otherwise specified in the related Prospectus Supplement, the
only obligations of the Depositor with respect to a Series of Securities will be
to obtain certain representations and warranties from the Sellers and to assign
to the Trustee for such Series of Securities the Depositor's rights with respect
to such representations and warranties. See "The Agreements--Assignment of Trust
Fund Assets". The obligations of the Master Servicer with respect to the Loans
will consist principally of its contractual servicing obligations under the
related Agreement (including its obligation to enforce the obligations of the
Sub-Servicers or Sellers, or both, as more fully described herein under "Loan
Program--Representations by Sellers; Repurchases" and "The
Agreements--Sub-Servicing of Loans", "--Assignment of Trust Fund Assets") and
its obligation, if any, to make certain cash advances in the event of
delinquencies in payments on or with respect to the Loans in the amounts
described herein under "Description of the Securities--Advances". The
obligations of the Master Servicer to make advances may be subject to
limitations, to the extent provided herein and in the related Prospectus
Supplement.
The following is a brief description of the assets expected to be
included in the Trust Funds. If specific information respecting the Trust Fund
Assets is not known at the time the related Series of Securities initially is
offered, more general information of the nature described below will be provided
in the related Prospectus Supplement, and specific information will be set forth
in a report on Form 8-K to be filed with the Securities and Exchange Commission
within fifteen days after the initial issuance of such Securities (the "Detailed
Description"). A copy of the Agreement with respect to each Series of Securities
will be attached to the Form 8-K and will be available for inspection at the
corporate trust office of the Trustee specified in the related Prospectus
Supplement. A schedule of the Trust Fund Assets relating to such Series will be
attached to the Agreement delivered to the Trustee upon delivery of the
Securities.
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THE LOANS
General. For purposes hereof, "Home Equity Loans" includes "Closed-End
Loans" and "Revolving Credit Line Loans". The real property which secures
repayment of the Loans is referred to as "Properties". Unless otherwise
specified in the related Prospectus Supplement, the Loans will be secured by
mortgages or deeds of trust or other similar security instruments creating a
lien on a Property, which may be subordinated to one or more senior liens on the
related Properties, each as described in the related Prospectus Supplement. As
more fully described in the related Prospectus Supplement, the Loans may be
"conventional" loans or loans that are insured or guaranteed by a governmental
agency such as the FHA or VA. The 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
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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
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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.
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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
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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
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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,
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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.
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REPRESENTATIONS BY SELLERS; REPURCHASES OR SUBSTITUTIONS
Each Seller will have made representations and warranties in respect of
the Loans sold by such Seller and evidenced by all, or a part, of a Series of
Securities. Except as otherwise specified in the related Prospectus Supplement,
such representations and warranties include, among other things: (i) that title
insurance (or in the case of Properties located in areas where such policies are
generally not available, an attorney's certificate of title) and any required
hazard insurance policy (or certificate of title as applicable) remained in
effect on the date of purchase of the Loan from the Seller by or on behalf of
the Depositor; (ii) that the Seller had good title to each such Loan and such
Loan was subject to no offsets, defenses, counterclaims or rights of rescission
except to the extent that any buydown agreement described herein may forgive
certain indebtedness of a borrower; (iii) that each Loan constituted a valid
lien on the Property (subject only to permissible liens disclosed, if
applicable, title insurance exceptions, if applicable, and certain other
exceptions described in the Agreement) and that the Property was free from
damage and was in acceptable condition; (iv) that there were no delinquent tax
or assessment liens against the Property; (v) that no required payment on a Loan
was more than thirty days' delinquent; and (vi) that each Loan was made in
compliance with, and is enforceable under, all applicable local, state and
federal laws and regulations in all material respects.
If so specified in the related Prospectus Supplement, the
representations and warranties of a Seller in respect of a Loan will be made not
as of the Cut-off Date but as of the date on which such Seller sold the Loan to
the Depositor or one of its affiliates. Under such circumstances, a substantial
period of time may have elapsed between such date and the date of initial
issuance of the Series of Securities evidencing an interest in such Loan. Since
the representations and warranties of a Seller do not address events that may
occur following the sale of a Loan by such Seller, its repurchase obligation
described below will not arise if the relevant event that would otherwise have
given rise to such an obligation with respect to a Loan occurs after the date of
sale of such Loan by such Seller to the Depositor or its affiliates. However,
the Depositor will not include any Loan in the Trust Fund for any Series of
Securities if anything has come to the Depositor's attention that would cause it
to believe that the representationes and warranties of a Seller will not be
accurate and complete in all material respects in respect of such Loan as of the
date of initial issuance of the related Series of Securities. If the Master
Servicer is also a Seller of Loans with respect to a particular Series, such
representations will be in addition to the representations and warranties made
by the Master Servicer in its capacity as a Master Servicer.
