PROSPECTUS SUPPLEMENT
(To Prospectus dated December 4, 1998)
(LOGO) C-BASS (SERVICE MARK)
CREDIT-BASED ASSET SERVICING
AND SECURITIZATION LLC
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-11 IN THIS PROSPECTUS
SUPPLEMENT AND IN PAGE 4 IN THE PROSPECTUS.
The certificates represent obligations of the trust only and do not represent an
interest in or obligation of Financial Asset Securities Corp., Credit-Based
Asset Servicing and Securitization LLC or any of their affiliates.
This prospectus supplement may be used to offer and sell the certificates only
if accompanied by the prospectus.
$120,121,722 (Approximate)
C-BASS TRUST 1998-3
ASSET-BACKED CERTIFICATES, SERIES 1998-3
$64,898,563 Class AF 6.50% Pass-Through Rate
$52,393,913 Class AV Variable Pass-Through Rate
$1,324,460 Class BF 6.50% Pass Through Rate
$1,504,786 Class BV Variable Pass-Through Rate
FINANCIAL ASSET SECURITIES CORP.
Depositor
----------------------
CREDIT-BASED ASSET SERVICING AND SECURITIZATION LLC
Seller
----------------------
LITTON LOAN SERVICING LP
Servicer
----------------------
Only the four classes of certificates identified above are being offered by this
prospectus supplement and the accompanying prospectus.
THE CERTIFICATES
o Represent ownership interests in a trust consisting primarily of a pool
of first lien residential mortgage loans. The mortgage loans will be
segregated into two groups, one for the fixed-rate mortgage loans and
one for the adjustable-rate mortgage loans.
o The Class AF and Class AV Certificates will be senior certificates.
o The Class BF and Class BV Certificates are subordinate to and provide
credit enhancement for the Class AF and Class AV Certificates.
o The Class AV and Class BV Certificates will accrue interest at a rate
equal to one-month LIBOR plus a fixed margin, subject to certain
limitations described in the prospectus supplement.
CREDIT ENHANCEMENT
o MBIA Insurance Corporation will issue a certificate guaranty insurance
policy guaranteeing payments on the Class AF and Class AV Certificates.
o Overcollateralization - Certain excess interest received from the
mortgage loans in the trust will be applied as payments of principal on
the offered certificates to establish and maintain a required level of
overcollateralization.
o Crosscollateralization - certain funds received on the mortgage loans
in one mortgage loan group may be available to pay the certificates
related to the other mortgage loan group.
o Approximately 17.64% of the mortgage loans by aggregate principal
balance will be covered by either insurance from the Federal Housing
Administration or a guaranty from the United States Department of
Veterans Affairs.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE
SECURITIES OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATIOn TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Class AF and Class AV Certificates are being offered by Greenwich Capital
Markets, Inc. from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. The Class BF and Class BV
Certificates will be transferred to the Seller as partial consideration for the
mortgage loans. Proceeds to the depositor with respect to the Class AF and Class
AV Certificates are expected to be approximately $116,706,350, before deducting
issuance expenses payable by the depositor, estimated to be $300,000. See
"Method of Distribution" in this prospectus supplement.
Delivery of the offered certificates will be made in book-entry form through the
facilities of The Depository Trust Company, Cedelbank and the Euroclear System
on or about December 15 1998.
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[GRAPHIC OMITTED]
December 14, 1998
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
Summary of Terms............................S-3
Risk Factors................................S-11
The Certificate Insurer.....................S-16
The Mortgage Pool...........................S-17
The Seller..................................S-42
The Servicer................................S-32
The Pooling and Servicing
Agreement.................................S-34
Description of the Certificates.............S-39
Yield, Prepayment and Maturity
Considerations............................S-52
Use of Proceeds.............................S-61
Certain Material Federal Income
Tax Consequences..........................S-61
State Taxes.................................S-64
ERISA Considerations........................S-64
Legal Investment Considerations.............S-66
Experts.....................................S-85
Method of Distribution......................S-66
Legal Matters...............................S-67
Ratings.....................................S-67
Index of Defined Terms......................S-68
PROSPECTUS
Page
Risk Factors................................4
The Trust Fund..............................13
Use of Proceeds.............................20
The Depositor...............................20
Loan Program................................21
Description of The
Securities ..............................23
Credit Enhancement..........................36
Yield and Prepayment
Considerations...........................43
The Agreements..............................46
Certain Legal Aspects
of the Loans.............................62
Certain Material Federal Income
Tax Considerations.......................78
State Tax Considerations....................107
ERISA Considerations........................107
Legal Investment............................112
Method of Distribution......................113
Legal Matters...............................114
Financial Information.......................115
Rating......................................115
Index of Defined Terms......................117
SUMMARY OF TERMS
o THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND
DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER IN
MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF AN
OFFERING OF THE CERTIFICATES, READ CAREFULLY THIS ENTIRE DOCUMENT AND
THE ACCOMPANYING PROSPECTUS.
o THIS SUMMARY PROVIDES AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION TO AID YOUR UNDERSTANDING AND IS
QUALIFIED BY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS. SOME OF THE INFORMATION CONSISTS OF
FORWARD-LOOKING STATEMENTS RELATING TO FUTURE ECONOMIC PERFORMANCE OR
PROJECTIONS AND OTHER FINANCIAL ITEMS. FORWARD-LOOKING STATEMENTS ARE
SUBJECT TO A VARIETY OF RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER FROM THE PROJECTED RESULTS. THOSE RISKS AND
UNCERTAINTIES INCLUDE, AMONG OTHERS, GENERAL ECONOMIC AND BUSINESS
CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL
REGULATIONS, AND VARIOUS OTHER MATTERS, ALL OF WHICH ARE BEYOND OUR
CONTROL. ACCORDINGLY, WHAT ACTUALLY HAPPENS MAY BE VERY DIFFERENT FROM
WHAT WE PREDICT IN OUR FORWARD-LOOKING STATEMENTS.
OFFERED CERTIFICATES
On the closing date, C-BASS Trust 1998-3 will issue seven classes of
certificates, four of which are being offered pursuant to this prospectus
supplement and the accompanying prospectus. The assets of the trust that will
support the certificates will consist of a pool of 1,546 fixed-rate and
adjustable-rate mortgage loans with an aggregate principal balance of
approximately $120,942,515 as of November 1, 1998.
The offered certificates will be book-entry securities clearing through The
Depository Trust Company (in the United States) or Cedelbank and the Euroclear
System (in Europe) in minimum denominations of $50,000.
OTHER CERTIFICATES
The trust will issue three additional classes of certificates. These
certificates will be designated the Class OC-I, Class OC-II and Class R
Certificates and are not being offered to the public pursuant to this prospectus
supplement and the prospectus. The Class OC-I, Class OC-II and Class R
Certificates will not have original principal balances. See "Description
otificates-- General" and "--Book-Entry Certificate" in this prospectus
supplement; and "The Mortgage Pool" in this prospectus supplement and rust
Fund--The Loans--General" in the prospectus.
CUT-OFF DATE November 1, 1998.
CLOSING DATE On or about December 15, 1998.
THE DEPOSITOR
Financial Asset Securities Corp.
600 Steamboat Road
Greenwich, Connecticut 06830
(203) 625-2700.
SELLER
Credit-Based Asset Servicing and Securitization LLC.
We refer you to "The Seller" in this prospectus supplement for additional
information.
SERVICER
Litton Loan Servicing LP, an affiliate of the Seller.
We refer you to "The Servicer" in this prospectus supplement for additional
information.
TRUSTEE
Norwest Bank Minnesota, National Association.
We refer you to "The Poolitee" in this prospectus supplement for additional
information.
CERTIFICATE INSURER
MBIA Insurance Corporation.
We refer you to "The Certificate Insurer" in this prospectus supplement for
additional information.
DESIGNATIONS
Each class of certificates will have different characteristics, some of which
are reflected in the following general designations.
o Class A Certificates
Class AF and Class AV Certificates.
o Class B Certificates
Class BF and Class BV Certificates.
o Class OC Certificates
Class OC-I and Class OC-II Certificates.
o Group I Certificates
Class AF and Class BF Certificates. Except under the circumstances
described herein under "Description of the Certificates - Allocation of
Available Funds", the Class AF and Class BF Certificates receive their
distributions from Loan Group I.
o Group II Certificates
Class AV and Class BV Certificates. Except under the circumstances
described herein under "Description of the Certificates - Allocation of
Available Funds", the Class AV and Class BV Certificates receive their
distributions from Loan Group II.
o Senior Certificates
Class A Certificates.
o Subordinate Certificates
Class B Certificates.
o Residual Certificates
Class R Certificates.
o Excess Reserve Fund Support Certificates
Class OC-II Certificates.
o Book-Entry Certificates
Class A and Class B Certificates.
o Physical Certificates
Class OC and Class R Certificates.
o Loan Group I
The mortgage loans that accrue interest at fixed rates.
o Loan Group II
The mortgage loans that accrue interest at adjustable rates.
MORTGAGE LOANS
On the Closing Date the trust will acquire a pool of mortgage loans that will be
divided into two loan groups, Loan Group I and Loan Group II. Loan Group I
consists of 1,055 mortgage loans with an aggregate outstanding principal balance
as of the Cut-off Date of approximately $66,223,023. Loan Group II consists of
491 mortgage loans with an aggregate outstanding principal balance as of the
Cut-off Date of approximately $54,719,492.
Loan Group I will consist of fixed-rate mortgage loans with the following
characteristics:
Loans With Prepayment 16.05%
Penalties(1):
Range of Remaining Term to
Stated Maturities(1): 2-410 months
Weighted Average Remaining Term
to Stated Maturity(1): 247 months
Range of Original Principal $6,135 to $1,155,000
Balances(1):
Average Original Principal $68,533
Balance(1):
Range of Outstanding Principal
Balances(1): $1,129 to $955,102
Average Outstanding Principal
Balance(1): $62,771
Range of Loan Rates(1): 5.000%-15.500%
Weighted Average Loan Rate(1): 9.529%
Weighted Average Net Loan 9.154%
Rate(1):
Geographic Concentrations in
Excess of 5%(1):
Texas 13.21%
New York 7.36%
New Jersey 6.30%
California 6.11%
Florida 5.90%
- -----------
(1) Approximate
Loan Group II will consist of adjustable-rate mortgage loans with the following
characteristics:
Loans With Prepayment 43.74%
Penalties(1):
Range of Remaining Term to
Stated Maturities(1): 6-386 months
Weighted Average Remaining Term
to Stated Maturity (1): 326 months
Range of Original Principal
Balances(1): $12,000 to $962,500
Average Original Principal
Balance(1): $115,397
Range of Outstanding Principal
Balances(1): $5,617 to $956,204
Average Outstanding Principal
Balance(1): $111,445
Current Range of Loan Rates(1): 4.940%-14.850%
Current Weighted Average Loan
Rate(1): 9.284%
Current Weighted Average Net
Loan Rate(1): 8.909%
Weighted Average Gross 5.415%
Margin(1):
Weighted Average Maximum Loan
Rate(1): 15.376%
Weighted Average Minimum Loan
Rate(1): 8.939%
Weighted Average Initial Rate
Adjustment Cap(1): 1.497%
Weighted Average Periodic Rate
Adjustment Cap(1): 1.207%
Weighted Average Time Until
Next Adjustment Date(1): 15 months
Loans With Negative
Amortization(1): 8.39%
Geographic Concentrations in
Excess of 5%(1):
California 32.50%
Illinois 15.39%
Colorado 7.55%
- -----------
(1) Approximate
DISTRIBUTION DATES
The trustee will make distributions on the certificates on the 25th day of each
calendar month beginning in December 1998 to the holder of record of the
certificates as of the business day preceding such date of distribution. If the
25th day of a month is not a business day, then the distribution will be made on
the next business day.
PAYMENTS ON THE CERTIFICATES
Interest Payments
The pass-through rate for each class of offered certificates will be calculated
at the per annum rates specified below, subject to the limitations described
under "Description of the Certificates -- Pass-Through Rates" in this prospectus
supplement:
Class AF 6.50%
Class AV One-Month LIBOR + 65 basis points
Class BF 6.50%
Class BV One-Month LIBOR + 65 basis points
In addition, if the Seller and the Certificate Insurer each fail to exercise
their option to terminate the trust as described below under "Optional
Termination", the pass-through rates on the offered certificates will increase
by the percentages indicated below:
Class AF 1.00%
Class AV 0.65%
Class BF 1.00%
Class BV 0.65%
Interest payable on the certificates accrues during an accrual period. The
accrual period for the Class AF and Class BF Certificates is the prior calendar
month. Except for the first accrual period, the accrual period for the Class AV
and Class BV Certificates is the period from the distribution date in the prior
month to the day prior to the current distribution date. The first accrual
period, with respect to the Class AV and Class BV Certificates, will begin on
the Closing Date and end on December 27, 1998. Interest will be calculated for
the Class AF and Class BF Certificates on the basis of a 360-day year consisting
of twelve 30-day months. Interest will be calculated for the Class AV and Class
BV Certificates on the basis of the actual number of days in the accrual period,
based on a 360-day year.
We refer you to "Description of the Certificates" in this prospectus supplement
for additional information.
Principal Payments
Principal will be distributed to the Class A Certificates on each Distribution
Date in the amounts described herein under "Description of the Certificates
- -Allocation of Available Funds." It is not expected that the Class B
Certificates will receive a principal distribution prior to the Distribution
Date in December 2001.
Payment Priorities
Group I Certificates
In general, on any distribution date, funds available for distribution from
payments and other amounts received on the mortgage loans in Loan Group I will
be distributed in the following order:
first, to interest on the Class AF Certificates;
second, to interest on the Class BF Certificates;
third, to principal on the Class AF Certificates;
and fourth, to principal on the Class BF Certificates.
Group II Certificates
In general, on any distribution date, funds available for distribution from
payments and other amounts received on the mortgage loans in Loan Group II will
be distributed in the following order:
first, to interest on the Class AV Certificates;
second, to interest on the Class BV Certificates;
third, to principal on the Class AV Certificates;
and fourth, to principal on the Class BV Certificates.
In certain limited circumstances described herein, payments on the mortgage
loans in one Loan Group may be used to make certain distributions to the offered
certificates relating to the other Loan Group.
We refer you to "Description of the Certificates" in this prospectus supplement
for additional information.
ADVANCES
The Servicer will make cash advances with respect to delinquent payments of
principal and interest to the extent the Servicer reasonably believes that the
cash advances are recoverable from future payments on the related mortgage
loans. Advances are intended to maintain a regular flow of scheduled interest
and principal payments on the certificates and are not intended to guarantee or
insure against losses.
We refer you to "The Pooling and Servicing Agreement--Advances" in this
prospectus supplement for additional information.
OPTIONAL TERMINATION
The Seller or the Certificate Insurer may purchase all of the mortgage loans and
retire the certificates when the current principal balance of the mortgage loans
in either loan group is less than 10% of the principal balance of the mortgage
loans in that loan group as of November 1, 1998.
We refer you to "The Pooling and Servicing Agreement--Termination" and
"Description of the Certificates -- Pass-Through Rates" in this prospectus
supplement for additional information.
CREDIT ENHANCEMENT
1. THE POLICY
The policy will guaranty the payment of principal and interest on the class a
certificates. If the certificate insurer were unable to pay under the policy,
the class a certificates could be subject to losses.
We refer you to "The Certificate Insurer" in this prospectus supplement for
additional information.
2. OVERCOLLATERALIZATION
The mortgage loans owned by the trust pay interest each month that in the
aggregate is expected to exceed the amount needed to pay monthly interest on the
offered certificates and certain fees and expenses of the trust. A portion of
this excess interest will be applied initially to pay principal on the class a
certificates (until the required level of overcollateralization is reached),
which reduces the principal balance of such certificates at a faster rate than
the principal balance on the mortgage loans is being reduced. As a result, the
aggregate principal balance of the mortgage loans is expected to exceed the
aggregate principal balance of the offered certificates. This feature is
referred to as "overcollateralization." The required level of
overcollateralization may increase or decrease over time. We cannot assure you
that sufficient interest will be generated by the mortgage loans to maintain the
required level of overcollateralization.
We refer you to "Description of the Certificates -- Overcollateralization" in
this prospectus supplement for additional information.
3. SUBORDINATION AND ALLOCATION OF LOSSES
There are two types of subordination features in this transaction:
(A) The Class A Certificates will have a payment priority over the Class B
Certificates.
(B) Losses that are realized when the unpaid principal balance on a mortgage
loan exceeds the proceeds recovered upon liquidation will first be applied to
reduce the overcollateralization amount of the related loan group. If there is
no overcollateralization at that time, losses on the mortgage loans will be
allocated to the subordinate certificates related to the loan group in which
such loss occurs, until the principal amount of the subordinate certificates is
reduced to zero. The outstanding principal balance of the Class A Certificates
will not be reduced as a result of realized losses.
SEE "Description of the Certificates" in this prospectus supplement.
4. CROSSCOLLATERALIZATION
Funds available with respect to one loan group may be used to make certain
distributions to the offered certificates relating to the other loan group. We
refer you to "Description of the Certificates--Crosscollateralization" in this
prospectus supplement for additional information.
RATINGS
It is a condition of the issuance of the offered certificates that they be
assigned the following ratings by Standard & Poor's, a division of the
McGraw-Hill Companies, Inc. ("S&P") and Moody's Investors Service, Inc.
("Moody's"):
S&P MOODY'S
CLASS RATING RATING
----- ------ -------
AF AAA AAA
AV AAA AAA
BF BBB BAA3
BV BBB BAA3
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.