The Master Servicer or the Trustee, if the Master Servicer is the
Seller, will promptly notify the relevant Seller of any breach of any
representation or warranty made by it in respect of a Loan which materially and
adversely affects the interests of the Securityholders in such Loan. Unless
otherwise specified in the related Prospectus Supplement, if such Seller cannot
cure such breach within 90 days following notice from the Master Servicer or the
Trustee, as the case may be, then such Seller will be obligated either (i) to
repurchase such Loan from the Trust Fund at a price (the "Purchase Price") equal
to 100% of the unpaid principal balance thereof as of the date of the repurchase
plus accrued interest thereon to the first day of the month following the month
of repurchase at the Loan Rate (less any Advances or amount payable as related
servicing compensation if the Seller is the Master Servicer) or (ii) to
substitute for such Loan a replacement loan that satisfies certain requirements
set forth in the Agreement. If a REMIC election is to be made with respect to a
Trust Fund, unless otherwise specified in the related Prospectus Supplement, the
Master Servicer or a holder of the related residual certificate
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generally will be obligated to pay any prohibited transaction tax which may
arise in connection with any such repurchase or substitution and the Trustee
must have received a satisfactory opinion of counsel that such repurchase or
substitution will not cause the Trust Fund to lose its status as a REMIC or
otherwise subject the Trust Fund to a prohibited transaction tax. The Master
Servicer may be entitled to reimbursement for any such payment from the assets
of the related Trust Fund or from any holder of the related residual
certificate. See "Description of the Securities--General". Except in those cases
in which the Master Servicer is the Seller, the Master Servicer will be required
under the applicable Agreement to enforce this obligation for the benefit of the
Trustee and the holders of the Securities, following the practices it would
employ in its good faith business judgment were it the owner of such Loan. This
repurchase or substitution obligation will constitute the sole remedy available
to holders of Securities or the Trustee for a breach of representation by a
Seller.
Neither the Depositor nor the Master Servicer (unless the Master
Servicer is the Seller) will be obligated to purchase or substitute a Loan if a
Seller defaults on its obligation to do so, and no assurance can be given that
Sellers will carry out their respective repurchase or substitution obligations
with respect to Loans. However, to the extent that a breach of a representation
and warranty of a Seller may also constitute a breach of a representation made
by the Master Servicer, the Master Servicer may have a repurchase or
substitution obligation as described below under "The Agreements--Assignment of
Trust Fund Assets".
DESCRIPTION OF THE SECURITIES
Each Series of Certificates will be issued pursuant to separate
agreements (each, a "Pooling and Servicing Agreement" or a "Trust Agreement")
among the Depositor, the Servicer, if the Series relates to Loans, and the
Trustee. A form of Pooling and Servicing Agreement and Trust Agreement has been
filed as an exhibit to the Registration Statement of which this Prospectus forms
a part. Each Series of Notes will be issued pursuant to an indenture (the
"Indenture") between the related Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the "Trustee") with respect to such Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. A Series may consist of both Notes and
Certificates. Each Agreement, dated as of the related Cut-off Date, will be
among the Depositor, the Master Servicer and the Trustee for the benefit of the
holders of the Securities of such Series. The provisions of each Agreement will
vary depending upon the nature of the Securities to be issued thereunder and the
nature of the related Trust Fund. The following summaries describe certain
provisions which may appear in each Agreement. The Prospectus Supplement for a
Series of Securities will describe any provision of the Agreement relating to
such Series that mainly differs from the description thereof contained in this
Prospectus. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
Agreement for each Series of Securities and the applicable Prospectus
Supplement. The Depositor will provide a copy of the Agreement (without
exhibits) relating to any Series without charge upon written request of a holder
of record of a Security of such Series addressed to Financial Asset Securities
Corp., 600 Steamboat Road, Greenwich, Connecticut 06830, Attention: Asset Backed
Finance Group.
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GENERAL
Unless otherwise specified in the related Prospectus Supplement, the
Certificates of each Series will be issued in book-entry or fully registered
form, in the authorized denominations specified in the related Prospectus
Supplement, will evidence specified beneficial ownership interests in the
related Trust Fund created pursuant to each Agreement and will not be entitled
to payments in respect of the assets included in any other Trust Fund
established by the Depositor. Unless otherwise specified in the related
Prospectus Supplement, the Notes of each Series will be issued in book-entry or
fully registered form, in the authorized denominations specified in the related
Prospectus Supplement, will be secured by the pledge of the assets of the
related Trust Fund and will not be entitled to payments in respect of the assets
included in any other Trust Fund established by the Depositor. The Securities
will not represent obligations of the Depositor or any affiliate of the
Depositor. Certain of the Loans may be guaranteed or insured as set forth in the
related Prospectus Supplement. Each Trust Fund will consist of, to the extent
provided in the Agreement, (i) the Trust Fund Assets, as from time to time are
subject to the related Agreement (exclusive of any amounts specified in the
related Prospectus Supplement ("Retained Interest")), including all payments of
interest and principal received with respect to the Loans after the Cut-off Date
(to the extent not applied in computing the Cut-off Date Principal Balance);
(ii) such assets as from time to time are required to be deposited in the
related Security Account, as described below under "The Agreements--Payments on
Loans; Deposits to Security Account"; (iii) property which secured a Loan and
which is acquired on behalf of the Securityholders by foreclosure or deed in
lieu of foreclosure and (iv) any insurance policies or other forms of credit
enhancement required to be maintained pursuant to the related Agreement. If so
specified in the related Prospectus Supplement, a Trust Fund may also include
one or more of the following: reinvestment income on payments received on the
Trust Fund Assets, a Reserve Account, a mortgage pool insurance policy, a
Special Hazard Insurance Policy, a Bankruptcy Bond, one or more letters of
credit, a surety bond, guaranties or similar instruments or other agreements.
Each Series of Securities will be issued in one or more classes. Each
class of Securities of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Trust Fund Assets in the related Trust Fund. A Series of
Securities may include one or more classes that are senior in right to payment
to one or more other classes of Securities of such Series. One or more classes
of Securities of a Series may be entitled to receive distributions of principal,
interest or any combination thereof. Distributions on one or more classes of a
Series of Securities may be made prior to one or more other classes, after the
occurrence of specified events, in accordance with a schedule or formula, on the
basis of collections from designated portions of the Trust Fund Assets in the
related Trust Fund or on a different basis, in each case as specified in the
related Prospectus Supplement. The timing and amounts of such distributions may
vary among classes or over time as specified in the related Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal only
or interest only) on the related Securities will be made by the Trustee on each
Distribution Date (i.e., monthly or at such other intervals and on the dates as
are specified in the Prospectus Supplement) in proportion to the percentages
specified in the related Prospectus Supplement. Distributions will be made to
the
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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.
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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;
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(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
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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
EnhancementnSubordination".
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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
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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:
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(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
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(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).
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Security Owners will receive all distributions of principal of, and
interest on, the Securities from the Trustee through DTC and Participants. While
the Securities are outstanding (except under the circumstances described below),
under the rules, regulations and procedures creating and affecting DTC and its
operations (the "Rules"), DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit distributions of principal of, and interest on,
the Securities. Participants and indirect participants with whom Security Owners
have accounts with respect to Securities are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Security Owners. Accordingly, although Security Owners will not
possess certificates, the Rules provide a mechanism by which Security Owners
will receive distributions and will be able to transfer their interest.
Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive Securities
are issued, Security Owners who are not Participants may transfer ownership of
Securities only through Participants and indirect participants by instructing
such Participants and indirect participants to transfer Securities, by
book-entry transfer, through DTC for the account of the purchasers of such
Securities, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Securities will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
Participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Security
Owners.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL Participant
(as defined herein) or Euroclear Participant (as defined herein) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement in DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for
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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
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Terms and Conditions only on behalf of Euroclear Participants, and has no record
of or relationship with persons holding through Euroclear Participants.
Under a book-entry format, beneficial owners of the Book-Entry
Securities may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect to
Securities held through CEDEL or Euroclear will be credited to the cash accounts
of CEDEL Participants or Euroclear Participants in accordance with the relevant
system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. See "Certain Material
Federal Income Tax Considerations--Tax Treatment of Foreign Investors" and
"--Tax Consequences to Holders of Notes--Backup Withholding" herein. Because DTC
can only act on behalf of Financial Intermediaries, the ability of a beneficial
owner to pledge Book-Entry Securities to persons or entities that do not
participate in the Depository system, or otherwise take actions in respect of
such Book-Entry Securities, may be limited due to the lack of physical
certificates for such Book-Entry Securities. In addition, issuance of the
Book-Entry Securities in book-entry form may reduce the liquidity of such
Securities in the secondary market since certain potential investors may be
unwilling to purchase Securities for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust will be provided to CEDE, as
nominee of DTC, and may be made available by CEDE to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Securities of such beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Securities are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Securities under the applicable Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Securities are credited, to the extent that such actions are taken on
behalf of Financial Intermediaries whose holdings include such Book-Entry
Securities. CEDEL or the Euroclear Operator, as the case may be, will take any
other action permitted to be taken by a Securityholder under the Agreement on
behalf of a CEDEL Participant or Euroclear Participant only in accordance with
its relevant rules and procedures and subject to the ability of the Relevant
Depositary to effect such actions on its behalf through DTC. DTC may take
actions, at the direction of the related Participants, with respect to some
Securities which conflict with actions taken with respect to other Securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee will recognize the holders of such Definitive Securities as
Securityholders under the applicable Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants of
DTC, CEDEL and Euroclear, they are
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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
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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 AgreementsnHazard 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.
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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 LoansnAnti-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.