We refer you to "Ratings" in this prospectus supplement for additional
information.
TAX STATUS
In the opinion of Brown & Wood LLP, for federal income tax purposes the trust,
exclusive of the assets held in the excess reserve fund account, will comprise
several "real estate mortgage investment conduits" ("REMICs") organized in a
tiered REMIC structure. Certain classes of certificates that are designated as
the regular certificates will constitute "regular interests" in the master
REMIC. The Class R Certificates will represent the sole class of "residual
interests" in the master REMIC and the sole class of residual interests in each
subsidiary REMIC.
The Class AV, Class AF and Class BF Certificates will also represent the right
to receive payments from an excess reserve fund account. This excess reserve
fund account will be treated as an "outside reserve fund" and the right to
receive payments from such account will be treated as an interest rate cap
agreement for federal income tax purposes. Beneficial owners of the Class AV,
Class AF and Class BF Certificates will be treated for federal income tax
purposes as having purchased an undivided beneficial interest in a regular
interest in the Master REMIC and as having acquired rights under an interest
rate cap agreement, both to the extent of the owner's proportionate interest in
the Class AV, Class AF and Class BF Certificates, as applicable. A
certificateholder generally will recognize ordinary income equal to such
certificateholder's proportionate share of interest and original issue discount,
if any, accrued on the Class AV, Class AF and Class BF Certificates and
beneficial owners of such certificates will take into account a proportionate
share of any payments received under the interest rate cap agreement. A
certificateholder's income derived from payments received under the interest
rate cap agreement generally must be accounted for under the notional principal
contract regulations. Any interest paid to beneficial owners of the Class AF and
Class BF certificates in excess of the weighted average net mortgage rate of
Loan Group I will be treated as paid from the Excess Reserve Fund Account
pursuant to an interest rate cap agreement treated as a notional principal
contract.
See "Certain Material Federal Income Tax Consequences" in this prospectus
supplement and "Certain Material Federal Income Tax Considerations" in the
prospectus.
ERISA CONSIDERATIONS
It is expected that the Class A Certificates may be purchased by a pension or
other employee benefit plan subject to the Employee Retirement Income Security
Act of 1974 or Section 4975 of the Internal Revenue Code of 1986, so long as
certain conditions are met. A fiduciary of an employee benefit plan must
determine that the purchase of a certificate is consistent with its fiduciary
duties under applicable law and does not result in a nonexempt prohibited
transaction under applicable law.
See "ERISA Considerations" in this prospectus supplement and in the prospectus.
LEGAL INVESTMENT
The Class AV certificates will be "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 as long as they are rated
in one of the two highest rating categories by at least one nationally
recognized statistical rating organization. The Class AF, Class BF and Class BV
certificates will not be "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984.
See "Legal Investment Considerations" in this prospectus supplement and "Legal
Investment" in the prospectus.
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER, IDENTIFIES
CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN THE
CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER
"RISK FACTORS" IN THE PROSPECTUS.
UNPREDICTABILITY OF PREPAYMENTS AND EFFECT ON YIELDS
Borrowers may prepay their mortgage loans in whole or in part at any
time. We cannot predict the rate at which borrowers will repay their mortgage
loans. A prepayment of a mortgage loan generally will result in a prepayment on
the certificates.
o If you purchase your certificates at a discount and principal is repaid
slower than you anticipate, then your yield may be lower than you
anticipate.
o If you purchase your certificates at a premium and principal is repaid
faster than you anticipate, then your yield may be lower than you
anticipate.
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,
those mortgage loans are more likely to prepay than if prevailing rates
remain above the interest rates on such mortgage loans. In addition, if
interest rates decline, adjustable-rate mortgage loan prepayments may
increase due to the availability of fixed-rate mortgage loans at lower
interest rates. Conversely, if prevailing interest rates rise
significantly, the prepayments on fixed-rate and adjustable-rate mortgage
loans are likely to decrease.
o Approximately 28.57% of the mortgage loans (by aggregate principal balance
as of the Cut-off Date) in the mortgage pool require the mortgagor to pay a
penalty if the mortgagor prepays the mortgage loan during periods ranging
from six months to five years after the mortgage loan was originated. A
prepayment penalty may discourage a mortgagor from prepaying the mortgage
loan during the applicable period.
o The Seller may be required to purchase mortgage loans from the trust in the
event certain breaches of representations and warranties have not been
cured. In addition, the Seller has the option to purchase mortgage loans
sixty days or more delinquent. These purchases will have the same effect on
the holders of the offered certificates as a prepayment of the mortgage
loans.
o If the rate of default and the amount of losses on the mortgage loans is
higher than you expect, then your yield may be lower than you expect.
o The overcollateralization provisions are intended to result in an
accelerated rate of principal distributions to holders of the Class A
Certificates.
o Approximately 8.39% of the Group II mortgage loans (by principal balance in
Loan Group II as of the Cut-off Date) have monthly payments that do not
adjust with changes in the loan rates. Payments on such mortgage loans
could result in either an accelerated amortization of principal if the
interest rate is lowered or in negative amortization of principal if the
monthly payment is insufficient to pay the accrued interest as a result of
an increase in the loan rate.
See "Yield, Prepayment and Maturity Considerations" for a description of
factors that may influence the rate and timing of prepayments on the mortgage
loans.
BALLOON LOAN RISK
Balloon loans pose a risk because a borrower must make a large lump sum
payment of principal at the end of the loan term. If the borrower is unable to
pay the lump sum or refinance such amount, you will suffer a loss if the
Certificate Insurer fails to perform its obligations under the policy.
Approximately 9.05% of the mortgage loans in Loan Group I are balloon loans (by
aggregate principal balance of Loan Group I as of the Cut-off Date).
POTENTIAL INADEQUACY OF CREDIT ENHANCEMENT FOR THE CLASS A CERTIFICATES
The credit enhancement features described in the summary are intended
to enhance the likelihood that holders of the Class A Certificates will receive
regular payments of interest and principal.
If delinquencies or defaults occur on the mortgage loans, neither the
Servicer nor any other entity will advance scheduled monthly payments of
interest and principal on delinquent or defaulted mortgage loans if such
advances are not likely to be recovered. We cannot assure you that the
applicable credit enhancement will adequately cover any shortfalls in cash
available to pay your certificates as a result of such delinquencies or
defaults.
If substantial losses occur as a result of defaults and delinquent
payments on the mortgage loans, and the Certificate Insurer were unable to pay
under the certificate guaranty insurance policy, you may suffer losses.
INTEREST PAYMENTS MAY BE INSUFFICIENT TO CREATE OVERCOLLATERALIZATION
Because the weighted average of the interest rates on the mortgage
loans is expected to be higher than the weighted average of the interest rates
on the certificates, the mortgage loans are expected to generate more interest
than is needed to pay interest owed on the certificates as well as certain fees
and expenses of the trust. Any remaining interest will then be used to
compensate for losses that occur on the mortgage loans. After these financial
obligations of the trust are covered, the available excess interest will be used
to create and maintain overcollateralization. We cannot assure you, however,
that enough excess interest will be generated to maintain the
overcollateralization level required by the rating agencies. The factors
described below will affect the amount of excess interest that the mortgage
loans will generate:
o Every time a mortgage loan is prepaid in full, excess interest may be
reduced because the mortgage loan will no longer be outstanding and
generating interest or, in the case of a partial prepayment, will be
generating less interest.
o Every time a mortgage loan is liquidated or written off, excess interest
will be reduced because such mortgage loans will no longer be outstanding
and generating interest.
o If the rates of delinquencies, defaults or losses on the mortgage loans
turn out to be higher than expected, excess interest will be reduced by the
amount necessary to compensate for any shortfalls in cash available on such
date to pay certificateholders.
o The mortgage loans have rates that are fixed or that adjust based on an
index that is different from the index used to determine rates on the
certificates. As a result, interest rates on the Class AV and Class BV
Certificates may increase relative to interest rates on the mortgage loans
in Loan Group II, requiring that more of the interest generated by the
mortgage loans in Loan Group II be applied to cover interest on the Class
AV and Class BV Certificates.
RATING OF THE CLASS A CERTIFICATES BASED PRIMARILY ON CLAIMS-PAYING ABILITY OF
THE CERTIFICATE INSURER
The ratings on the Class A Certificates depend primarily on the claims
paying ability of the Certificate Insurer. Therefore, a reduction of the rating
assigned to the claims paying ability of the Certificate Insurer may have a
corresponding reduction on the ratings assigned to the Class A Certificates. In
general, the ratings address credit risk and do not address the likelihood of
prepayments.
RISKS OF HOLDING SUBORDINATE CERTIFICATES
The protections afforded the Senior Certificates in this transaction
create risks for the Subordinate Certificates. Prior to any purchase of
Subordinate Certificates, consider the following factors that may negatively
impact your yield:
o Because the Subordinate Certificates receive interest and principal
distributions after the Senior Certificates receive such distributions,
there is a greater likelihood that the Subordinate Certificates will not
receive the distributions to which they are entitled on any Distribution
Date.
o If the Servicer determines not to advance a delinquent payment because such
amount is not recoverable from a mortgagor, there may be a shortfall in
distributions on the certificates which will impact the Subordinate
Certificates.
o The Subordinate Certificates are not expected to receive principal
distributions until, at the earliest, December 2001.
o Payments on the mortgage loans in a loan group may be distributed to the
Senior Certificates of the other loan group and would not be available for
distribution to the Subordinate Certificates.
o Losses resulting from the liquidation of defaulted mortgage loans will
first reduce the level of overcollateralization for the related loan group.
If there is no overcollateralization, losses will be allocated to the
Subordinate Certificates. A loss allocation results in a reduction in a
certificate balance without a corresponding distribution of cash to the
holder. A lower certificate balance will result in less interest accruing
on the certificate.
o The earlier in the transaction that a loss on a mortgage loan occurs, the
greater the impact on yield.
Please review "Description of the Certificates" and "Yield, Prepayment
and Maturity Considerations" in this prospectus supplement for more detail.
EFFECT OF MORTGAGE LOAN RATES ON THE GROUP II CERTIFICATES
The Group II Certificates accrue interest at pass-through rates based
on the one-month LIBOR index plus a specified margin, but are subject to a cap.
The cap on interest paid on the Group II Certificates is based on the weighted
average of the interest rates on the mortgage loans in Loan Group II net of
certain trust expenses. The mortgage loans in Loan Group II have interest rates
that are based on various indices. Substantially all of the Group II mortgage
loans have periodic and maximum limitations on adjustments to the mortgage loan
rate. As a result, the Group II Certificates may accrue less interest than they
would accrue if their rates were based solely on the one-month LIBOR index plus
the specified margin.
A variety of factors could limit the pass-through rates on the Group II
Certificates. Some of these factors are described below:
o The pass-through rates adjust monthly while the loan rates on the
adjustable-rate mortgage loans adjust less frequently. Consequently, the
cap on the certificates may limit increases in the pass-through rates for
extended periods in a rising interest rate environment.
o The loan rate on certain mortgage loans may respond to different economic
and market factors than one-month LIBOR. It is possible that interest rates
on certain of the adjustable-rate mortgage loans may decline while interest
rates on the Group II Certificates are stable or rising. It is also
possible that interest rates on both the adjustable-rate mortgage loans in
Loan Group II and the Group II Certificates may decline or increase during
the same period, but that the interest rates on the Group II Certificates
may decline more slowly or increase more rapidly.
o These factors may adversely affect the yields to maturity on the Group II
Certificates.
INTEREST PAYMENTS MAY BE INSUFFICIENT
When a mortgage loan is prepaid in full, the borrower is charged
interest only up to the date on which payment is made, rather than for an entire
month. This may result in a shortfall in interest collections available for
payment on the next distribution date. The Servicer is required to cover a
portion of the shortfall in interest collections that are attributable to
prepayments in full, but only up to one-half of the Servicer's servicing fee for
the related accrual period. The Certificate Insurer is not required to cover
this shortfall. If the other credit enhancement is insufficient to cover this
shortfall in excess of one-half of the servicing fee, you may incur a loss.
In addition, certain shortfalls in interest collections arising from
the application of the Soldiers' and Sailors' Civil Relief Act of 1940 will not
be covered by either the Servicer or the Certificate Insurer.
DELAY IN RECEIPT OF LIQUIDATION PROCEEDS; LIQUIDATION PROCEEDS MAY BE LESS THAN
MORTGAGE LOAN BALANCE
Substantial delays could be encountered in connection with the
liquidation of delinquent mortgage loans. Further, liquidation expenses such as
legal fees, real estate taxes and maintenance and preservation expenses will
reduce the portion of liquidation proceeds payable to you. If a mortgaged
property fails to provide adequate security for the mortgage loan, you will
incur a loss on your investment if the Certificate Insurer fails to perform its
obligations under the certificate insurance policy and the other credit
enhancements are insufficient to cover the loss.
HIGH LOAN-TO-VALUE RATIOS INCREASE RISK OF LOSS
Mortgage loans with higher loan-to-value ratios may present a greater
risk of loss than mortgage loans with loan-to-value ratios of 80% or below.
Approximately 62.52% of the mortgage loans in Loan Group I and 38.91% of the
mortgage loans in Loan Group II (in each case, based on the aggregate principal
balance of the mortgage loans in that Loan Group as of the Cut-off Date), had a
loan-to-value ratio in excess of 80% at origination.
GEOGRAPHIC CONCENTRATION
The following chart lists the states with the highest concentrations of
mortgage loans for each Loan Group, based on the aggregate principal balance of
the mortgage loans in each Loan Group as of the Cut-off Date.
Loan Group I Loan Group II
---------------------- ----------------------
Texas 13.21% California 32.50%
New York 7.36% Illinois 15.39%
New Jersey 6.30% Colorado 7.55%
California 6.11%
Florida 5.90%
Property in California may be particularly susceptible to certain types
of uninsurable hazards, such as earthquakes, floods, mudslides and other natural
disasters.
In addition, the conditions below will have a disproportionate impact
on the mortgage loans in general:
o Economic conditions in states listed above which may or may not affect real
property values may affect the ability of borrowers to repay their loans on
time.
o Declines in the residential real estate markets in the states listed above
may reduce the values of properties located in those states, which would
result in an increase in the loan-to-value ratios.
o Any increase in the market value of properties located in the states listed
above would reduce the loan-to-value ratios and could, therefore, make
alternative sources of financing available to the borrowers at lower
interest rates, which could result in an increased rate of prepayment of
the mortgage loans.
RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE
The Servicer is faced with the task of completing its goals for
compliance in connection with the year 2000 issue. The year 2000 issue is the
result of prior computer programs being written using two digits to define the
applicable year. Any computer program that has time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. Any such
occurrence could result in miscalculations or in a major computer system
failure. Although the Servicer believes its computer systems are year 2000
compliant, it is presently engaged in various procedures to determine if the
computer systems and software of its suppliers, customers, brokers and agents
will be year 2000 compliant. In the event that the Servicer, any subservicer or
any of their suppliers, customers, brokers or agents do not successfully and
timely achieve year 2000 compliance, the Servicer's performance of its
obligations could be adversely affected.
The year 2000 is also an issue for almost all entities which use
computers. To the extent any entity related to this transaction (including the
Servicer, any depository and the trustee) is unable to achieve year 2000
compliance, there could be delays in processing payments on the mortgage loans
and consequently delays in distributions to you.
LACK OF LIQUIDITY
Greenwich Capital Markets, Inc. intends to make a secondary market in
the classes of certificates actually purchased by it, but it has no obligation
to do so. There is no assurance that such a secondary market will develop or, if
it develops, that it will continue. Consequently, you may not be able to sell
your certificates readily or at prices that will enable you to realize your
desired yield. The market values of the certificates are likely to fluctuate;
these fluctuations may be significant and could result in significant losses to
you.
The secondary markets for mortgage backed securities have experienced
periods of illiquidity and can be expected to do so in the future. Illiquidity
can have a severely adverse effect on the prices of securities that are
especially sensitive to prepayment, credit, or interest rate risk, or that have
been structured to meet the investment requirements of limited categories of
investors.
CONSEQUENCES OF OWNING BOOK-ENTRY CERTIFICATES
Limit On Liquidity Of Certificates. Issuance of the Book-Entry
Certificates in book-entry form may reduce the liquidity of such certificates in
the secondary trading market since investors may be unwilling to purchase
certificates for which they cannot obtain physical certificates.
Limit On Ability To Transfer Or Pledge. Since transactions in the
Book-Entry Certificates can be effected only though certain depositories,
participating organizations, indirect participants and certain banks, your
ability to transfer or pledge a Book-Entry Certificate to persons or entities
that are not affiliated with these organizations or otherwise to take actions in
respect of such certificates, may be limited due to lack of a physical
certificate representing the Book-Entry Certificates.
Delays In Distributions. You may experience some delay in the receipt
of distributions on the Book-Entry Certificates since the distributions will be
forwarded by the Trustee to a depository to credit the accounts of its
participants which will thereafter credit them to your account either directly
or indirectly through indirect participants, as applicable.
Please review "Description Of The Certificates -- Book-Entry
Certificates" in this prospectus supplement for more detail.
NATURE OF THE MORTGAGE LOANS
Almost half of the mortgage loans in the trust are of sub-prime credit
quality. In addition, the trust contains some mortgage loans that have been
severely delinquent, in bankruptcy or are in a forbearance period. Delinquencies
and liquidation proceedings are more likely with these mortgage loans than with
mortgage loans that do not have such histories. In the event these mortgage
loans do become delinquent or subject to liquidation, you may face delays in
receiving payment and losses if the Certificate Insurer is unable to pay on the
certificate insurance policy and the other credit enhancements are insufficient
to cover the delays and losses.