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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
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option either (a) to purchase the property securing the defaulted Loan at a
price equal to the principal balance thereof plus accrued and unpaid interest at
the Loan Rate to the date of purchase and certain expenses incurred by the
Master Servicer on behalf of the Trustee and Securityholders, or (b) to pay the
amount by which the sum of the principal balance of the defaulted Loan plus
accrued and unpaid interest at the Loan Rate to the date of payment of the claim
and the aforementioned expenses exceeds the proceeds received from an approved
sale of the Property, in either case net of certain amounts paid or assumed to
have been paid under the related Primary Mortgage Insurance Policy. If any
Property securing a defaulted Loan is damaged and proceeds, if any, from the
related hazard insurance policy or the applicable Special Hazard Insurance
Policy are insufficient to restore the damaged Property to a condition
sufficient to permit recovery under the Pool Insurance Policy, the Master
Servicer will not be required to expend its own funds to restore the damaged
Property unless it determines that (i) such restoration will increase the
proceeds to securityholders on liquidation of the Loan after reimbursement of
the Master Servicer for its expenses and (ii) such expenses will be recoverable
by it through proceeds of the sale of the Property or proceeds of the related
Pool Insurance Policy or any related Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will not insure (and many Primary Mortgage Insurance
Policies do not insure) against loss sustained by reason of a default arising
from, among other things, (i) fraud or negligence in the origination or
servicing of a Loan, including misrepresentation by the borrower, the originator
or persons involved in the origination thereof, or (ii) failure to construct a
Property in accordance with plans and specifications. A failure of coverage
attributable to one of the foregoing events might result in a breach of the
related Seller's representations described above, and, in such events might give
rise to an obligation on the part of such Seller to purchase the defaulted Loan
if the breach cannot be cured by such Seller. No Pool Insurance Policy will
cover (and many Primary Mortgage Insurance Policies do not cover) a claim in
respect of a defaulted Loan occurring when the servicer of such Loan, at the
time of default or thereafter, was not approved by the applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Pool Insurance Policy will be reduced
over the life of the related Securities by the aggregate dollar amount of claims
paid less the aggregate of the net amounts realized by the Pool Insurer upon
disposition of all foreclosed properties. The amount of claims paid may include
certain expenses incurred by the Master Servicer as well as accrued interest on
delinquent Loans to the date of payment of the claim. Accordingly, if aggregate
net claims paid under any Pool Insurance Policy reach the original policy limit,
coverage under that Pool Insurance Policy will be exhausted and any further
losses will be borne by the Securityholders.
FHA INSURANCE; VA GUARANTEES
Loans designated in the related Prospectus Supplement as insured by the
FHA will be insured by the FHA as authorized under the United States Housing Act
of 1934, as amended. In addition to the Title I Program of the FHA, see "Certain
Legal Considerations -- Title I Program", certain Loans will be insured under
various FHA programs including the standard FHA 203(b) program to finance the
acquisition of one- to four-family housing units and the FHA 245 graduated
payment mortgage program. These programs generally limit the principal amount
and interest rates of the mortgage loans insured.
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The insurance premiums for Loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development ("HUD") or
by the Master Servicer or any Sub-Servicer and are paid to the FHA. The
regulations governing FHA single-family mortgage insurance programs provide that
insurance benefits are payable either upon foreclosure (or other acquisition of
possession) and conveyance of the mortgaged premises to the United States of
America or upon assignment of the defaulted Loan to the United States of
America. With respect to a defaulted FHA-insured Loan, the Master Servicer or
any Sub-Servicer is limited in its ability to initiate foreclosure proceedings.
When it is determined, either by the Master Servicer or any Sub-Servicer or HUD,
that default was caused by circumstances beyond the mortgagor's control, the
Master Servicer or any Sub-Servicer is expected to make an effort to avoid
foreclosure by entering, if feasible, into one of a number of available forms of
forbearance plans with the mortgagor. Such plans may involve the reduction or
suspension of regular mortgage payments for a specified period, with such
payments to be made upon or before the maturity date of the mortgage, or the
recasting of payments due under the mortgage up to or, other than Loans
originated under the Title I Program of the FHA, beyond the maturity date. In
addition, when a default caused by such circumstances is accompanied by certain
other criteria, HUD may provide relief by making payments to the Master Servicer
or any Sub-Servicer in partial or full satisfaction of amounts due under the
Loan (which payments are to be repaid by the mortgagor to HUD) or by accepting
assignment of the loan from the Master Servicer or any Sub-Servicer. With
certain exceptions, at least three full monthly installments must be due and
unpaid under the Loan, and HUD must have rejected any request for relief from
the mortgagor before the Master Servicer or any Sub-Servicer may initiate
foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. The Master Servicer or any Sub-Servicer of each
FHA-insured Single Family Loan will be obligated to purchase any such debenture
issued in satisfaction of such Loan upon default for an amount equal to the
principal amount of any such debenture.
Other than in relation to the Title I Program of the FHA, the amount of
insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted Loan adjusted to reimburse the Master Servicer
or Sub-Servicer for certain costs and expenses and to deduct certain amounts
received or retained by the Master Servicer or Sub-Servicer after default. When
entitlement to insurance benefits results from foreclosure (or other acquisition
of possession) and conveyance to HUD, the Master Servicer or Sub-Servicer is
compensated for no more than two-thirds of its foreclosure costs, and is
compensated for interest accrued and unpaid prior to such date but in general
only to the extent it was allowed pursuant to a forbearance plan approved by
HUD. When entitlement to insurance benefits results from assignment of the Loan
to HUD, the insurance payment includes full compensation for interest accrued
and unpaid to the assignment date. The insurance payment itself, upon
foreclosure of an FHA-insured Loan, bears interest from a date 30 days after the
borrower's first uncorrected failure to perform any obligation to make any
payment due under the mortgage and, upon assignment, from the date of assignment
to the date of payment of the claim, in each case at the same interest rate as
the applicable HUD debenture interest rate as described above.