RISKS RELATED TO OWNER-FINANCED MORTGAGE LOANS
Reduced Underwriting Standards
Approximately 5.22% of the mortgage loans by the aggregate principal
balance of the mortgage loans as of the Cut-off Date are owner-financed mortgage
loans. These mortgage loans were originated by the individual sellers of the
related mortgaged property who generally are inexperienced in matters pertaining
to mortgage banking. These mortgage loans were originated with less stringent
standards than the other mortgage loans. The borrower under an owner-financed
mortgage loan generally does not complete a mortgage loan application and the
seller of the related property generally does not verify the income or
employment of the related borrower, nor obtain other information customarily
obtained during the mortgage loan origination process. Credit-Based Asset
Servicing and Securitization LLC did obtain and review in connection with an
acquisition of an owner-financed loan the credit history and payment history of
the borrower, as well as conduct an assessment of the value of the property. As
a result, certain information concerning the owner-financed mortgage loans that
may be of interest to you is not available.
Appraisals May Be Inaccurate
In acquiring owner-financed mortgage loans, the Seller assesses the
value of a property, generally using either a prior appraisal, which must be
re-certified if older than six months, or a drive-by appraisal. A drive-by
appraisal is not as accurate as a full real estate appraisal because the
appraiser does not have access to the interior of the mortgaged property and may
not have access to the rear of the mortgaged property. As a result, the
appraisal may reflect assumptions made by the appraiser regarding the interior
or the rear of the mortgaged property which may not be accurate. In addition,
for approximately 1.12% (by aggregate principal balance as of the Cut-off Date)
of the owner-financed mortgage loans, no full or drive-by appraisal is available
and the value of such property was based upon the sale price for the related
mortgaged property. To the extent the Seller has over-appraised the value of a
property, such amount may not be recovered during a liquidation proceeding.
SERVICER ALTERNATIVES TO FORECLOSURE
Many of the Mortgage Loans are delinquent as of the Closing Date. Other
Mortgage Loans may become delinquent after the Closing Date. The Servicer may
either foreclose on any such mortgage loan or work out an agreement with the
mortgagor, which may involve waiving or modifying any term of the mortgage loan.
If the Servicer extends the payment period or accepts a lesser amount than
stated in the mortgage note in satisfaction of the mortgage note, your yield may
be reduced.
RECOVERY OF DEFAULTED AMOUNTS UNDER FHA AND VA PROGRAMS IS UNCERTAIN
Approximately 31.74% of the mortgage loans in Loan Group I and 0.57% of
the mortgage loans in Loan Group II, in each case by the respective loan group
principal balance as of the Cut-off Date, are covered by either insurance from
the Federal Housing Administration or a guaranty from the United States
Department of Veterans Affairs. Recovery of insured amounts from these agencies
is dependent upon material compliance by the originator and the Servicer to
applicable regulations. These regulations are subject to interpretative
uncertainties. If upon filing a claim for recovery of a defaulted amount, it is
discovered that the mortgage loan did not comply with a regulation, the Servicer
may not be able to fully recover the insured amounts. See "The Mortgage Pool -
FHA Mortgage Loans and VA Mortgage Loans" herein.
THE CERTIFICATE INSURER
MBIA Insurance Corporation ("MBIA") is the principal operating subsidiary
of MBIA Inc., a New York Stock Exchange listed company (the "Company"). The
Company is not obligated to pay the debts of or claims against MBIA. MBIA is
domiciled in the State of New York and licensed to do business in and subject to
regulation under the laws of all 50 states, the District of Columbia, the
Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands,
the Virgin Islands of the United States and the Territory of Guam. MBIA has two
European branches, one in the Republic of France and the other in the Kingdom of
Spain. New York has laws prescribing minimum capital requirements, limiting
classes and concentrations of investments and requiring the approval of policy
rates and forms. State laws also regulate the amount of both the aggregate and
individual risks that may be insured, the payment of dividends by MBIA, changes
in control and transactions among affiliates. Additionally, MBIA is required to
maintain contingency reserves on its liabilities in certain amounts and for
certain periods of time.
Effective February 17, 1998, the Company acquired all of the outstanding
stock of Capital Markets Assurance Corporation ("CMAC") through a merger with
its parent CapMAC Holdings Inc. Pursuant to a reinsurance agreement, CMAC has
ceded all of its net insured risks (including any amounts due but unpaid from
third party reinsurers), as well as its unearned premiums and contingency
reserves, to MBIA. The Company is not obligated to pay the debts of or claims
against CMAC.
The consolidated financial statements of MBIA, a wholly owned subsidiary of
the Company and its subsidiaries as of December 31, 1997 and December 31, 1996
and for each of the three years in the period ended December 31, 1997, prepared
in accordance with generally accepted accounting principles, included in the
Annual Report on Form 10-K of the Company for the year ended December 31, 1997
and the consolidated financial statements of MBIA and its subsidiaries as of
September 30, 1998 and for the nine month periods ended September 30, 1998 and
September 30, 1997 included in the Quarterly Report on Form 10-Q of the Company
for the period ended September 30, 1998, are hereby incorporated by reference
into this Prospectus Supplement and shall be deemed to be a part hereof. Any
statement contained in a document incorporated by reference herein shall be
modified or superseded for purposes of this Prospectus Supplement to the extent
that a statement contained herein or in any other subsequently filed document
which also is incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus
Supplement.
All financial statements of MBIA and its subsidiaries included in documents
filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, subsequent to the date of this
Prospectus Supplement and prior to the termination of the offering of the Class
AF Certificates and Class AV Certificates shall be deemed to be incorporated by
reference into this Prospectus Supplement and to be a part hereof from the
respective dates of filing such documents.
The tables below present selected financial information of MBIA determined
in accordance with statutory accounting practices prescribed or permitted by
insurance regulatory authorities ("SAP") and generally accepted accounting
principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
-----------------------------------------------------
December 31, 1997 September 30, 1998
(Audited) (Unaudited)
(In millions)
<S> <C> <C>
Admitted Assets....................................... $5,256 $6,318
Liabilities........................................... 3,496 4,114
Capital and Surplus................................... 1,760 2,204
GAAP
-----------------------------------------------------
December 31, 1997 September 30, 1998
(Audited) (Unaudited)
(In millions)
Assets................................................ $5,988 $7,439
Liabilities........................................... 2,624 3,268
Shareholder's Equity.................................. 3,364 4,171
</TABLE>
Copies of the financial statements of MBIA incorporated by reference herein
and copies of MBIA's 1997 year-end audited financial statements prepared in
accordance with statutory accounting practices are available, without charge,
from MBIA. The address of MBIA is 113 King Street, Armonk, New York 10504. The
telephone number of MBIA is (914) 273-4545.
MBIA does not accept any responsibility for the accuracy or completeness of
this Prospectus Supplement or any information or disclosure contained herein, or
omitted herefrom, other than with respect to the accuracy of the information
regarding MBIA set forth under the headings "The Certificate Insurer" and
"Description of the Certificates - The Policy" in this Prospectus Supplement.
Additionally, MBIA makes no representation regarding the Certificates or the
advisability of investing in the Certificates.
The Policy is not covered by the Property/Casualty Insurance Security Fund
specified in Article 76 of the New York Insurance Law.
Moody's Investors Service, Inc. rates the financial strength of MBIA "Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. rates the financial strength of MBIA "AAA."
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.) rates
the financial strength of MBIA "AAA."
Each rating of MBIA should be evaluated independently. The ratings reflect
the respective rating agency's current assessment of the creditworthiness of
MBIA and its ability to pay claims on its policies of insurance. Any further
explanation as to the significance of the above ratings may be obtained only
from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
securities, and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the securities.
MBIA does not guaranty the market price of the securities nor does it guaranty
that the ratings on the securities will not be revised or withdrawn.
YEAR 2000 READINESS
An area of potential risk to MBIA's financial guarantee business would be
the inability of an issuer or its trustee or paying agent to make payments on an
MBIA insured transaction because of their failure to be Year 2000 ready. To
mitigate this risk, the Certificate Insurer has been surveying all trustees, all
paying agents and selected high volume issuers to determine their state of
readiness. While the survey is not complete, the results to date are that all
respondents are either ready or planning to be ready by late 1999. If MBIA is
asked to pay in those situations where the issuer's system fails, it will do so
and would expect to recover any such payment in a fairly short time period. It
is not possible at this time to evaluate the extent of such payments. MBIA
believes that it has adequate sources of liquidity to cover these payments.
THE MORTGAGE POOL
The information set forth in the following paragraphs has been provided
by the Seller. None of the Depositor, the Underwriter, the Servicer, the Trustee
or any of their respective affiliates have made or will make any representation
as to the accuracy or completeness of such information.
Certain information with respect to the Mortgage Loans to be included
in each Loan Group is set forth herein. Prior to the Closing Date, Mortgage
Loans may be removed from a Loan Group and other Mortgage Loans may be
substituted therefor. The Seller believes that the information set forth herein
with respect to each Loan Group as presently constituted is representative of
the characteristics of each Loan Group as it will be constituted at the Closing
Date, although certain characteristics of the Mortgage Loans in a Loan Group may
vary.
GENERAL
C-BASS Trust 1998-3 (the "Trust Fund") will consist of a pool of 1,546
closed-end, fixed-rate and adjustable-rate mortgage loans (the "Mortgage Pool")
having original terms to maturity ranging from 1.5 to 40.5 years (the "Mortgage
Loans") and an aggregate principal balance as of November 1, 1998 (the "Cut-off
Date") of approximately $120,942,515. All Mortgage Loan statistics set forth
herein are based on principal balances, interest rates, terms to maturity,
mortgage loan counts and similar statistics as of the Cut-off Date. All weighted
averages specified herein are based on the principal balances of the Mortgage
Loans in the related Loan Group as of the Cut-off Date, as adjusted for the
principal payments received or advanced on or before such date, plus Deferred
Interest (each, a "Cut-off Date Principal Balance"). The "Principal Balance" of
a Mortgage Loan, as of any date, is equal to the principal balance of such
Mortgage Loan at its origination, less the sum of scheduled and unscheduled
payments in respect of principal made on such Mortgage Loan. References to
percentages of the Mortgage Loans mean percentages based on the aggregate of the
Cut-off Date Principal Balances of the Mortgage Loans in the related Loan Group,
unless otherwise specified. The "Pool Balance" is equal to the aggregate
Principal Balances of the Mortgage Loans in both Loan Groups.
The Depositor will purchase the Mortgage Loans from the Seller pursuant to
the Mortgage Loan Purchase Agreement (the "Mortgage Loan Purchase Agreement")
dated as of the Cut-off Date between the Seller and the Depositor. Pursuant to
the Pooling and Servicing Agreement, the Depositor will cause the Mortgage Loans
to be assigned to the Trustee for the benefit of the Certificateholders. See
"The Pooling and Servicing Agreement" herein.
Each of the Mortgage Loans in the Mortgage Pool was selected from the
Seller's portfolio of mortgage loans. The Mortgage Loans were acquired by the
Seller in the secondary market in the ordinary course of its business and
re-underwritten by the Seller in accordance with its underwriting standards as
described in "The Seller Underwriting Standards". The Mortgage Loans in the
Mortgage Pool were originated by various mortgage loan originators. Originators
representing more than ten percent of the Mortgage Loans by Pool Balance as of
the Cut-off Date include: Fieldstone Mortgage Company, 22.10%, Mellon Mortgage
Company, 16.19% and The Money Store, 10.48%.
Under the Pooling and Servicing Agreement, the Seller will make certain
representations and covenants to the Trustee relating to, among other things,
the due execution and enforceability of the Pooling and Servicing Agreement and
certain characteristics of the Mortgage Loans and, subject to certain
limitations, will be obligated to repurchase or substitute a similar mortgage
loan for any Mortgage Loan as to which there exists deficient documentation or
an uncured breach of any such representation, warranty or covenant, if such
breach of any such representation, warranty or covenant materially and adversely
affects the Certificateholders' interests in such Mortgage Loan. The Depositor
will make no representations or warranties with respect to the Mortgage Loans
and will have no obligation to repurchase or substitute Mortgage Loans with
deficient documentation or that are otherwise defective. The Seller is selling
the Mortgage Loans without recourse and will have no obligation with respect to
the Certificates in its capacity as Seller other than the repurchase or
substitution obligations described above.
The Mortgage Pool will consist of two loan groups ("Loan Group I" and "Loan
Group II", respectively and each a "Loan Group"). The Mortgage Loans in Loan
Group I (the "Group I Mortgage Loans") consist of 1,055 fixed-rate Mortgage
Loans with an aggregate principal balance (the "Group I Loan Balance") of
approximately $66,223,023 as of the Cut-off Date. The Mortgage Loans in Loan
Group II (the "Group II Mortgage Loans") consist of 491 adjustable-rate Mortgage
Loans with an aggregate principal balance (the "Group II Loan Balance", and each
of the Group I Loan Balance and the Group II Loan Balance, a "Loan Group
Balance") of approximately $54,719,492 as of the Cut-off Date.
Each of Loan Group I and Loan Group II consists of Performing Mortgage
Loans, Sub-Performing Mortgage Loans and Re-Performing Mortgage Loans, each as
defined below:
o A "Performing Mortgage Loan" is a Mortgage Loan pursuant to which no
payment due under the related mortgage note (or any modification thereto)
prior to the Cut-off Date, is 30 days Delinquent.
o A "Sub-Performing Mortgage Loan" is a Mortgage Loan pursuant to which a
payment due prior to the Cut-off Date under the terms of the related
mortgage note (or any modification thereto), is at least 30 but not more
than 89 days Delinquent. Certain Sub-Performing Mortgage Loans have been
modified in writing and are also characterized as follows:
(i) If a Sub-Performing Mortgage Loan is a "Forbearance Plan Mortgage
Loan", the related mortgagor must make monthly payments
("Modified Scheduled Payments") in an amount at least equal to
the sum of (i) the amount of the monthly scheduled payment of
principal and interest determined in accordance with such
mortgage loan's original amortization schedule ("Regular
Scheduled Payments") plus (ii) an additional amount to be applied
to pay down the total amount of scheduled monthly payments due
thereon on or before the Cut-off Date but not received prior to
the Cut-off Date plus the aggregate amount of tax and insurance
advances made with respect to such Mortgage Loan to the extent
remaining outstanding as of the Cut-off Date.
(ii) If a Sub-Performing Mortgage Loan is a "Bankruptcy Plan Mortgage
Loan," the related mortgagor defaulted and, after default, became
the subject of a case under Title 11 of the United States Code
(the "Bankruptcy Code") and, as of the Cut-off Date, had a
confirmed bankruptcy plan. Each such bankruptcy plan generally
requires the related mortgagor to make Modified Scheduled
Payments in an amount at least equal to (i) the Regular Scheduled
Payment plus (ii) an additional amount sufficient to pay down
overdue amounts resulting from the period of default, generally
over a period of three to five years from the commencement of
such bankruptcy plan.
o A "Re-Performing Mortgage Loan" is a mortgage loan (that might be a
Forbearance Plan Mortgage Loan or a Bankruptcy Plan Mortgage Loan) which
had defaulted in the past and which is currently at least 60 days
Delinquent with respect to certain Regular Scheduled Payments but which
satisfies one of the following criteria (the "Re-Performance Test"):
(i) the mortgagor has made at least three aggregate
Regular Scheduled Payments in the three calendar
months preceding the Cut-off Date (regardless of
either the timing of receipt of such payments or the
payment history of such loans prior to August 1,
1998), or
(ii) the mortgagor has made at least four aggregate
Regular Scheduled Payments in the four calendar
months preceding the Cut-off Date (regardless of
either the timing of receipt of such payments or the
payment history of such loans prior to July 1, 1998),
or
(iii) the mortgagor has made at least five aggregate
Regular Scheduled Payments in the five calendar
months preceding the Cut-off Date (regardless of
either the timing of receipt of such payments or the
payment history of such loans prior to June 1, 1998).
A Mortgage Loan is "Delinquent," if a monthly payment due on a due date is
not paid by the close of business on the next scheduled due date for such
Mortgage Loans. Delinquency status is determined as of the last day of each
calendar month. Thus, a Mortgage Loan for which the borrower failed to make the
monthly payment due on November 1, 1998 will be reported as current in the
calculation of delinquency status on November 30, 1998 and delinquent as of
December 1, 1998 if the payment is not made on such date.
With respect to certain Delinquent Mortgage Loans, the total amount of
scheduled monthly payments due thereon on or before the Cut-off Date but not
received prior to the Cut-off Date, together with any outstanding servicing
advances on such Mortgage Loans, is referred to as the "Arrearage." The Servicer
has previously made advances in respect of the Arrearages. Any Arrearage shall
not be included as part of the Trust Fund and, accordingly, payments with
respect to Arrearage will not be payable to the Certificateholders as and when
received. However, the Servicer shall be required to make servicing advances on
Delinquent Mortgage Loans and make advances of delinquent payments of principal
and interest on Delinquent Mortgage Loans, each to the extent such advances are
deemed recoverable, until such Mortgage Loans become current.
GROUP I MORTGAGE LOANS STATISTICS
Loan Group I consists of 1,055 fixed-rate Mortgage Loans. The Group I Loan
Balance as of the Cut-off Date is equal to approximately $66,223,023. The Group
I Mortgage Loans have original terms to maturity ranging from 1.5 years to 40.5
years. The following statistical information, unless otherwise specified, is
based upon the Group I Loan Balance as of the Cut-off Date.
The Group I Mortgage Loans are secured by first mortgages or deeds of trust
or other similar security instruments (each, a "Mortgage") creating first liens
on one- to four-family residential properties consisting of detached or
semi-detached one- to four-family dwelling units and individual condominium
units (each, a "Mortgaged Property"). Approximately 62.52% of the Group I
Mortgage Loans had a Loan-to-Value Ratio at origination in excess of 80.00%.
Approximately 39.41% of the Group I Mortgage Loans had a Loan-to-Value Ratio at
origination exceeding 90.00%. There can be no assurance that the Loan-to-Value
Ratio of any Group I Mortgage Loan determined at any time after origination is
less than or equal to its original Loan-to-Value Ratio. Except for 14.93% of the
Group I Mortgage Loans, all of the Group I Mortgage Loans have scheduled monthly
payments due on the first day of the month (with respect to each Mortgage Loan ,
a "Due Date").
Approximately 20.99% of the Group I Mortgage Loans are FHA Mortgage Loans.
Approximately 11.40% of the Group I Mortgage Loans are VA Mortgage Loans.
Sees and VA Mortgage Loans."
Approximately 63.54% of the Group I Mortgage Loans are Performing Mortgage
Loans. Approximately 22.77% of the Group I Mortgage Loans are Sub-Performing
Mortgage Loans, including 2.97% (of the Group I Loan Balance) that are
Forbearance Plan Mortgage Loans and 1.88% (of the Group I Loan Balance) that are
Bankruptcy Plan Mortgage Loans. Approximately 13.69% of the Group I Mortgage
Loans are Re-Performing Mortgage Loans including 2.06% (of the Group I Loan
Balance) that are Forbearance Plan Mortgage Loans and 8.27% (of the Group I Loan
Balance) that are Bankruptcy Plan Mortgage Loans.
Approximately 16.05% of the Group I Mortgage Loans provide for payment by
the mortgagor of a prepayment charge in limited circumstances on certain
prepayments. Generally, each such Group I Mortgage Loan provides for payment of
a prepayment charge on certain partial prepayments and all prepayments in full
made within six months, one year, two years, three years, four years or five
years from the date of origination of such Group I Mortgage Loan. The amount of
the prepayment charge is provided in the related mortgage note and is generally
equal to six months' interest on any amounts prepaid in excess of 20% of the
then outstanding principal balance of the related Mortgage Loan in any 12 month
period.
There are 91 Group I Mortgage Loans (representing approximately 9.05% of
the Group I Loan Balance) that are balloon payment mortgage loans (each, a
"Balloon Loan"). The monthly payment for each Balloon Loan is based on an
amortization schedule ranging from 120 months to 510 months, except for the
final payment (the "Balloon Payment") which is due and payable between the 18th
month and the 216th month following origination of such Mortgage Loan, depending
on the terms of the related Mortgage Note. With respect to the majority of the
Balloon Loans, the monthly payments for such Balloon Loans amortize over 360
months, but the Balloon Payment is due on the 180th month. The amount of the
Balloon Payment on each Balloon Loan is substantially in excess of the amount of
the scheduled monthly payment for such Mortgage Loan.
There are 163 Group I Mortgage Loans (representing approximately 9.42% of
the Group I Loan Balance) that were originated by the individual seller of the
related mortgaged property (each, an "Owner-Financed Mortgage Loan").
Each Group I Mortgage Loan accrues interest at a rate (each, a "Loan Rate")
of not less than 5.00% per annum and not more than 15.50% per annum and as of
the Cut-off Date the weighted average Loan Rate of the Group I Mortgage Loans
was approximately 9.53% per annum.
The weighted average remaining term to maturity of the Group I Mortgage
Loans will be approximately 247 months as of the Cut-off Date. None of the Group
I Mortgage Loans had a first Due Date prior to August 1971 or after September
1998 or will have a remaining term to maturity of less than 2 months or greater
than 34.2 years as of the Cut-off Date. The month of the latest maturity date of
any Group I Mortgage Loan is December 2032.
The average Principal Balance of the Group I Mortgage Loans at origination
was approximately $68,533. The average Cut-off Date Principal Balance of the
Group I Mortgage Loans was approximately $62,771.
No Group I Mortgage Loan had a Cut-off Date Principal Balance of greater
than approximately $955,103 or less than approximately $1,129. The Group I
Mortgage Loans are expected to have the following characteristics as of the
Cut-off Date (the sum in any column may not equal the total indicated due to
rounding):
CUT-OFF DATE PRINCIPAL BALANCES OF THE GROUP I MORTGAGE LOANS (1)
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
NUMBER OF PRINCIPAL BALANCE BALANCE OF LOAN GROUP
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
PRINCIPAL BALANCE ($) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------------------------- -------------- --------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
1,129 - 50,000................ 511 $ 15,768,172.89 23.81%
50,001 - 100,000................. 392 26,886,222.43 40.60
100,001 - 150,000................. 103 12,451,820.25 18.80
150,001 - 200,000................. 26 4,354,587.44 6.58
200,001 - 250,000................. 15 3,372,498.97 5.09
250,001 - 300,000................. 3 838,606.91 1.27
300,001 - 350,000................. 2 646,510.49 0.98
400,001 - 450,000................. 1 434,027.01 0.66
500,001 - 550,000.................. 1 515,474.47 0.78
950,001 - 955,102.................. 1 955,102.36 1.44
============== ===================== ===========================
Total............................... 1,055 $66,223,023.22 100.00%
============== ===================== ===========================
</TABLE>
- ----------------------
(1) The average Cut-off Date Principal Balance of the Group I Mortgage Loans
was approximately $62,770.64.
ORIGINAL TERMS TO MATURITY OF THE GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE OF
PRINCIPAL BALANCE LOAN GROUP
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL TERM (MONTHS) OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- ------------------- ------------------------ -----------------------
<S> <C> <C> <C> <C>
18-60..................... 17 $ 901,734.49 1.36%
61-120.................... 47 2,013,675.93 3.04
121-180.................... 201 10,945,651.42 16.53
181-240.................... 73 3,915,839.17 5.91
241-300.................... 40 3,750,165.26 5.66
301-360.................... 676 44,605,772.08 67.36
481-485.................... 1 90,184.87 0.14
------------------- ------------------------ -----------------------
Total..................... 1,055 $66,223,023.22 100.00%
=================== ======================== =======================
</TABLE>
- --------------------
(1) The weighted average original term of the Group I Mortgage Loans was
approximately 307 months.
PROPERTY TYPES OF THE GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE OF
NUMBER PRINCIPAL BALANCE LOAN GROUP
OF MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- ------------------- ------------------------ -----------------------
<S> <C> <C> <C>
Single Family Detached....... 1,009 $62,707,771.63 94.69%
Two Family................... 20 1,563,300.29 2.36
Condo Low-Rise............... 15 927,504.66 1.40
Townhouse.................... 5 552,306.71 0.83
PUD(1)....................... 1 249,068.91 0.38
Three Family................. 3 114,177.59 0.17
Four Family................. 2 108,893.43 0.16
------------------- ------------------------ -----------------------
Total..................... 1,055 $66,223,023.22 100.00%
=================== ======================== =======================
</TABLE>
- --------------------
(1) PUD refers to a Planned Unit Development.
OCCUPANCY STATUS OF THE GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE OF
PRINCIPAL BALANCE LOAN GROUP
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- ------------------- ------------------------ -----------------------
<S> <C> <C> <C>
Primary...................... 1,000 $63,094,025.24 95.28%
Investor..................... 55 3,128,997.98 4.72
=================== ======================== =======================
Total..................... 1,055 $66,223,023.22 100.00%
=================== ======================== =======================
</TABLE>
PURPOSE OF THE GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE OF
NUMBER PRINCIPAL BALANCE LOAN GROUP
OF MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
PURPOSE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- ------------------- ------------------------ -----------------------
<S> <C> <C> <C>
Purchase..................... 711 $39,362,267.21 59.44%
Rate/Term Refinance.......... 337 25,873,458.67 39.07
Cash Out Refinance........... 7 987,297.34 1.49
------------------- ------------------------ -----------------------
Total..................... 1,055 $66,223,023.22 100.00%
=================== ======================== =======================
</TABLE>
LOAN RATES OF THE GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE OF
PRINCIPAL BALANCE LOAN GROUP
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN RATE (%) OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- ------------------- ------------------------ -----------------------
<S> <C> <C> <C> <C>
5.00 - 5.50............ 1 $ 19,320.58 0.03%
5.51 - 6.00............ 1 185,985.16 0.28
6.01 - 6.50............ 3 118,019.00 0.18
6.51 - 7.00............ 18 1,097,641.21 1.66
7.01 - 7.50............ 14 1,108,508.04 1.67
7.51 - 8.00............ 81 7,017,322.80 10.60
8.01 - 8.50............ 162 11,656,087.31 17.60
8.51 - 9.00............ 142 8,853,400.91 13.37
9.01 - 9.50............ 159 9,094,313.17 13.73
9.51 - 10.00............ 158 7,912,843.67 11.95
10.01 - 10.50............ 84 6,066,595.68 9.16
10.51 - 11.00............ 65 5,395,461.05 8.15
11.01 - 11.50............ 44 2,226,208.90 3.36
11.51 - 12.00............ 37 1,632,471.49 2.47
12.01 - 12.50............ 23 1,006,520.90 1.52
12.51 - 13.00............ 22 1,012,661.73 1.53
13.01 - 13.50............ 13 757,460.50 1.14
13.51 - 14.00............ 12 547,217.71 0.83
14.01 - 14.50............ 6 218,657.38 0.33
14.51 - 15.00............ 6 182,602.23 0.28
15.01 - 15.50............ 4 113,723.80 0.17
------------------- ------------------------ -----------------------
Total..................... 1,055 $66,223,023.22 100.00%
=================== ======================== =======================
</TABLE>
- ------------------
(1) The weighted average Loan Rate of the Group I Mortgage Loans as of the
Cut-off Date was approximately 9.53% per annum.
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE
PRINCIPAL BALANCE OF LOAN GROUP
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL LOAN-TO-VALUE RATIO (%) OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------- ------------------ ---------------------- --------------------
<S> <C> <C> <C> <C> <C>
5.16 - 10.00...................... 2 $ 10,768.21 0.02%
10.01 - 15.00........................ 5 69,703.19 0.11
20.01 - 25.00........................ 2 36,866.90 0.06
25.01 - 30.00........................ 1 25,023.39 0.04
30.01 - 35.00........................ 2 31,359.14 0.05
35.01 - 40.00........................ 4 114,653.32 0.17
40.01 - 45.00........................ 4 307,018.56 0.46
45.01 - 50.00........................ 9 290,722.29 0.44
50.01 - 55.00........................ 12 926,767.44 1.40
55.01 - 60.00........................ 15 617,691.59 0.93
60.01 - 65.00........................ 39 2,876,825.84 4.34
65.01 - 70.00........................ 40 2,918,211.55 4.41
70.01 - 75.00........................ 89 7,591,230.55 11.46
75.01 - 80.00........................ 123 9,002,377.66 13.59
80.01 - 85.00........................ 121 8,318,729.50 12.56
85.01 - 90.00........................ 100 6,989,259.89 10.55
90.01 - 95.00........................ 54 2,985,464.89 4.51
95.01 - 100.00........................ 197 10,694,806.64 16.15
100.01 - 105.00........................ 221 11,753,607.92 17.75
105.01 - 110.00........................ 14 643,739.24 0.97
110.01 - 113.51........................ 1 18,195.51 0.03
------------------ ---------------------- --------------------
Total................................ 1,055 $66,223,023.22 100.00%
================== ====================== ====================
</TABLE>
- ------------------
(1) The weighted average original Loan-to-Value Ratio of the Group I Mortgage
Loans as of the Cut-off Date was approximately 85.94%.
GEOGRAPHIC DISTRIBUTION OF THE GROUP I MORTGAGED PROPERTIES(1)
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE
PRINCIPAL BALANCE OF LOAN GROUP
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------- ------------------ ---------------------- --------------------
<S> <C> <C> <C>
Alabama................................. 10 $485,401.45 0.73%
Alaska.................................. 5 192,094.64 0.29
Arizona................................. 34 2,448,523.37 3.70
Arkansas................................ 3 106,117.84 0.16
California.............................. 53 4,049,353.05 6.11
Colorado................................ 11 638,177.97 0.96
Connecticut............................. 6 708,460.68 1.07
Delaware................................ 5 496,291.11 0.75
District of Columbia.................... 4 335,136.16 0.51
Florida................................. 67 3,905,087.96 5.90
Georgia................................. 43 2,294,806.54 3.47
Hawaii.................................. 1 129,351.13 0.20
Idaho................................... 5 157,079.38 0.24
Illinois................................ 37 2,353,187.41 3.55
Indiana................................. 29 1,436,934.25 2.17
Iowa.................................... 2 164,339.01 0.25
Kansas.................................. 5 292,232.81 0.44
Kentucky................................ 7 406,323.42 0.61
Louisiana............................... 19 938,279.97 1.42
Maine................................... 2 118,064.00 0.18
Maryland................................ 33 3,136,159.38 4.74
Massachusetts........................... 9 1,340,210.05 2.02
Michigan................................ 41 1,704,485.54 2.57
Minnesota............................... 15 1,003,118.23 1.51
Mississippi............................. 4 227,839.04 0.34
Missouri................................ 17 1,008,362.94 1.52
Montana................................. 8 395,178.21 0.60
Nebraska................................ 4 194,483.48 0.29
Nevada.................................. 10 611,121.67 0.92
New Hampshire........................... 4 381,393.62 0.58
New Jersey.............................. 41 4,171,965.96 6.30
New Mexico.............................. 6 564,546.68 0.85
New York................................ 51 4,877,063.79 7.36
North Carolina.......................... 48 2,975,558.22 4.49
Ohio.................................... 32 1,795,004.21 2.71
Oklahoma................................ 12 589,492.90 0.89
Oregon.................................. 10 758,209.88 1.14
Pennsylvania............................ 43 2,547,035.36 3.85
Rhode Island............................ 2 197,576.15 0.30
South Carolina.......................... 25 1,394,480.46 2.11
Tennessee............................... 40 2,315,568.93 3.50
Texas................................... 200 8,746,938.64 13.21
Utah.................................... 7 690,238.78 1.04
Vermont................................. 1 57,339.49 0.09
Virginia................................ 20 1,366,313.87 2.06
Washington.............................. 18 1,059,800.98 1.60
West Virginia........................... 2 127,269.34 0.19
Wisconsin............................... 3 261,421.21 0.39
Wyoming................................. 1 69,604.06 0.11
------------------ ---------------------- --------------------
Total................................... 1,055 $66,223,023.22 100.00%
================== ====================== ====================
</TABLE>
- -------------------
(1) The greatest ZIP Code geographic concentration of Group I Mortgage Loans,
by Cut-off Date Principal Balance, was approximately 1.44% in the 21043 ZIP
Code.
DOCUMENTATION LEVEL OF THE GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE
PRINCIPAL BALANCE OF LOAN GROUP
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
DOCUMENTATION LEVEL OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------- ------------------ ---------------------- --------------------
<S> <C> <C> <C>
Full Documentation....................... 569 $35,894,362.07 54.20%
No Documentation......................... 207 10,305,562.93 15.56
Limited Documentation.................... 133 10,262,499.56 15.50
Alternative Documentation................ 146 9,760,598.66 14.74
================== ====================== ====================
Total................................ 1,055 $66,223,023.22 100.00%
================== ====================== ====================
</TABLE>
- --------------------
(1) For a description of each documentation level, see "The Seller Underwriting
Standards" herein.
GROUP II MORTGAGE LOANS STATISTICS
Loan Group II consists of 491 adjustable-rate Mortgage Loans. The Group II
Loan Balance as of the Cut-off Date is equal to approximately $54,719,492. The
Group II Mortgage Loans have original terms to maturity ranging from 10 years to
40 years. The following statistical information, unless otherwise specified, is
based upon the Group II Loan Balance as of the Cut-off Date.
The Group II Mortgage Loans are secured by first mortgages creating first
liens on Mortgaged Properties or by the proprietary leases or occupancy
agreements relating to specific dwellings within a cooperative and the related
shares issued by such cooperative. Approximately 38.91% of the Group II Mortgage
Loans had a Loan-to-Value Ratio at origination in excess of 80.00%.
Approximately 7.64% of the Group II Mortgage Loans had a Loan-to-Value Ratio at
origination exceeding 90.00%. There can be no assurance that the Loan-to-Value
Ratio of any Group II Mortgage Loan determined at any time after origination is
less than or equal to its original Loan-to-Value Ratio. Except for 3.58% of the
Group II Mortgage Loans, all of the Group II Mortgage Loans have Due Dates on
the first day of the month.
Approximately 1.54% of the Group II Mortgage Loans are FHA Mortgage Loans.
Approximately 0.46% of the Group II Mortgage Loans are VA Mortgage Loans. Sees
and VA Mortgage Loans."
None of the Group II Mortgage Loans are Balloon Loans.
Approximately 77.84% of the Group II Mortgage Loans are Performing Mortgage
Loans. Approximately 17.92% of the Group II Mortgage Loans are Sub-Performing
Mortgage Loans, including 0.18% (of the Group II Loan Balance) that are
Forbearance Plan Mortgage Loans and 1.65% (of the Group II Loan Balance) that
are Bankruptcy Plan Mortgage Loans. Approximately 4.24% of the Group II Mortgage
Loans are Re-Performing Mortgage Loans including 0.19% (of the Group II Loan
Balance) that are Forbearance Plan Mortgage Loans and 2.97% (of the Group II
Loan Balance) that are Bankruptcy Plan Mortgage Loans.