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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
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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
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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 AgreementsnCollection 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 SecuritiesnCompensating
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
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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
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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
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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 ProgramnRepresentations 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.
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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
FundnPrivate 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 "nSub-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 "nSub-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
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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
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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
ProgramnRepresentations by Sellers; Repurchases" or
"nAssignment of Trust Fund Assets" above and all proceeds of
any Loan repurchased as described under "nTermination;
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 "nHazard 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
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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 "nPayments 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 "nServicing 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
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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 LoansnDue-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
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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 EnhancementnSpecial
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
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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.
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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
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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.
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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
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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
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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
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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
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inconsistent with the provisions thereof, provided that such action will not
adversely affect in any material respect the interests of any Securityholder.
In addition, to the extent provided in the related Agreement, an Agreement may
be amended without the consent of any of the Securityholders, to change the
manner in which the Security Account is maintained, provided that any such
change does not adversely affect the then current rating on the class or
classes of Securities of such Series that have been rated. In addition, if a
REMIC election is made with respect to a Trust Fund, the related Agreement may
be amended to modify, eliminate or add to any of its provisions to such extent
as may be necessary to maintain the qualification of the related Trust Fund as
a REMIC, provided that the Trustee has received an opinion of counsel to the
effect that such action is necessary or helpful to maintain such
qualification. Except as otherwise specified in the related Prospectus
Supplement, each Agreement may also be amended by the Depositor, the Master
Servicer and the Trustee with consent of holders of Securities of such Series
evidencing not less than 66% of the aggregate Percentage Interests of each
class affected thereby for the purpose of adding any provisions to or changing
in an manner or eliminating any of the provisions of the Agreement or of
modifying in any manner the rights of the holders of the related Securities;
provided, however, that no such amendment may (i) reduce in any manner the
amount of or delay the timing of, payments received on Loans which are
required to be distributed on any Security without the consent of the holder
of such Security, or (ii) reduce the aforesaid percentage of Securities of any
class of holders which are required to consent to any such amendment without
the consent of the holders of all Securities of such class covered by such
Agreement then outstanding. If a REMIC election is made with respect to a
Trust Fund, the Trustee will not be entitled to consent to an amendment to the
related Agreement without having first received an opinion of counsel to the
effect that such amendment will not cause such Trust Fund to fail to qualify
as a REMIC.
TERMINATIONS; OPTIONAL TERMINATION
Pooling and Servicing Agreement; Trust Agreement. Unless otherwise
specified in the related Agreement, the obligations created by each Pooling and
Servicing Agreement and Trust Agreement for each Series of Securities will
terminate upon the payment to the related Securityholders of all amounts held in
the Security Account or by the Master Servicer and required to be paid to them
pursuant to such Agreement following the later of (i) the final payment of or
other liquidation of the last of the Trust Fund Assets subject thereto or the
disposition of all property acquired upon foreclosure of any such Trust Fund
Assets remaining in the Trust Fund and (ii) the purchase by the Master Servicer
or, if REMIC treatment has been elected and if specified in the related
Prospectus Supplement, by the holder of the residual interest in the REMIC (see
"Certain Material Federal Income Tax Considerations" below), from the related
Trust Fund of all of the remaining Trust Fund Assets and all property acquired
in respect of such Trust Fund Assets.
Unless otherwise specified by the related Prospectus Supplement, any
such purchase of Trust Fund Assets and property acquired in respect of Trust
Fund Assets evidenced by a Series of Securities will be made at the option of
the Master Servicer or, if applicable, such holder of the REMIC residual
interest, at a price, and in accordance with the procedures, specified in the
related Prospectus Supplement. The exercise of such right will effect early
retirement of the Securities of that Series, but the right of the Master
Servicer or, if applicable, such holder of the REMIC residual interest, to so
purchase is subject to the principal balance of the related Trust Fund Assets
being less than the percentage specified in the related Prospectus Supplement of
the
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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.
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Priority between mortgages depends on their terms and generally on the order
of recording with a state or county office. There are two parties to a
mortgage, the mortgagor, who is the borrower and owner of the mortgaged
property, and the mortgagee, who is the lender. Under the mortgage instrument,
the mortgagor delivers to the mortgagee a note or bond and the mortgage.
Although a deed of trust is similar to a mortgage, a deed of trust formally
has three parties, the borrower-property owner called the trustor (similar to
a mortgagor), a lender (similar to a mortgagee) called the beneficiary, and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the obligation. A
security deed and a deed to secure debt are special types of deeds which
indicate on their face that they are granted to secure an underlying debt. By
executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until such time as the underlying debt is repaid. The trustee's
authority under a deed of trust, the mortgagee's authority under a mortgage
and the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of
the beneficiary.