Approximately 43.74% of the Group II Mortgage Loans provide for payment by
the Mortgagor of a prepayment charge in limited circumstances on certain
prepayments. Generally, each such Group II Mortgage Loan provides for payment of
a prepayment charge on certain partial prepayments and all prepayments in full
made within six months, one year, two years, three years, four years or five
years from the date of origination of such Group II Mortgage Loan. The amount of
the prepayment charge is provided in the related Mortgage Note and is generally
equal to six months' interest on any amounts prepaid in excess of 20% of the
then outstanding Principal Balance of the related Mortgage Loan in any 12 month
period.
The weighted average remaining term to maturity of the Group II Mortgage
Loans will be approximately 326 months as of the Cut-off Date. None of the Group
II Mortgage Loans had a first Due Date prior to September 1979 or after August
1998 or will have a remaining term to maturity of less than 6 months or greater
than 32.2 years as of the Cut-off Date. The month of the latest maturity date of
any Group II Mortgage Loan is December 2030.
The average Principal Balance of the Group II Mortgage Loans at origination
was approximately $115,397. The average Cut-off Date Principal Balance of the
Group II Mortgage Loans was approximately $111,445.
Generally, the Group II Mortgage Loans provide for semi-annual adjustment
to the Loan Rate thereon and (except for the Group II Mortgage Loans that are
Negative Amortization Mortgage Loans) for corresponding adjustments to the
monthly payment amount due thereon, in each case on each adjustment date
applicable thereto (each such date, an "Adjustment Date"); provided, that the
first adjustment for such Mortgage Loans will occur after an initial period of
one year, in the case of 3.33% of the Group II Mortgage Loans, two years, in the
case of 56.12% of the Group II Mortgage Loans, three years, in the case of 3.27%
of the Group II Mortgage Loans, and five years, in the case of 0.26% of the
Group II Mortgage Loans (each such Mortgage Loan, a "Delayed First Adjustment
Mortgage Loan "). On each Adjustment Date for each Group II Mortgage Loan, the
Loan Rate thereon will be adjusted to equal the sum, rounded to the nearest
multiple of 0.125%, of the index applicable to determining the Loan Rate on each
Mortgage Loan (the "Index") and a fixed percentage amount (the "Gross Margin"").
The Loan Rate on each such Group II Mortgage Loan will not increase or decrease
by more than 6.00% per annum on the first related Adjustment Date (the "Initial
Periodic Rate Cap") and 3.00% on any Adjustment Date thereafter (the "Periodic
Rate Cap"); provided, however, 36 Group II Mortgage Loans do not have an Initial
Periodic Rate Cap or a Periodic Rate Cap. The Group II Mortgage Loans have a
weighted average Initial Periodic Rate Cap of approximately 1.50% per annum and
a weighted average Periodic Rate Cap of approximately 1.21% per annum thereafter
(excluding those loans without periodic caps). Each Loan Rate on each such Group
II Mortgage Loan will not exceed a specified maximum Loan Rate over the life of
such Group II Mortgage Loan (the "Maximum Loan Rate") or be less than a
specified minimum Loan Rate over the life of such Group II Mortgage Loan (the
"Minimum Loan Rate"), except that 14 and 109 Group II Mortgage Loans do not have
Maximum Loan Rates and Minimum Loan Rates, respectively. The Delayed First
Adjustment Mortgage Loans have a weighted average Initial Periodic Rate Cap of
approximately 1.40% per annum and a weighted average Periodic Rate Cap of
approximately 1.07% per annum thereafter. Effective with the first monthly
payment due on each Group II Mortgage Loan (other than any Group II Mortgage
Loan that is a Negative Amortization Mortgage Loan) after each related
Adjustment Date, the monthly payment amount will be adjusted to an amount that
will amortize fully the outstanding Principal Balance of the related Mortgage
Loan over its remaining term, and pay interest at the Loan Rate as so adjusted.
Due to the application of the Periodic Rate Caps and the Maximum Loan Rates, the
Loan Rate on each such Mortgage Loan, as adjusted on any related Adjustment
Date, may be less than the sum of the Index and the related Gross Margin,
rounded as described herein. See "--The Index" herein. None of the Group II
Mortgage Loans permits the related mortgagor to convert the adjustable Loan Rate
thereon to a fixed Loan Rate.
The Group II Mortgage Loans had Loan Rates as of the Cut-off Date of not
less than 4.94% per annum and not more than 14.85% per annum and the weighted
average Loan Rate was approximately 9.28% per annum. As of the Cut-off Date, the
Group II Mortgage Loans had Gross Margins ranging from -0.50% to 11.25%, Minimum
Loan Rates ranging from 0% per annum to 14.30% per annum and Maximum Loan Rates
ranging from 10.50% per annum to 21.85% per annum (except for 14 Group II
Mortgage Loans that do not have Maximum Loan Rates). As of the Cut-off Date, the
weighted average Gross Margin was approximately 5.41%, the weighted average
Minimum Loan Rate was approximately 8.94% per annum (exclusive of the Mortgage
Loans that do not have a Minimum Loan Rate) and the weighted average Maximum
Loan Rate was approximately 15.38% per annum (exclusive of the Mortgage Loans
that do not have a Maximum Loan Rate). The latest next Adjustment Date following
the Cut-off Date on any Group II Mortgage Loan occurs in November 2005 and the
weighted average next Adjustment Date for all of the Group II Mortgage Loans
following the Cut-off Date is February 2000.
For a description of the Negative Amortization Mortgage Loans, see
"--Negative Amortization" below.
No Group II Mortgage Loan had a Cut-off Date Principal Balance of greater
than approximately $956,204 or less than approximately $5,617. The Group II
Mortgage Loans are expected to have the following characteristics as of the
Cut-off Date (the sum in any column may not equal the total indicated due to
rounding):
CUT-OFF DATE PRINCIPAL BALANCES OF THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
NUMBER OF PRINCIPAL BALANCE BALANCE OF LOAN GROUP
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
PRINCIPAL BALANCE ($) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------------------------- -------------- --------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
5,617 - 50,000.................. 72 $ 2,476,113.73 4.53%
50,001 - 100,000..................... 198 14,648,237.23 26.77
100,001 - 150,000...................... 117 14,165,336.46 25.89
150,001 - 200,000...................... 61 10,205,159.46 18.65
200,001 - 250,000...................... 21 4,809,233.85 8.79
250,001 - 300,000...................... 7 1,892,886.81 3.46
300,001 - 350,000...................... 3 955,183.12 1.75
350,001 - 400,000...................... 5 1,810,797.43 3.31
400,001 - 450,000....................... 2 853,404.15 1.56
450,001 - 500,000....................... 2 935,290.35 1.71
500,001 - 550,000....................... 2 1,011,645.42 1.85
950,001 - 956,204....................... 1 956,203.61 1.75
============== ===================== ===========================
Total............................... 491 $54,719,491.62 100.00%
============== ===================== ===========================
</TABLE>
- ----------------------
(1) The average Cut-off Date Principal Balance of the Group II Mortgage Loans
was approximately $111,445.
ORIGINAL TERMS TO MATURITY OF THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE OF
PRINCIPAL BALANCE LOAN GROUP
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL TERM (MONTHS) OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- ------------------- ------------------------ -----------------------
<S> <C> <C> <C> <C>
Up to 120.................... 1 $ 374,183.82 0.68%
121 - 180.................... 7 765,128.47 1.40
181 - 240.................... 5 93,558.16 0.17
241 - 300.................... 9 529,039.52 0.97
301 - 360.................... 462 51,965,475.06 94.97
421 - 480.................... 7 992,106.59 1.81
------------------- ------------------------ -----------------------
Total..................... 491 $54,719,491.62 100.00%
=================== ======================== =======================
</TABLE>
- --------------------
(1) The weighted average original term of the Group II Mortgage Loans was
approximately 357 months.
PROPERTY TYPES OF THE GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE OF
NUMBER PRINCIPAL BALANCE LOAN GROUP
OF MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- ------------------- ------------------------ -----------------------
<S> <C> <C> <C>
Single Family Detached....... 390 $42,699,294.80 78.03%
PUD(1)....................... 30 4,686,081.54 8.56
Condo Low-Rise............... 25 2,716,929.03 4.97
Two Family................... 23 1,958,304.92 3.58
Four Family.................. 8 1,178,747.81 2.15
Townhouse.................... 7 748,465.94 1.37
Three Family................. 4 592,012.54 1.08
Condo High-Rise.............. 3 104,106.31 0.19
Cooperative................. 1 35,548.73 0.06
------------------- ------------------------ -----------------------
=================== ======================== =======================
Total..................... 491 $54,719,491.62 100.00%
=================== ======================== =======================
</TABLE>
- --------------------
(1) PUD refers to a Planned Unit Development.
OCCUPANCY STATUS OF THE GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE OF
PRINCIPAL BALANCE LOAN GROUP
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- ------------------- ------------------------ -----------------------
<S> <C> <C> <C>
Primary...................... 445 $50,268,956.82 91.87%
Investor..................... 45 4,386,801.36 8.02
Second Home.................. 1 63,733.44 0.12
------------------- ------------------------ -----------------------
Total..................... 491 $54,719,491.62 100.00%
=================== ======================== =======================
</TABLE>
PURPOSE OF THE GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE OF
NUMBER PRINCIPAL BALANCE LOAN GROUP
OF MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
PURPOSE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- ------------------- ------------------------ -----------------------
<S> <C> <C> <C>
Purchase..................... 217 $23,921,060.98 43.72%
Rate/Term Refinance.......... 168 18,336,752.83 33.51
Cash Out Refinance........... 106 12,461,677.81 22.77
------------------- ------------------------ -----------------------
Total..................... 491 $54,719,491.62 100.00%
=================== ======================== =======================
</TABLE>
CURRENT LOAN RATES OF THE GROUP II MORTGAGE LOANS (1)
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE OF
PRINCIPAL BALANCE LOAN GROUP
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
CURRENT LOAN RATE (%) OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- ------------------- ------------------------ -----------------------
<S> <C> <C> <C> <C>
4.94 - 5.00.............. 1 $ 80,423.69 0.15%
5.01 - 5.50.............. 1 25,202.81 0.05
6.01 - 6.50.............. 1 166,731.72 0.30
6.51 - 7.00.............. 8 1,061,413.61 1.94
7.01 - 7.50.............. 28 4,181,852.27 7.64
7.51 - 8.00.............. 52 5,330,935.23 9.74
8.01 - 8.50.............. 51 4,939,269.62 9.03
8.51 - 9.00.............. 74 10,114,611.09 18.48
9.01 - 9.50.............. 61 8,088,022.50 14.78
9.51 - 10.00.............. 66 7,592,136.65 13.87
10.01 - 10.50............... 32 3,208,544.89 5.86
10.51 - 11.00............... 55 5,084,652.56 9.29
11.01 - 11.50............... 21 1,811,317.29 3.31
11.51 - 12.00............... 16 1,404,005.03 2.57
12.01 - 12.50............... 7 463,480.14 0.85
12.51 - 13.00............... 6 354,416.04 0.65
13.01 - 13.50............... 2 174,380.56 0.32
13.51 - 14.00............... 4 283,009.52 0.52
14.01 - 14.50............... 4 287,640.06 0.53
14.51 - 14.85............... 1 67,446.34 0.12
------------------- ------------------------ -----------------------
Total..................... 491 $54,719,491.62 100.00%
=================== ======================== =======================
</TABLE>
- ------------------
(1) The weighted average Loan Rate of the Group II Mortgage Loans as of the
Cut-off Date was approximately 9.28% per annum.
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE
PRINCIPAL BALANCE OF LOAN GROUP
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL LOAN-TO-VALUE RATIO (%) OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------- ------------------ ---------------------- --------------------
<S> <C> <C> <C> <C>
29.43 - 30.00....................... 1 $ 35,548.73 0.06%
30.01 - 35.00............. 2 73,221.49 0.13
35.01 - 40.00............. 2 172,829.42 0.32
40.01 - 45.00............. 3 136,752.28 0.25
45.01 - 50.00............. 8 439,620.01 0.80
50.01 - 55.00............. 7 1,343,959.99 2.46
55.01 - 60.00............. 13 1,788,905.84 3.27
60.01 - 65.00............. 21 1,686,534.38 3.08
65.01 - 70.00............. 37 3,755,920.30 6.86
70.01 - 75.00............. 64 7,337,486.35 13.41
75.01 - 80.00............. 141 16,657,624.58 30.44
80.01 - 85.00............. 81 10,195,318.09 18.63
85.01 - 90.00............. 60 6,915,241.38 12.64
90.01 - 95.00............. 18 1,745,370.38 3.19
95.01 - 100.00............. 22 1,805,784.86 3.30
100.01 - 105.00............. 8 484,900.59 0.89
105.01 - 108.33............. 3 144,472.95 0.26
================== ====================== ====================
Total................................ 491 $54,719,491.62 100.00%
================== ====================== ====================
</TABLE>
- ------------------
(1) The weighted average original Loan-to-Value Ratio of the Group II Mortgage
Loans as of the Cut-off Date was approximately 79.32%.
GEOGRAPHIC DISTRIBUTION OF THE GROUP II MORTGAGED PROPERTIES(1)
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE
PRINCIPAL BALANCE OF LOAN GROUP
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------- ------------------ ---------------------- --------------------
<S> <C> <C> <C>
Alaska.................................. 1 $ 25,362.99 0.05%
Arizona................................. 20 1,943,460.81 3.55
Arkansas................................ 1 22,751.69 0.04
California.............................. 104 17,786,564.16 32.50
Colorado................................ 31 4,132,514.97 7.55
Connecticut............................. 10 990,330.90 1.81
Delaware................................ 4 362,665.06 0.66
District of Columbia.................... 4 378,513.47 0.69
Florida................................. 24 1,714,790.94 3.13
Georgia................................. 8 750,184.25 1.37
Idaho................................... 2 109,494.47 0.20
Illinois................................ 87 8,419,400.46 15.39
Indiana................................. 10 586,234.19 1.07
Iowa.................................... 1 80,762.15 0.15
Kansas.................................. 3 112,133.11 0.20
Kentucky................................ 5 457,488.03 0.84
Louisiana............................... 6 498,508.16 0.91
Maryland................................ 15 1,896,295.51 3.47
Massachusetts........................... 3 345,717.67 0.63
Michigan................................ 13 921,299.75 1.68
Minnesota............................... 8 942,352.45 1.72
Missouri................................ 2 159,409.41 0.29
Montana................................. 1 74,862.71 0.14
Nevada.................................. 6 870,686.34 1.59
New Jersey.............................. 13 1,547,138.43 2.83
New York................................ 18 2,344,028.20 4.28
North Carolina.......................... 3 227,308.81 0.42
Ohio.................................... 22 1,411,072.81 2.58
Oklahoma................................ 1 13,331.51 0.02
Oregon.................................. 8 670,528.28 1.23
Pennsylvania............................ 7 615,161.77 1.12
Rhode Island............................ 5 484,781.74 0.89
Texas................................... 17 1,450,955.96 2.65
Utah.................................... 10 1,067,086.30 1.95
Virginia................................ 8 504,223.72 0.92
Washington.............................. 7 650,840.14 1.19
Wisconsin............................... 2 135,374.52 0.25
Wyoming................................. 1 15,875.78 0.03
------------------ ---------------------- --------------------
Total................................ 491 $54,719,491.62 100.00%
================== ====================== ====================
</TABLE>
- -------------------
(1) The greatest ZIP Code geographic concentration of Group II Mortgage Loans,
by Group II Loan Balance as of the Cut-off Date, was approximately 1.78% in
the 94065 ZIP Code.
DOCUMENTATION LEVELS OF THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE
PRINCIPAL BALANCE OF LOAN GROUP
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
DOCUMENTATION LEVEL OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------- ------------------ ---------------------- --------------------
<S> <C> <C> <C>
Full Documentation....................... 350 $38,534,376.79 70.42%
Limited Documentation.................... 61 7,398,988.23 13.52
Alternative Documentation................ 59 6,644,910.97 12.14
No Documentation......................... 21 2,141,215.63 3.91
================== ====================== ====================
Total................................ 491 $54,719,491.62 100.00%
================== ====================== ====================
</TABLE>
- --------------------
(1) For a description of each documentation level, see "The Seller --
Underwriting Standards" herein.
MAXIMUM LOAN RATES OF THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE OF
PRINCIPAL BALANCE LOAN GROUP
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
MAXIMUM LOAN RATE (%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------------------- ----------------- ------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
10.50 - 11.00.................... 14 $ 1,375,011.75 2.51%
11.01 - 12.00.................... 13 1,335,280.18 2.44
12.01 - 13.00.................... 15 1,479,675.31 2.70
13.01 - 14.00.................... 49 5,902,923.30 10.79
14.01 - 15.00.................... 93 11,919,664.45 21.78
15.01 - 16.00.................... 128 15,686,281.35 28.67
16.01 - 17.00.................... 87 8,882,240.02 16.23
17.01 - 18.00.................... 50 4,622,107.52 8.45
18.01 - 19.00.................... 15 1,122,510.13 2.05
19.01 - 20.00.................... 8 658,064.53 1.20
20.01 - 21.00.................... 3 214,891.88 0.39
21.01 - 22.00.................... 2 157,527.54 0.29
No Maximum......................... 14 1,363,313.66 2.49
-------------- ----------------- ---------------
Total........................... 491 $54,719,491.62 100.00%
============== ================= ===============
</TABLE>
(1) The weighted average Maximum Loan Rate of the Group II Mortgage Loans as of
the Cut-off Date was approximately 15.38% per annum (excluding those Group
II Mortgage Loans with no Maximum Loan Rate).
MINIMUM LOAN RATES OF THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE OF
PRINCIPAL BALANCE LOAN GROUP
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
MINIMUM LOAN RATE (%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------------------- ----------------- ------------------------- ----------------------
<S> <C> <C> <C> <C>
No Minimum................. 109 $11,055,801.02 20.20%
0.01 - 1.00.............. 8 700,651.71 1.28
1.01 - 2.00............. 13 1,179,719.98 2.16
2.00 - 3.00............. 2 340,163.70 0.62
3.01 - 4.00............. 5 339,162.98 0.62
4.01 - 5.00............. 3 324,640.70 0.59
5.01 - 6.00............. 9 884,466.04 1.62
6.01 - 7.00............. 8 1,613,533.26 2.95
7.01 - 8.00............. 15 1,569,067.18 2.87
8.01 - 9.00............. 83 11,911,239.82 21.77
9.01 - 10.00............. 122 14,881,952.31 27.20
10.01 - 11.00............. 81 7,412,723.68 13.55
11.01 - 12.00............. 20 1,526,438.80 2.79
12.01 - 13.00............. 4 290,502.59 0.53
13.01 - 14.00............. 7 573,983.66 1.05
14.01 - 14.30............. 2 115,444.19 0.21
----------------- ------------------------- ----------------------
Total.......................... 491 $54,719,491.62 100.00%
================= ========================= ======================
</TABLE>
- --------------------
(1) The weighted average Minimum Loan Rate of the Group II Mortgage Loans as of
the Cut-off Date was approximately 8.94% per annum (excluding those Group
II Mortgage Loans with no Minimum Loan Rate).
GROSS MARGINS OF THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE OF
NUMBER PRINCIPAL BALANCE LOAN GROUP
OF MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
GROSS MARGINS (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------- ----------------- ------------------------ ------------------------
<S> <C> <C> <C> <C> <C>
-0.50 - 0.00............. 2 $ 76,371.74 0.14%
0.01 - 1.00............. 5 972,379.14 1.78
1.01 - 2.00............. 4 327,971.64 0.60
2.01 - 3.00............. 113 11,958,798.85 21.85
3.01 - 4.00............. 11 767,004.77 1.40
4.01 - 5.00............. 27 2,898,085.30 5.30
5.01 - 6.00............. 99 12,591,105.52 23.01
6.01 - 7.00............. 138 15,222,960.44 27.82
7.01 - 8.00............. 69 8,010,868.93 14.64
8.01 - 9.00............. 14 1,178,380.60 2.15
9.01 - 10.00............. 4 391,528.20 0.72
10.01 - 11.00............. 4 298,673.50 0.55
11.01 - 11.25............. 1 25,362.99 0.05
================= ======================== ========================
Total.................. 491 $54,719,491.62 100.00%
================= ======================== ========================
</TABLE>
- ------------------
(1) The weighted average Gross Margin of the Group II Mortgage Loans as of the
Cut-off Date was approximately 5.41%.
NEXT ADJUSTMENT DATE FOR THE GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE PRINCIPAL
PRINCIPAL BALANCE BALANCE OF LOAN GROUP
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF THE
NEXT ADJUSTMENT DATE MORTGAGE LOANS THE CUT-OFF DATE CUT-OFF DATE
---------------------------- ----------------- ----------------------- --------------------------------
<S> <C> <C> <C> <C>
12/01/98................... 9 $ 1,183,378.67 2.16%
12/20/98................... 1 181,202.50 0.33
01/01/99................... 28 2,677,148.56 4.89
01/10/99................... 1 79,526.36 0.15
02/01/99................... 13 966,701.89 1.77
03/01/99................... 12 1,604,153.99 2.93
03/10/99................... 1 56,263.85 0.10
03/20/99................... 1 89,494.32 0.16
04/01/99................... 21 2,477,552.51 4.53
05/01/99................... 11 928,366.13 1.70
05/10/99................... 3 599,255.57 1.10
06/01/99................... 16 1,787,297.71 3.27
06/10/99................... 1 239,954.92 0.44
07/01/99................... 31 2,901,863.65 5.30
08/01/99................... 19 1,293,963.64 2.36
08/15/99................... 2 39,480.93 0.07
09/01/99................... 25 3,480,457.25 6.36
09/05/99................... 1 80,423.69 0.15
09/23/99................... 1 26,072.57 0.05
10/01/99................... 27 3,153,193.75 5.76
10/10/99................... 1 227,466.35 0.42
11/01/99................... 4 565,032.80 1.03
12/01/99................... 5 399,220.85 0.73
12/05/99................... 1 73,365.92 0.13
01/01/00................... 1 114,571.72 0.21
01/05/00................... 1 96,476.24 0.18
02/01/00................... 4 252,900.75 0.46
03/01/00................... 3 191,167.22 0.35
04/01/00................... 2 493,545.21 0.90
05/01/00................... 7 851,868.19 1.56
06/01/00................... 39 4,212,603.83 7.70
06/30/00................... 1 67,392.42 0.12
07/01/00................... 165 19,730,137.59 36.06
08/01/00................... 1 36,976.07 0.07
09/01/00................... 2 128,913.82 0.24
10/01/00................... 1 86,966.58 0.16
11/01/00................... 1 117,959.67 0.22
12/01/00................... 1 53,453.76 0.10
01/01/01................... 3 233,252.20 0.43
03/01/01................... 1 166,731.72 0.30
05/01/01................... 2 124,639.57 0.23
06/01/01................... 2 197,569.77 0.36
07/01/01................... 10 1,430,477.66 2.61
08/01/01................... 1 47,762.36 0.09
11/01/01................... 1 54,522.05 0.10
12/01/01................... 1 110,536.51 0.20
01/01/02................... 1 121,256.40 0.22
02/01/02................... 1 62,168.82 0.11
04/01/02................... 1 43,818.87 0.08
06/01/02................... 1 152,423.01 0.28
08/01/02................... 1 141,791.77 0.26
11/01/05................... 1 286,769.46 0.52
----------------- ----------------------- --------------------------------
Total 491 $54,719,491.62 100.00%
================= ======================= ================================
</TABLE>
INDICES OF THE GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE
NUMBER OF PRINCIPAL BALANCE OF LOAN GROUP
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
INDEX(1) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------------------------------- ------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Six Month LIBOR(2)................. 350 $40,271,442.63 73.60%
One Year CMT....................... 75 6,829,613.81 12.48
Eleventh District COFI............. 29 4,360,504.32 7.97
National Monthly Median COFI....... 13 1,096,158.42 2.00
Other(3)........................... 24 2,161,772.44 3.95
------------- ----------------------- ----------------------
Total......................... 491 $54,719,491.62 100.00%
============ ======================= =======================
</TABLE>
(1) Each of these Indices are described under "--The Index."
(2) Of the Group II Mortgage Loans with an Index of Six-Month LIBOR,
approximately 3.33%, 56.12%, 3.27%, and 0.26% (in each case by Group II
Loan Balance as of the Cut-off Date) have initial fixed Loan Rates for one
year, two years, three years and five years, respectively.
(3) Includes 8 other Indices, each of which represents 1.50% or less of the
Group II Loan Balance as of the Cut-off Date.
INITIAL PERIODIC RATE CAPS OF THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE
PRINCIPAL BALANCE OF LOAN GROUP
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
INITIAL PERIODIC RATE CAP (%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------------------- ----------------- ----------------------- -------------------------
<S> <C> <C> <C>
None................................... 36 $ 5,206,551.83 9.51%
1.00................................... 275 31,033,524.89 56.71
1.50................................... 29 3,644,782.53 6.66
2.00................................... 80 7,335,741.93 13.41
3.00................................... 70 7,340,350.25 13.41
6.00................................... 1 158,540.19 0.29
--------------- ------------------------- -------------------------
Total.............................. 491 $54,719,491.62 100.00%
=============== ========================= =========================
</TABLE>
- ------------------
(1) Relates solely to initial rate adjustments.
SUBSEQUENT PERIODIC RATE CAPS OF THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE
PRINCIPAL BALANCE OF LOAN GROUP
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
PERIODIC RATE CAP (%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------------------- --------------- ------------------------- -------------------------
<S> <C> <C> <C>
None ................................ 36 $ 5,206,551.83 9.51%
1.00................................. 332 36,305,305.67 66.35
1.50................................. 47 6,112,230.32 11.17
2.00................................. 75 7,022,037.88 12.83
3.00................................. 1 73,365.92 0.13
=============== ========================= =========================
Total.............................. 491 $54,719,491.62 100.00%
=============== ========================= =========================
</TABLE>
- ------------------
(1) Relates to all rate adjustments subsequent to initial rate adjustments.
THE INDEX
With respect to approximately 12.48% of the Group II Mortgage Loans,
the Index is the weekly average yield on United States Treasury securities
adjusted to a constant maturity of one year as published by the Federal Reserve
Board in Statistical Release H.15(519) and most recently available as of a day
specified in the related note ("One Year CMT"); with respect to approximately
7.97% of the Group II Mortgage Loans, the Index is the monthly weighted average
cost of funds for depository institutions that have home offices located in
Arizona, California or Nevada and that are members of the Eleventh District of
the Federal Home Loan Bank System as computed from statistics tabulated and
published by the Federal Home Loan Bank of San Francisco as most recently
available generally as of a day specified in the related note ("Eleventh
District COFI"); with respect to approximately 73.60% of the Group II Mortgage
Loans, the Index is the average of interbank offered rates for six-month U.S.
dollar deposits in the London market based on quotations of major banks, and
most recently available as of a day specified in the related note as published
by Fannie Mae ("Six Month LIBOR"); with respect to approximately 2.00% of the
Group II Mortgage Loans, the Index is the cost of funds index tabulated and
published by the Office of Thrift Supervision ("National Monthly Median COFI");
and approximately 3.95% of the Group II Mortgage Loans are based upon a variety
of indices, none of which comprise more than 1.50% of the Group II Mortgage
Loans. Listed below are some historical values for the months indicated of three
of the indices.
<TABLE>
<CAPTION>
ONE YEAR CMT
Year
-------------------------------------------------------------------
Month 1998 1997 1996 1995 1994 1993 1992
- ----- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
January 5.24% 5.61% 5.09% 7.05% 3.54% 3.50% 4.15%
February 5.31% 5.53% 4.94% 6.70% 3.87% 3.39% 4.29%
March 5.39% 5.80% 5.34% 6.43% 4.32% 3.33% 4.63%
April 5.38% 5.99% 5.54% 6.27% 4.82% 3.24% 4.30%
May 5.44% 5.87% 5.64% 6.00% 5.31% 3.36% 4.19%
June 5.41% 5.69% 5.81% 5.64% 5.27% 3.54% 4.17%
July 5.36% 5.54% 5.85% 5.59% 5.48% 3.47% 3.60%
August 5.21% 5.56% 5.67% 5.75% 5.56% 3.44% 3.47%
September 4.71% 5.52% 5.83% 5.62% 5.76% 3.36% 3.18%
October 4.12% 5.46% 5.55% 5.59% 6.11% 3.39% 3.30%
November 4.53% 5.46% 5.42% 5.43% 6.54% 3.58% 3.68%
December N/A 5.53% 5.47% 5.31% 7.14% 3.61% 3.71%
</TABLE>
<TABLE>
<CAPTION>
Eleventh District COFI
Year
-------------------------------------------------------------------------
Month 1998 1997 1996 1995 1994 1993 1992
- ----- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
January 4.99% 4.82% 5.03% 4.75% 3.71% 4.36% 6.00%
February 4.97% 4.76% 4.98% 4.93% 3.69% 4.33% 5.80%
March 4.92% 4.78% 4.87% 5.01% 3.63% 4.25% 5.61%
April 4.90% 4.82% 4.84% 5.06% 3.67% 4.17% 5.43%
May 4.88% 4.86% 4.82% 5.14% 3.73% 4.10% 5.29%
June 4.88% 4.85% 4.81% 5.18% 3.80% 4.05% 5.26%
July 4.91% 4.89% 4.82% 5.14% 3.86% 4.00% 5.07%
August 4.90% 4.90% 4.84% 5.13% 3.95% 3.96% 4.87%
September 4.88% 4.94% 4.83% 5.11% 4.04% 3.88% 4.81%
October 4.76% 4.96% 4.85% 5.12% 4.19% 3.82% 4.60%
November N/A 4.95% 4.84% 5.12% 4.37% 3.82% 4.51%
December N/A 4.96% 4.84% 5.06% 4.59% 3.88% 4.43%
</TABLE>
<TABLE>
<CAPTION>
Six Month LIBOR
Year
-------------------------------------------------------------------------
Month 1998 1997 1996 1995 1994 1993 1992
- ----- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
January 5.63% 5.69% 5.34% 6.69% 3.39% 3.44% 4.31%
February 5.70% 5.68% 5.29% 6.44% 4.00% 3.33% 4.38%
March 5.75% 5.94% 5.52% 6.44% 4.25% 3.38% 4.50%
April 5.81% 6.00% 5.42% 6.31% 4.63% 3.31% 4.25%
May 5.75% 6.00% 5.64% 6.06% 5.00% 3.44% 4.19%
June 5.78% 5.91% 5.84% 5.88% 5.25% 3.56% 4.00%
July 5.75% 5.80% 5.92% 5.88% 5.33% 3.56% 3.63%
August 5.59% 5.84% 5.74% 5.94% 5.33% 3.44% 3.56%
September 5.25% 5.84% 5.75% 5.99% 5.69% 3.38% 3.19%
October 4.98% 5.79% 5.58% 5.95% 6.00% 3.50% 3.56%
November 5.15% 5.91% 5.55% 5.74% 6.44% 3.52% 4.00%
December N/A 5.84% 5.62% 5.56% 7.00% 3.50% 3.63%
</TABLE>
If any Index becomes unpublished or is otherwise unavailable, the
Servicer will select an alternative index which is based upon comparable
information.
NEGATIVE AMORTIZATION
With respect to approximately 8.39% of the Group II Mortgage Loans (the
"Negative Amortization Mortgage Loans"), the Loan Rate thereon adjusts on a date
which is different than the date on which monthly payments are adjusted and/or,
any increase or decrease in the amount of the monthly payment on the date of
adjustment is generally limited to an amount not greater than 10% of the monthly
payment due on the immediately preceding Due Date (a "Payment Cap"). Such
provisions may result in accelerated or negative amortization with respect to
such Negative Amortization Mortgage Loans. Certain Negative Amortization
Mortgage Loans do not apply the Payment Cap in setting the monthly payment on
each five year anniversary of such loan's origination date or if the principal
balance of any such mortgage loan exceeds the initial principal balance by a
particular percentage. In such event a monthly payment is established that will
fully amortize the principal balance over its then remaining term at the current
Loan Rate.
Since the Loan Rates on the Negative Amortization Mortgage Loans adjust
at a different time than the monthly payments thereon and the Payment Caps may
limit the amount by which the monthly payments may adjust, the amount of a
monthly payment may be more or less than the amount necessary to fully amortize
the principal balance of the Negative Amortization Mortgage Loan over its then
remaining term at the applicable Loan Rate. Accordingly, Negative Amortization
Mortgage Loans may be subject to reduced amortization (if the monthly payment
due on a Due Date is sufficient to pay interest accrued during the related
accrual period at the applicable Loan Rate but is not sufficient to reduce
principal in accordance with a fully amortizing schedule); negative amortization
(if interest accrued during the related accrual period at the applicable Loan
Rate is greater than the entire monthly payment due on the related Due Date
(such excess accrued interest, "Deferred Interest")); or accelerated
amortization (if the monthly payment due on a Due Date is greater than the
amount necessary to pay interest accrued during the related accrual period at
the applicable Loan Rate and to reduce principal in accordance with a fully
amortizing schedule). In the event the Loan Rate on a Negative Amortization
Mortgage Loan is increased, Deferred Interest is added to the principal balance
of any Negative Amortization Mortgage Loan, and, if such Deferred Interest is
not offset by subsequent accelerated amortization, it may result in a final lump
sum payment at maturity greater than, and potentially substantially greater
than, the monthly payment due on the immediately preceding Due Date.
FHA MORTGAGE LOANS AND VA MORTGAGE LOANS
As noted above, (i) 31.74% of the Group I Mortgage Loans are subject to
either FHA insurance as described herein (the "FHA Mortgage Loans") or are
subject to a VA guarantee as described herein (the "VA Mortgage Loans") and (ii)
0.57% of the Group II Mortgage Loans are FHA Mortgage Loans or VA Mortgage
Loans. All FHA Mortgage Loans and VA Mortgage Loans must conform to HUD or VA
origination guidelines, as the case may be, at the time of origination. The FHA
Mortgage Loans will be insured by the Federal Housing Administration ("FHA") of
the United States Department of Housing and Urban Development ("HUD") as
authorized under the National Housing Act of 1934, as amended (the "National
Housing Act"), and the United States Housing Act of 1937, as amended (the
"United States Housing Act"). No FHA Mortgage Loan may have an interest rate or
original principal amount exceeding the applicable FHA limits at the time of
origination of such FHA Mortgage Loan.
The VA Mortgage Loans will be partially guaranteed by The United States
Department of Veterans Affairs (the "VA") under the Servicemen's Readjustment
Act of 1944, as amended. The Servicemen'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 a current mortgage loan limit of $203,000, requires no down payment
from the purchaser and permits the guarantee of mortgage loans of generally up
to 30 years' duration. However, no VA Mortgage Loan will have an original
principal amount greater than five times the amount of the related guarantee.