FORECLOSURE/REPOSSESSION
Foreclosure of a deed of trust is generally accomplished by a
non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In addition to any
notice requirements contained in a deed of trust, in some states, the trustee
must record a notice of default and send a copy to the borrower-trustor, to any
person who has recorded a request for a copy of any notice of default and notice
of sale, to any successor in interest to the borrower-trustor, to the
beneficiary of any junior deed of trust and to certain other persons. In
general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a statutorily prescribed reinstatement period, cure a
monetary default by paying the entire amount in arrears plus other designated
costs and expenses incurred in enforcing the obligation. Generally, state law
controls the amount of foreclosure expenses and costs, including attorney's
fees, which may be recovered by a lender. After the reinstatement period has
expired without the default having been cured, the borrower or junior lienholder
no longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale. If the deed of trust is not reinstated,
a notice of sale must be posted in a public place and, in most states, published
for a specific period of time in one or more newspapers. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the foreclosure
may occasionally result from difficulties in locating necessary parties.
Judicial foreclosure proceedings are often not contested by any of the parties.
When the mortgagee's right to foreclosure is contested, the legal proceedings
necessary to resolve the issue can be time consuming. After the completion of a
judicial foreclosure proceeding, the court generally issues a judgment of
foreclosure and appoints a referee or other court officer to conduct the sale of
the property. In some states, mortgages may also be foreclosed by advertisement,
pursuant to a power of sale provided in the mortgage.
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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
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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
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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.
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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.
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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
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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
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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.
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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
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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
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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.
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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
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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.
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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.
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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.
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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.
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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.
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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.
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Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest is
unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
interest is based on a "qualified floating rate," an "objective rate," or a
combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such Debt Security. In
the case of Compound Interest Securities, certain Interest Weighted Securities,
and certain of the other Debt Securities, none of the payments under the
instrument will be considered qualified stated interest, and thus the aggregate
amount of all payments will be included in the stated redemption price.
The Internal Revenue Services (the "IRS") issued regulations (the
"Contingent Regulations") governing the calculation of OID on instruments having
contingent interest payments. The Contingent Regulations represent the only
guidance regarding the views of the IRS with respect to contingent interest
instruments and specifically do not apply for purposes of calculating OID on
debt instruments subject to Code Section 1272(a)(6), such as the Debt Security.
Additionally, the OID Regulations do not contain provisions specifically
interpreting Code Section 1272(a)(6). Until the Treasury issues guidance to the
contrary, the Trustee intends to base its computation on Code Section 1272(a)(6)
and the OID Regulations as described in this Prospectus. However, because no
regulatory guidance currently exists under Code Section 1272(a)(6), there can be
no assurance that such methodology represents the correct manner of calculating
OID.
The holder of a Debt Security issued with OID must include in gross
income, for all days during its taxable year on which it holds such Debt
Security, the sum of the "daily portions" of such original issue discount. The
amount of OID includible in income by a holder will be computed by allocating to
each day during a taxable year a pro rata portion of the original issue discount
that accrued during the relevant accrual period. In the case of a Debt Security
that is not a Regular Interest Security and the principal payments on which are
not subject to acceleration resulting from prepayments on the Loans, the amount
of OID includible in income of a holder for an accrual period (generally the
period over which interest accrues on the debt instrument) will equal the
product of the yield to maturity of the Debt Security and the adjusted issue
price of the Debt Security, reduced by any payments of qualified stated
interest. The adjusted issue price is the sum of its issue price plus prior
accruals or OID, reduced by the total payments made with respect to such Debt
Security in all prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through
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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
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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
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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
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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,
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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,
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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
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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
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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
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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
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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
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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.
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Among other possibilities, the Internal Revenue Service could contend that (i)
in certain Series, each non-Interest Weighted Security is composed of an
unstripped undivided ownership interest in Loans and an installment obligation
consisting of stripped principal payments; (ii) the non-Interest Weighted
Securities are subject to the contingent payment provisions of the Proposed
Regulations; or (iii) each Interest Weighted Stripped Security is composed of
an unstripped undivided ownership interest in Loans and an installment
obligation consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped
Securities and the different federal income tax consequences that result from
each alternative, potential purchasers are urged to consult their own tax
advisers regarding the proper treatment of the Securities for federal income tax
purposes.
Character as Qualifying Loans. In the case of Stripped Securities,
there is no specific legal authority existing regarding whether the character of
the Securities, for federal income tax purposes, will be the same as the Loans.
The IRS could take the position that the Loans character is not carried over to
the Securities in such circumstances. Pass-Through Securities will be, and,
although the matter is not free from doubt, Stripped Securities should be
considered to represent "real estate assets" within the meaning of Section
856(c)(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
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applicable federal rate as of the beginning of such holder's holding period,
over the amount of ordinary income actually recognized by the holder with
respect to such Regular Interest Security.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. Subject to the discussion below with respect to
Trust Funds as to which a partnership election is made, a holder, other than a
holder of a REMIC Residual Security, may, under certain circumstances, be
subject to "backup withholding" at a rate of 31% with respect to distributions
or the proceeds of a sale of certificates to or through brokers that represent
interest or original issue discount on the Securities. This withholding
generally applies if the holder of a Security (i) fails to furnish the Trustee
with its taxpayer identification number ("TIN"); (ii) furnishes the Trustee an
incorrect TIN; (iii) fails to report properly interest, dividends or other
"reportable payments" as defined in the Code; or (iv) under certain
circumstances, fails to provide the Trustee or such holder's securities broker
with a certified statement, signed under penalty of perjury, that the TIN
provided is its correct number and that the holder is not subject to backup
withholding. Backup withholding will not apply, however, with respect to certain
payments made to holders, including payments to certain exempt recipients (such
as exempt organizations) and to certain Nonresidents (as defined below). Holders
should consult their tax advisers as to their qualification for exemption from
backup withholding and the procedure for obtaining the exemption.