Insurance premiums for the FHA Mortgage Loans are collected by the
Servicer and are paid to the FHA. The regulations governing FHA-insured
single-family mortgage insurance programs generally provide that insurance
benefits are payable upon foreclosure (or other acquisition of possession) and
conveyance of the mortgaged premises to HUD. With respect to a defaulted FHA
Mortgage Loan, the Servicer may be limited in its ability to initiate
foreclosure proceedings. Historically, pursuant to an assignment program (the
"Assignment Program"), HUD in certain circumstances offered qualified mortgagors
who had defaulted on an FHA insured mortgage loan an opportunity to avoid
foreclosure and retain their homes. Under the Assignment Program, the FHA
serviced FHA-insured mortgage loans that had defaulted and been assigned to HUD
under the Assignment Program. In addition, HUD gave forbearance for a period of
no longer than 36 months to mortgagors who had demonstrated a temporary
inability to make full payments due to circumstances beyond the mortgagor's
control such as a reduction in income or increase in expenses. The Assignment
Program was terminated and replaced with mandatory loss mitigation procedures in
April 1996 whereby servicers of defaulted FHA-insured mortgage loans must choose
from a variety of tools to cure a default prior to filing an FHA insurance
claim.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Presently, claims for most programs are being paid
in cash and, for the most part, claims have not been paid in debentures since
1965. HUD debentures issued in satisfaction of FHA insurance claims bear
interest at the applicable HUD debenture interest rate.
The amount of insurance benefits generally paid by the FHA is equal to
the entire unpaid principal amount of the defaulted FHA Mortgage Loan, adjusted
to reimburse the Servicer of that FHA Mortgage Loan for certain costs and
expenses and to deduct certain amounts received or retained by the Servicer
after default. When entitlement to insurance benefits results from foreclosure
(or other acquisition of possession) and conveyance to HUD, the Servicer is
generally compensated for no more than two-thirds of its foreclosure costs and
attorneys' fees (which costs are evaluated based upon Fannie Mae guidelines
(which are state specific)), and is compensated for accrued and unpaid mortgage
interest for a limited period prior to the institution of foreclosure or other
acquisition in general only to the extent it was allowed pursuant to a
forbearance plan approved by HUD, and the Servicer is otherwise in material
compliance with FHA regulations. Provided that the Servicer is in material
compliance with FHA regulations, the Servicer will generally be entitled to the
debenture interest which would have been earned, as of the date the cash payment
is received, had the benefits been paid in debentures. Except where unpaid
mortgage interest is recoverable pursuant to an approved special forbearance
plan, such debenture interest is generally payable from a date 60 days after the
mortgagor's first uncorrected failure to perform any obligation or make any
payment due under the mortgage loan, which results in no recovery of interest
accrued during the first two months of delinquency.
Under certain circumstances, as set forth in the regulations, HUD is
authorized to request or require the Servicer to pursue a deficiency judgment
against any defaulting mortgagor. In this regard, HUD may request or require the
Servicer (as the case may be under the regulations) to pursue a deficiency
judgment in connection with the foreclosure. Under neither case would the
Servicer be responsible for collecting on the judgment. Further, in all cases,
HUD may reimburse the Servicer for all additional costs of seeking the judgment.
As of the date hereof, the maximum guarantees that may be issued by the
VA under a VA Mortgage Loan are generally (a) as to loans with an original
principal amount of $45,000 or less, 50% of such loan, (b) as to loans with an
original principal amount of greater than $45,000, but not more than $56,250,
$22,500; (c) as to loans with an original principal amount of more than $56,250,
but not more than $144,000, the lesser of $36,000 or 40% of the loan, and (d) as
to loans with an original principal amount of more than $144,000 (for an
owner-occupied, single-family home or condominium unit), the lesser of $50,750
or 25% of the loan. The liability on the guaranty 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 guaranty exceed the amount of the original
guaranty. The VA may, at its option and without regard to the guaranty, 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 Mortgage Loan, the Servicer is, absent
exceptional circumstances, authorized to announce its intention to foreclose
only when the default has continued for three months. However, notwithstanding
the foregoing, the regulations require the Servicer to take immediate action if
it determines that the property to be foreclosed upon has been abandoned by the
debtor or has been or may be subject to extraordinary waste or if there exist
conditions justifying the appointment of a receiver for the property. Generally,
a claim for the guaranty is submitted after liquidation of the mortgaged
property. Upon default and subsequent termination of a VA-guaranteed loan by a
servicer, the VA makes a determination, using a formula, whether it will reduce
its maximum claim liability by acquiring and reselling the property or by paying
the claim on its guaranty without such acquisition. If the VA determines it will
acquire the property, it will establish a maximum price, known as the specified
amount, which the servicer may bid at the foreclosure sale in order for the
servicer to subsequently convey the property to the VA. If the servicer
purchases the property at the sale for no more than such specified amount, it
may convey the property to the VA in return for the payment of such amount. The
VA also pays, up to the maximum amount of the loan guaranty, the claim for the
difference between the price paid for the property and any balance remaining on
the loan. If, however, the VA determines that acquiring and disposing of the
property would increase rather than reduce the government's loss, it will not
establish a maximum bid price for the holder to bid at the foreclosure sale
(thus, a "no-bid"), but rather will solely pay the guaranty claim up to the
maximum amount of the guaranty, once the loss on the loan has been established.
In the event of a no-bid, the Servicer must foreclose on the defaulted VA
Mortgage Loan and thus a loss may be incurred on such mortgage loan in an amount
equal to the difference between (a) the total indebtedness and (b) the sum of
(i) the guaranteed amount and (ii) the proceeds of any foreclosure.
The amount payable under the guaranty will be the percentage of the VA
Mortgage Loan originally guaranteed applied to the indebtedness outstanding as
of the applicable date of computation specified in the VA regulations. Payments
under the guaranty will be equal to the unpaid principal amount of the VA
Mortgage Loan, interest accrued on the unpaid balance thereof 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 mortgaged property. The amount payable under the guaranty may in no event
exceed the amount of the original guaranty.
THE SELLER
GENERAL
Credit-Based Asset Servicing and Securitization LLC is a Delaware limited
liability company with its principal place of business in New York, New York.
The information set forth in the following paragraphs has been provided by the
Seller and neither the Depositor nor any other party makes any representation as
to the accuracy or completeness of such information.
The Seller was established in July 1996 as a venture of Mortgage Guaranty
Insurance Corporation ("MGIC"), Enhance Financial Services Group, Inc. ("EFSG")
and certain members of management of the Seller. Each of MGIC and EFSG has
approximately a 48% interest in the Seller with the remainder owned by
management of the Seller. At September 30, 1998, the Seller had approximately
$400 million in assets, approximately $308 million in liabilities and
approximately $92 million in equity.
The Seller's principal business is the purchasing of performing,
sub-performing and non-performing residential mortgage loans from banks and
other financial institutions and individuals and mortgage-related securities,
including non-investment grade subordinated securities, for investment and
securitization. All mortgage loans owned by the Seller are serviced by its
affiliate, Litton Loan Servicing LP. The Seller does not originate mortgages.
The Seller is a HUD-approved investing mortgagee.
UNDERWRITING STANDARDS
Each Mortgage Loan included in the Trust Fund has satisfied the credit,
appraisal and underwriting guidelines established by the Seller that are
described below. To determine satisfaction of such guidelines, the Seller or a
loan reviewer reviewed the files related to the Mortgage Loans in connection
with the acquisition of the Mortgage Loans by the Seller. These files include
the documentation pursuant to which the mortgage loan was originally
underwritten, as well as the mortgagor's payment history on the mortgage loan.
The Seller's underwriting guidelines when reunderwriting mortgage loans are
intended to evaluate the borrower's credit standing, repayment ability and
willingness to repay debt, as well as the value and adequacy of the mortgaged
property as collateral. In general, to establish the adequacy of the mortgaged
property as collateral, the Seller will obtain a current appraisal, broker's
price opinion, and/or drive-by or desk review of such property, prepared within
six months of the Seller's purchase. A borrower's ability and willingness to
repay debts (including the Mortgage Loan) in a timely fashion must be
demonstrated by the quality, quantity and durability of income history, history
of debt management, history of debt repayment, and net worth accumulation.
Accordingly, the Seller also obtains and reviews a current credit report for the
mortgagor.
The Seller purchases mortgage loans that were originated pursuant to one of
the following documentation programs:
Full Documentation. Mortgage loans originally underwritten with "Full
Documentation" include a detailed application designed to provide pertinent
credit information. As part of the description of the mortgagor's financial
condition, the mortgagor was required to fill out a detailed application
designed to provide pertinent credit information. As part of the description of
the mortgagor's financial condition, the mortgagor provided a balance sheet,
current as of the origination of the mortgage loan, describing assets and
liabilities and a statement of income and expenses, as well as authorizing the
originator to obtain a credit report which summarizes the mortgagor's credit
history with local merchants and lenders and any record of bankruptcy. In
addition, an employment verification was obtained wherein the employer reported
the length of employment with that organization, the mortgagor's salary as of
the mortgage loan's origination, and an indication as to whether it is expected
that the mortgagor will continue such employment after the mortgage loan's
origination. If a mortgagor was self-employed when such mortgagor's loan was
originated, the mortgagor submitted copies of signed tax returns. The originator
was also provided with deposit verification at all financial institutions where
the mortgagor had demand or savings accounts.
In determining the adequacy of the property as collateral at origination,
an independent appraisal was made of each property considered for financing. The
appraiser inspected the property and verified that it was in good condition and
that construction, if new, had been completed at the time of the loan's
origination. Such appraisal was based on the appraiser's judgment of values,
giving appropriate weight to both the then market value of comparable homes and
the cost of replacing the property.
Other Levels of Documentation. Other mortgage loans purchased and
reunderwritten by the Seller were originally underwritten pursuant to
alternative documentation programs that require less documentation and
verification than do traditional "full documentation" programs, including "No
Documentation," "Limited Documentation" and "Alternative Documentation" programs
for certain qualifying mortgage loans. Under a "No Documentation" program, no
verification of a mortgagor's income or assets is undertaken by the originator.
Under a "Limited Documentation" program, certain underwriting documentation
concerning income and employment verification is waived. "Alternative
Documentation" programs allow a mortgagor to provide W-2 forms instead of tax
returns, permits bank statements in lieu of verification of deposits and permits
alternative methods of employment verification. These are underwriting programs
designed to streamline the underwriting process by eliminating the requirement
for income verification. Depending on the facts and circumstances of a
particular case, the originator of the mortgage loan may have accepted other
mortgage loans based on limited documentation that eliminated the need for
either income verification and/or asset verification. The objective use of
limited documentation is to shift the emphasis of the underwriting process from
the credit standing of the mortgagor to the value and adequacy of the mortgaged
property as collateral.
OWNER-FINANCED MORTGAGE LOANS
The Seller routinely purchases mortgage loans which are owner-financed
mortgage loans. Owner-financed mortgage loans are originated by the individual
sellers of the related mortgaged property who generally are inexperienced in
matters pertaining to mortgage banking. These mortgage loans were originated
with less stringent standards than the other mortgage loans typically purchased
by the Seller. The borrower under an owner-financed mortgage loan generally does
not complete a mortgage loan application and the seller of the related property
generally does not verify the income or employment of the related borrower. In
connection with the Seller's acquisition of an owner-financed mortgage loan, the
Seller did obtain and review the credit history and payment history of the
borrower. In deciding to purchase owner-financed mortgage loans, the Seller
generally places considerable emphasis on the value of the mortgaged property.
The Seller, in connection with its underwriting of an owner-financed mortgage
loan, calculates the loan-to-value ratio of the mortgage loan at the time of
acquisition for underwriting purposes to determine the mortgagor's equity in the
related mortgaged property. A drive-by appraisal of the market value of each
mortgaged property relating to an owner-financed mortgage loan generally was
obtained within 90 days prior to the purchase by the Seller of such mortgage
loan. However, in certain instances, the Seller may have utilized a previous
appraisal if it was completed within one year prior to the purchase by the
Seller, in which case the Seller will generally require the appraiser to
recertify the value in such appraisal. The Seller may have acquired an
owner-financed mortgage loan based upon a statistical valuation provided by
independent data providers of the mortgaged property and subsequently obtained a
drive-by appraisal, generally within three months of acquisition. For all
Owner-Financed Mortgage Loans included in either Loan Group acquired using
statistical valuations, appraisals (which generally are drive-by appraisals)
have been subsequently obtained.
For a discussion of the certain risks related to owner-financed
mortgage loans that a Certificateholder should consider prior to purchase, see
"Risk Factors - Risks Related to Owner-Financed Mortgage Loans."
THE SERVICER
The information set forth in the following paragraphs has been provided
by Litton Loan Servicing LP. None of the Depositor, the Seller, the Trustee, the
Underwriter or any of their respective affiliates have made or will make any
representation as to the accuracy or completeness of such information.
Litton Loan Servicing LP ("Litton") a Delaware limited partnership, and
an affiliate of the Seller, will act as the servicer of the Mortgage Loans
pursuant to the Pooling and Servicing Agreement. Litton Loan Servicing LP was
formed in July 1996, with all of the general and limited partnership interests
owned by EFSG, MGIC and C-BASS Holding LLC. On October 1, 1998 Litton Loan
Servicing, Inc., a wholly-owned subsidiary of EFSG, transferred its business to
Litton Loan Servicing LP. From and after October 1, 1998 all activities formerly
conducted by Litton Servicing, Inc. are being conducted by Litton Loan Servicing
LP. The Servicer currently employs approximately 160 individuals. The main
office of the Servicer is located at 5373 W. Alabama, Houston, Texas 77056. The
Servicer is currently a Fannie Mae and Freddie Mac approved servicer and an
approved FHA and VA lender with a servicing portfolio in excess of $2.625
billion. Litton specializes in servicing sub-performing mortgage loans and
entering into workouts with the related mortgagors. Other transactions for which
the Servicer acts as servicer include Housing Securities, Inc. 1995-RP1, C-BASS
ABS, LLC 1997-1, C-BASS ABS, LLC 1997-3, C-BASS ABS, LLC 1998-1, Merrill Lynch
Mortgage Investors, Inc., Series 1998-G1 and Series 1998-FF2 and The Prudential
Home Mortgage Securities Company, Inc., Series 1990-09, Series 1990-14, Series
1991-05, Series 1991-10, Series 1991-14, Series 1991-20, Series 1991-20, Series
1992-06, Series 1992-12, Series 1992-16 and Series 1992-23.
Delinquency and Foreclosure Experience. The following table sets forth
the delinquency and foreclosure experience of the mortgage loans serviced by
Litton (doing business as Litton Loan Servicing, Inc.) as of the date indicated.
The Servicer's portfolio of mortgage loans may differ significantly from the
Mortgage Loans in terms of interest rates, principal balances, geographic
distribution, types of properties and other possibly relevant characteristics.
There can be no assurance, and no representation is made, that the delinquency
and foreclosure experience with respect to the Mortgage Loans will be similar to
that reflected in the table below, nor is any representation made as to the rate
at which losses may be experienced on liquidation of defaulted Mortgage Loans.
The actual delinquency experience on the Mortgage Loans will depend, among other
things, upon the value of the real estate securing such Mortgage Loans and the
ability of the related mortgagor to make required payments. It should be noted
that the Servicer's business emphasizes to a certain degree the acquisition of
servicing rights with respect to non-performing and subperforming mortgage loans
and the Servicer has been an active participant in the market for such servicing
rights over the past several months. The acquisition of such servicing rights
may have affected the delinquency and foreclosure experience of the Servicer in
the period ending on September 30, 1998 as compared with the period ending on
December 31, 1997.
DELINQUENCY AND FORECLOSURE EXPERIENCE1
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998 AS OF DECEMBER 31, 1997
--------------------------------------------- ---------------------------------------------
% BY % BY
NO. OF PRINCIPAL NO. OF PRINCIPAL
LOANS PRINCIPAL BALANCE2 BALANCE LOANS PRINCIPAL BALANCE2 BALANCE
-------- ----------------- --------- ------ ------------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Current Loans 36,704 $2,011,253,745.11 76.60% 28,982 $1,360,468,859.99 80.48%
Period of Delinquency3
30-59 Days 3,438 187,462,160.31 7.14% 2,534 111,026,183.71 6.57%
60-89 1,223 62,597,185.92 2.38% 728 29,739,191.62 1.76%
90 Days or more 2,773 127,574,244.83 4.86% 1,348 50,772,586.46 3.00%
------- ---------------- --------- -------- ----------------- --------
TOTAL DELINQUENCIES 7,434 377,633,591.06 14.38% 4,610 191,537,962.00 11.33%
Foreclosure/Bankruptcies4 2,681 179,333,653.45 6.83% 1,344 98,380,747.30 5.82%
Real Estate Owned 821 57,492,117.66 2.19% 427 39,978,357.34 2.37%
------ ---------------- --------- -------- ------------------ --------
TOTAL PORTFOLIO 47,640 2,625,713,107.28 100.00% 35,363 1,690,365,926.42 100.00%
------ ---------------- ------- ------- ----------------- -------
</TABLE>
- ---------------------------
(1) The table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated.
(2) For the Real Estate Owned properties, the principal balance is at the time
of foreclosure.
(3) No mortgage loan is included in this section of the table as delinquent
until it is 30 days past due.
(4) Exclusive of the number of loans and principal balance shown in Period of
Delinquency.