The Trustee will report to the holders and to the Servicer for each
calendar year the amount of any "reportable payments" during such year and the
amount of tax withheld, if any, with respect to payments on the Securities.
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New Regulations will generally be effective for payments made after December 31,
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)
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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
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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
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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
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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
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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.
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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
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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.
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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
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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 (on one or more designated
pools of assets held by a Trust Fund) to be eligible for FASIT status,
substantially all of the assets of the Trust Fund (or the designated pool) must
consist of "permitted assets" as of the close of the third month beginning after
the closing date and at all times thereafter (the "FASIT Qualification Test").
Permitted assets include (i) cash or cash equivalents, (ii) debt instruments
with fixed terms that would qualify as REMIC regular interests if issued by a
REMIC (generally, instruments that provide for interest at a fixed rate, a
qualifying variable rate, or a qualifying interest-only ("IO") type rate, (iii)
foreclosure property, (iv) certain hedging instruments (generally, interest and
currency rate swaps and credit enhancement contracts) that are reasonably
required to guarantee or hedge against the FASIT's risks associated with being
the obligor on FASIT interests, (v) contract rights to acquire qualifying debt
instruments or qualifying hedging instruments, (vi) FASIT regular interests, and
(vii) REMIC regular interests. Permitted assets do not include any debt
instruments issued by the holder of the FASIT's ownership interest or by any
person related to such holder.
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Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements. All
of the interests in a FASIT must belong to either of the following: (i) one or
more classes of regular interests or (ii) a single class of ownership interest
that is held by a fully taxable domestic corporation. In the case of Series that
include FASIT Ownership Securities, the ownership interest will be represented
by the FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater than
thirty years, (iii) it entitles its holder to a specified principal amount, (iv)
the issue price of the interest does not exceed 125% of its stated principal
amount, (v) the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%, and (vi) if it pays interest, such
interest is payable at either (a) a fixed rate with respect to the principal
amount of the regular interest or (b) a permissible variable rate with respect
to such principal amount. Permissible variable rates for FASIT regular interests
are the same as those for REMIC regular interest (i.e., certain qualified
floating rates and weighted average rates). See "Certain Material Federal Income
Tax Considerations--Taxation of Debt Securities--Variable Rate Debt Securities."
If a FASIT Security fails to meet one or more of the requirements set
out in clauses (iii), (iv) or (v) above, but otherwise meets the above
requirements, it may still qualify as a type of regular interest known as a
"High-Yield Interest." In addition, if a FASIT Security fails to meet the
requirements of clause (vi), but the interest payable on the Security consists
of a specified portion of the interest payments on permitted assets and that
portion does not vary over the life of the Security, the Security also will
qualify as a High-Yield Interest. A High-Yield Interest may be held only by
domestic corporations that are fully subject to corporate income tax ("Eligible
Corporations"), other FASITs and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition, holders of
High-Yield Interests are subject to limitations on offset of income derived from
such interest. See "Certain Material Federal Income Tax Considerations--FASIT
Securities--Tax Treatment of FASIT Regular Securities--Treatment of High-Yield
Interests."
Consequences of Disqualification. If a Series of FASIT Securities fails
to comply with one or more of the Code's ongoing requirements for FASIT status
during any taxable year, the Code provides that its FASIT status may be lost for
that year and thereafter. If FASIT status is lost, the treatment of the former
FASIT and the interests therein for federal income tax purposes is uncertain.
The former FASIT might be treated as a grantor trust, as a separate association
taxed as a corporation, or as a partnership. The FASIT Regular Securities could
be treated as debt instruments for federal income tax purposes or as equity
interests. Although the Code authorizes the Treasury to issue regulations that
address situations where a failure to meet the requirements for FASIT status
occurs inadvertently and in good faith, such regulations have not yet been
issued. It is possible that disqualification relief might be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
FASIT's income for a period of time in which the requirements for FASIT status
are not satisfied.
Tax Treatment of FASIT Regular Securities. Payments received by holders
of FASIT Regular Securities generally should be accorded the same tax treatment
under the Code as payments received on other taxable corporate debt instruments
and on REMIC Regular Securities. As in the case of holders of REMIC Regular
Securities, holders of FASIT Regular
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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.
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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.
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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.
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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
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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.
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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%).
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(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
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(ii) have been rated (or the obligor has
been rated) in one or the three highest generic rating
categories by an Exemption Rating Agency ("Permitted
Investments").
(8) The related prospectus or prospectus supplement must
describe:
(i) any pre-funding account and/or
capitalized interest account used in connection with a
pre-funding account;
(ii) the duration of the Pre-Funding Period;
(iii) the percentage and/or dollar amount of
the Pre-Funding Limit for the trust; and
(iv) that the amounts remaining in the
pre-funding account at the end of the Pre-Funding Period will
be remitted to certificateholders as repayments of principal.
(9) The related pooling and servicing agreement must describe
the Permitted Investments for the pre-funding account and/or
capitalized interest account and, if not disclosed in the
related prospectus or prospectus supplement, the terms and
conditions for eligibility of Additional Obligations.
LEGAL INVESTMENT
The Prospectus Supplement for each series of Securities will specify
which, if any, of the classes of Securities offered thereby constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Classes of Securities that qualify as "mortgage related
securities" will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts, and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulations to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any such entities. Under SMMEA, if a state enacted
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any such entities with respect to "mortgage related securities",
securities will constitute legal investments for entities subject to such
legislation only to the extent provided therein. Approximately twenty-one states
adopted such legislation prior to the October 4, 1991 deadline. SMMEA provides,
however, that in no event will the enactment of any such legislation affect the
validity of any contractual commitment to purchase, hold or invest in
securities, or require the sale or other disposition of securities, so long as
such contractual commitment was made or such securities were acquired prior to
the enactment of such legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal in
Securities without limitations as to the percentage of their assets represented
thereby, federal credit unions may invest in mortgage related securities, and
national banks may purchase certificates for their own account without regard to
the limitations
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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
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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
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by the nationally recognized statistical rating agency or agencies (each, a
"Rating Agency") specified in the related Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of
the value of the Trust Fund Assets and any credit enhancement with respect to
such class and will reflect such Rating Agency's assessment solely of the
likelihood that holders of a class of Securities of such class will receive
payments to which such Securityholders are entitled under the related Agreement.
Such rating will not constitute an assessment of the likelihood that principal
prepayments on the related Loans will be made, the degree to which the rate of
such prepayments might differ from that originally anticipated or the likelihood
of early optional termination of the Series of Securities. Such rating should
not be deemed a recommendation to purchase, hold or sell Securities, inasmuch as
it does not address market price or suitability for a particular investor. Such
rating will not address the possibility that prepayment at higher or lower rates
than anticipated by an investor may cause such investor to experience a lower
than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios.
There is also no assurance that any such rating will remain in effect
for any given period of time or that it may not be lowered or withdrawn entirely
by the Rating Agency in the future if in its judgment circumstances in the
future so warrant. In addition to being lowered or withdrawn due to any erosion
in the adequacy of the value of the Trust Fund Assets or any credit enhancement
with respect to a Series, such rating might also be lowered or withdrawn among
other reasons, because of an adverse change in the financial or other condition
of a credit enhancement provider or a change in the rating of such credit
enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a Series of Securities will be determined on the basis of
criteria established by each Rating Agency rating classes of such Series. Such
criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. Such analysis is often the basis upon which
each Rating Agency determines the amount of credit enhancement required with
respect to each such class. There can be no assurance that the historical data
supporting any such actuarial analysis will accurately reflect future experience
nor any assurance that the data derived from a large pool of mortgage loans
accurately predicts the delinquency, foreclosure or loss experience of any
particular pool of Loans. No assurance can be given that values of any
Properties have remained or will remain at their levels on the respective dates
of origination of the related Loans. If the residential real estate markets
should experience an overall decline in property values such that the
outstanding principal balances of the Loans in a particular Trust Fund and any
secondary financing on the related Properties become equal to or greater than
the value of the Properties, the rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry. In additional, adverse economic conditions (which may or may not
affect real property values) may affect the timely payment by mortgagors of
scheduled payments of principal and interest on the Loans and, accordingly, the
rates of delinquencies, foreclosures and losses with respect to any Trust Fund.
To the extent that such losses are not covered by credit enhancement, such
losses will be borne, at least in part, by the holders of one or more classes of
the Securities of the related Series.
123
<PAGE>
[LOGO]
$173,979,000
OCWEN MORTGAGE LOAN ASSET BACKED NOTES, SERIES 1998-
OAC1
$87,073,000 Class A-1 Variable Rate Notes
$86,906,000 Class A-2 Variable Rate Notes
FINANCIAL ASSET SECURITIES CORP.
(DEPOSITOR)
-----------------------------
PROSPECTUS SUPPLEMENT
-----------------------------
[GREENWICH CAPITAL MARKETS, INC.]
IN LOGO
-----------------------------
You should rely on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not authorized anyone to provide you with different information.
We are not offering the Notes in any state where the offer is not
permitted.
Until the expiration of 90 days after the date of this prospectus
supplement, all dealers selling the Notes, whether or not participating in
this distribution, will deliver a prospectus supplement and the prospectus to
which it relates. This delivery requirement is in addition to the obligation
of dealers to deliver a prospectus supplement and prospectus when acting as
underwriters and with respect to their unsold allotment or subscriptions.