It is unlikely that the delinquency experience of the Mortgage Loans
comprising the Mortgage Pool will correspond to the delinquency experience of
Litton's mortgage portfolio set forth in the foregoing tables. The statistics
shown above represent the delinquency experience for the Servicer's mortgage
servicing portfolio only for the periods presented, whereas the aggregate
delinquency experience on the Mortgage Loans comprising the Mortgage Pool will
depend on the results obtained over the life of the Mortgage Pool. Litton does
not have significant historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of estimating the future
delinquency and loss experience of Mortgage Loans. There can be no assurance
that the Mortgage Loans comprising the Mortgage Pool will perform consistent
with the delinquency or foreclosure experience described herein. It should be
noted that if the residential real estate market should experience an overall
decline in property values, the actual rates of delinquencies and foreclosures
could be higher than those previously experienced by the Servicer. In addition,
adverse economic conditions may affect the timely payment by Mortgagors of
scheduled payments of principal and interest on the Mortgage Loans and,
accordingly, the actual rates of delinquencies and foreclosures with respect to
the Mortgage Pool.
THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement, dated as of November 1, 1998 (the "Pooling and Servicing Agreement"),
among the Depositor, the Seller, the Servicer and the Trustee. The Trust Fund
created under the Pooling and Servicing Agreement will consist of (i) all of the
Depositor's right, title and interest in the Mortgage Loans, the related
mortgage notes, mortgages and other related documents, (ii) all payments on or
collections in respect of the Mortgage Loans due after the Cut-off Date,
together with any proceeds thereof, (iii) any Mortgaged Properties acquired on
behalf of Certificateholders by foreclosure or by deed in lieu of foreclosure,
and any revenues received thereon, (iv) the rights of the Trustee under all
insurance policies required to be maintained pursuant to the Pooling and
Servicing Agreement and (v) the rights of the Depositor under the Mortgage Loan
Purchase Agreement between the Depositor and the Seller. The Offered
Certificates will be transferable and exchangeable at the corporate trust
offices of the Trustee.
ASSIGNMENT OF THe MORTGAGE LOANS
On the Closing Date the Depositor will transfer to the Trust Fund all of
its right, title and interest in and to each Mortgage Loan, the related mortgage
notes, mortgages and other related documents (collectively, the "Related
Documents"), including all scheduled payments with respect to each such Mortgage
Loan due after the Cut-off Date. The Trustee, concurrently with such transfer,
will deliver the Certificates to the Depositor. Each Mortgage Loan transferred
to the Trust Fund will be identified on a schedule (the "Mortgage Loan
Schedule") delivered to the Trustee pursuant to the Pooling and Servicing
Agreement. Such schedule will include information such as the Principal Balance
of each Mortgage Loan as of the Cut-off Date, its Loan Rate as well as other
information.
The Pooling and Servicing Agreement will require that, within the time
period specified therein, the Seller will deliver or cause to be delivered to
the Trustee (or a custodian, as the Trustee's agent for such purpose) the
mortgages notes endorsed to the Trustee on behalf of the Certificateholders and
the Related Documents. In lieu of delivery of original mortgages or mortgage
notes, if such original is not available or lost, the Seller may deliver or
cause to be delivered true and correct copies thereof, or, with respect to a
lost mortgage note, a lost note affidavit executed by the Seller.
Within 45 days of the Closing Date, the Trustee will review the Mortgage
Loans and the Related Documents pursuant to the Pooling and Servicing Agreement
and if any Mortgage Loan or Related Document is found to be defective in any
material respect and such defect is not cured within 90 days following
notification thereof to the Seller by the Trustee, the Seller will be obligated
to either (i) substitute for such Mortgage Loan an Eligible Substitute Mortgage
Loan; however, such substitution is permitted only within two years of the
Closing Date and may not be made unless an opinion of counsel is provided to the
effect that such substitution will not disqualify the Trust Fund as a REMIC or
result in a prohibited transaction tax under the Code or (ii) purchase such
Mortgage Loan at a price (the "Purchase Price") equal to the outstanding
Principal Balance of such Mortgage Loan as of the date of purchase, plus all
accrued and unpaid interest thereon, computed at the Loan Rate through the end
of the calendar month in which the purchase is effected, plus the amount of any
unreimbursed Advances and Servicing Advances made by the Servicer. The Purchase
Price will be deposited in the Collection Account on or prior to the next
succeeding Determination Date after such obligation arises. The obligation of
the Seller to repurchase or substitute for a Defective Mortgage Loan is the sole
remedy regarding any defects in the Mortgage Loans and Related Documents
available to the Trustee or the Certificateholders.
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the Seller will be required to deposit in the Collection Account on or
prior to the next succeeding Determination Date after such obligation arises an
amount (the "Substitution Adjustment") equal to the excess of the Principal
Balance of the related Defective Mortgage Loan over the Principal Balance of
such Eligible Substitute Mortgage Loan.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted by
the Seller for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance), not in excess of, and not more than 5% less than,
the Principal Balance of the Defective Mortgage Loan; (ii) have a Loan Rate,
with respect to a Group I Mortgage Loan, not less than the Loan Rate of the
Defective Mortgage Loan and not more than 1% in excess of the Loan Rate of such
Defective Mortgage Loan or, with respect to a Group II Mortgage Loan, have a
Maximum Loan Rate and Minimum Loan Rate not less than the respective rate for
the Defective Mortgage Loan and have a Gross Margin equal to or greater than the
Defective Mortgage Loan; (iii) have the same Due Date as the Defective Mortgage
Loan; (iv) have a remaining term to maturity not more than one year earlier and
not later than the remaining term to maturity of the Defective Mortgage Loan;
(v) comply with each representation and warranty as to the Mortgage Loans set
forth in the Pooling and Servicing Agreement (deemed to be made as of the date
of substitution); (vi) have been reunderwritten by the Seller in accordance with
the same underwriting criteria and guidelines as the Mortgage Loans being
replaced; (vii) must be of the same or better credit quality as the Mortgage
Loan being replaced; and (viii) satisfy certain other conditions specified in
the Pooling and Servicing Agreement.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., Cut-off Date Principal Balance
and the Loan Rate). In addition, the Seller will represent and warrant, on the
Closing Date, that, among other things: (i) at the time of transfer to the
Depositor, the Seller has transferred or assigned all of its right, title and
interest in each Mortgage Loan and the Related Documents, free of any lien; and
(ii) each Mortgage Loan complied, at the time of origination, in all material
respects with applicable state and federal laws. Upon discovery of a breach of
any such representation and warranty which materially and adversely affects the
interests of the Certificate Insurer or the Certificateholders in the related
Mortgage Loan and Related Documents, the Seller will have a period of 90 days
after discovery or notice of the breach to effect a cure. If the breach cannot
be cured within the 90-day period, the Seller will be obligated to (i)
substitute for such Defective Mortgage Loan an Eligible Substitute Mortgage Loan
or (ii) purchase such Defective Mortgage Loan from the Trust Fund. The same
procedure and limitations that are set forth above for the substitution or
purchase of Defective Mortgage Loans as a result of deficient documentation
relating thereto will apply to the substitution or purchase of a Defective
Mortgage Loan as a result of a breach of a representation or warranty in the
Pooling and Servicing Agreement that materially and adversely affects the
interests of the Certificate Insurer or the Certificateholders.
Mortgage Loans required to be transferred to the Seller as described in the
preceding paragraphs are referred to as "Defective Mortgage Loans."
Pursuant to the Pooling and Servicing Agreement, the Servicer will service
and administer the Mortgage Loans as more fully set forth therein.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Servicer shall establish and maintain or cause to be maintained a
separate trust account (the "Collection Account") for the benefit of the holders
of the Certificates. The Collection Account will be an Eligible Account (as
defined herein). Upon receipt by the Servicer of amounts in respect of the
Mortgage Loans (excluding amounts representing the Servicing Fee, reimbursement
for Advances and Servicing Advances and insurance proceeds to be applied to the
restoration or repair of a Mortgaged Property or similar items), the Servicer
will deposit such amounts in the Collection Account. Amounts so deposited may be
invested in Eligible Investments (as described in the Pooling and Servicing
Agreement) maturing no later than one Business Day prior to the date on which
the amount on deposit therein is required to be deposited in the Distribution
Account. The Trustee will establish an account (the "Distribution Account") into
which will be deposited amounts withdrawn from the Collection Account for
distribution to Certificateholders on a Distribution Date. The Distribution
Account will be an Eligible Account. Amounts on deposit therein may be invested
in Eligible Investments maturing on or before the Business Day prior to the
related Distribution Date unless such Eligible Investments are invested in
investments managed or advised by the Trustee or an affiliate thereof, in which
case such Eligible Investments may mature on the related Distribution Date.
An "Eligible Account" is a segregated account that is (i) an account or
accounts maintained with a federal or state chartered depository institution or
trust company the short-term unsecured debt obligations of which (or, in the
case of a depository institution or trust company that is the principal
subsidiary of a holding company, the short-term unsecured debt obligations of
such holding company) are rated P-1 by Moody's and A-1 by Standard & Poor's (or
comparable ratings if Moody's and Standard & Poor's are not the Rating Agencies)
at the time any amounts are held on deposit therein, (ii) an account or accounts
the deposits in which are fully insured by the Federal Deposit Insurance
Corporation (to the limits established by such corporation), the uninsured
deposits in which account are otherwise secured such that, as evidenced by an
opinion of counsel delivered to the Trustee and to each Rating Agency, the
Certificateholders will have a claim with respect to the funds in such account
or a perfected first priority security interest against such collateral (which
shall be limited to Eligible Investments) securing such funds that is superior
to claims of any other depositors or creditors of the depository institution
with which such account is maintained, (iii) a trust account or accounts
maintained with the trust department of a federal or state chartered depository
institution, national banking association or trust company acting in its
fiduciary capacity or (iv) otherwise acceptable to each Rating Agency and the
Certificate Insurer without reduction or withdrawal of their then current
ratings of the Certificates as evidenced by a letter from each Rating Agency to
the Trustee. Eligible Investments are specified in the Pooling and Servicing
Agreement and are limited to investments which meet the criteria of the Rating
Agencies and the Certificate Insurer from time to time as being consistent with
their then current ratings of the Certificates.
ADVANCES
Subject to the following limitations, the Servicer will be obligated to
advance or cause to be advanced on or before each Distribution Date its own
funds, or funds in the Collection Account that are not included in the Available
Funds for such Distribution Date, in an amount equal to the aggregate of all
payments of principal and interest, net of the Servicing Fee that was due during
the related Prepayment Period on the Mortgage Loans, other than Balloon
Payments, and that were delinquent on the related Determination Date, plus
certain amounts representing assumed payments not covered by any current net
income on the Mortgaged Properties acquired by foreclosure or deed in lieu of
foreclosure, and, with respect to Balloon Loans, with respect to which the
Balloon Payment is not made when due, an assumed monthly payment that would have
been due on the related Due Date based on the original principal amortization
schedule for such Balloon Loan (any such advance, an "Advance").
Advances are required to be made only to the extent they are deemed by the
Servicer to be recoverable from related late collections, insurance proceeds or
liquidation proceeds. The purpose of making such Advances is to maintain a
regular cash flow to the Certificateholders, rather than to guarantee or insure
against losses. The Servicer will not be required, however, to make any Advances
with respect to reductions in the amount of the monthly payments on the Mortgage
Loans due to bankruptcy proceedings or the application of the Relief Act.
Subject to the recoverability standard above, the Servicer's obligation to make
Advances as to any Mortgage Loan will continue until the Mortgage Loan is paid
in full or until the recovery of all Liquidation Proceeds thereon; provided,
however that such obligation will cease if title to the Mortgaged Property is
acquired by the Trust Fund in foreclosure or by deed in lieu of foreclosure
("REO Property").
All Advances will be reimbursable to the Servicer from late collections,
insurance proceeds and liquidation proceeds from the Mortgage Loan as to which
such unreimbursed Advance was made. In addition, any Advances previously made in
respect of any Mortgage Loan that are deemed by the Servicer to be
nonrecoverable from related late collections, insurance proceeds or liquidation
proceeds may be reimbursed to the Servicer out of any funds in the Collection
Account prior to the distributions on the Certificates. In the event the
Servicer fails in its obligation to make any such advance, the Trustee, in its
capacity as successor Servicer, will be obligated to make any such advance, to
the extent required in the Pooling and Servicing Agreement.
In the course of performing its servicing obligations, the Servicer will
pay all reasonable and customary "out-of-pocket" costs and expenses incurred in
the performance of its servicing obligations, including, but not limited to, the
cost of (i) the preservation, restoration and protection of the Mortgaged
Properties, (ii) any enforcement or judicial proceedings, including
foreclosures, and (iii) the management and liquidation of Mortgaged Properties
acquired in satisfaction of the related mortgage. Each such expenditure will
constitute a "Servicing Advance."
The Servicer's right to reimbursement for Servicing Advances is limited to
late collections on the related Mortgage Loan, including liquidation proceeds,
released mortgaged property proceeds, insurance proceeds and such other amounts
as may be collected by the Servicer from the related Mortgagor or otherwise
relating to the Mortgage Loan in respect of which such unreimbursed amounts are
owed, unless such amounts are deemed to be nonrecoverable by the Servicer, in
which event reimbursement will be made to the Servicer from general funds in the
Collection Account.
THE TRUSTEE
Norwest Bank Minnesota, National Association, a national banking
association organized and existing under the laws of the United States, will be
named Trustee pursuant to the Pooling and Servicing Agreement. The Trustee may
make available each month, to any interested party, the monthly statement to
Certificateholders via the Trustee's website, electronic bulletin board and its
fax-on-demand service. The Trustee's website can be accessed at
"http://www.ctslink.com". The Trustee's electronic bulletin board may be
accessed by calling (301) 815-6620, and its fax-on-demand service may be
accessed by calling (301) 815-6610. The Trustee will also distribute to
Certificateholders hard copies of such reports.
The principal compensation (the "Trustee Fee") to be paid to the Trustee in
respect of its obligations under the Pooling and Servicing Agreement will be
equal to accrued interest at the "Trustee Fee Rate" of 0.0175% per annum on the
Principal Balance of each Mortgage Loan. In addition, as compensation for its
services the Trustee will receive certain investment earnings on the amounts on
deposit in the Distribution Account. The Pooling and Servicing Agreement will
provide that the Trustee and any director, officer, employee or agent of the
Trustee will be indemnified by the Trust Fund and will be held harmless against
any loss, liability or expense (not including expenses, disbursements and
advances incurred or made by the Trustee, including the compensation and the
expenses and disbursements of its agents and counsel, in the ordinary course of
the Trustee's performance in accordance with the provisions of the Pooling and
Servicing Agreement) incurred by the Trustee arising out of or in connection
with the acceptance or administration of its obligations and duties under the
Pooling and Servicing Agreement, other than any loss, liability or expense (i)
that constitutes a specific liability of the Trustee under the Pooling and
Servicing Agreement or (ii) incurred by reason of willful misfeasance, bad faith
or negligence in the performance of the Trustee's duties under the Pooling and
Servicing Agreement or as a result of a breach, or by reason of reckless
disregard, of the Trustee's obligations and duties under the Pooling and
Servicing Agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation (the "Servicing Fee") to be paid to the Servicer
in respect of its servicing activities for the Certificates will be at the
"Servicing Fee Rate" of 0.375% per annum on the Principal Balance of each
Mortgage Loan. As additional servicing compensation, the Servicer is entitled to
retain all service-related fees (other than prepayment penalties), including
assumption fees, modification fees, extension fees and late payment charges, to
the extent collected from mortgagors, together with any interest or other income
earned on funds held in the Collection Account and any escrow accounts. The
Servicer is obligated to offset any Prepayment Interest Shortfall on any
Distribution Date (payments made by the Servicer in satisfaction of such
obligation, "Compensating Interest") by an amount not in excess of one-half of
its Servicing Fee for such Distribution Date. The Servicer is obligated to pay
certain insurance premiums and certain ongoing expenses associated with the
Mortgage Pool and incurred by the Servicer in connection with its
responsibilities under the Pooling and Servicing Agreement and is entitled to
reimbursement therefor as provided in the Pooling and Servicing Agreement.
The Servicer, in its capacity as a special servicer is also entitled to an
additional servicing fee (the "Special Servicing Fee"), in connection with
Mortgage Loans that are 90 or more days delinquent. As more fully described in
the Pooling and Servicing Agreement, the Special Servicing Fee is equal to $150
per Mortgage Loan 90 or more days delinquent, payable monthly for eighteen
consecutive months commencing in the first month after the Cut-off Date in which
payments on such Mortgage Loan are 90 or more days delinquent, unless such
Mortgage Loan becomes less than 90 days delinquent.
The "Determination Date" with respect to any Distribution Date will be the
15th day of the calendar month in which such Distribution Date occurs or, if
such 15th day is not a Business Day, the Business Day immediately preceding such
15th day. With respect to any Determination Date and each Mortgage Loan as to
which a principal prepayment in full was applied during the prior calendar
month, the "Prepayment Interest Shortfall" is an amount equal to the interest at
the applicable Loan Rate (net of the Servicing Fee) on the amount of such
principal prepayment for the number of days commencing on the date on which the
principal prepayment is applied and ending on the last day of the prior calendar
month.
VOTING RIGHTS
With respect to any date of determination, if no Insurer Default exists and
is continuing and the Class A Certificates are outstanding or any amounts are
owed to the Certificate Insurer under the Insurance Agreement, all of the Voting
Rights allocated to the Certificateholders shall be vested in the Certificate
Insurer. However, (i) if an Insurer Default does exist and is continuing or (ii)
the Class A Certificates are no longer outstanding and no amounts are owed to
the Certificate Insurer under the Insurance Agreement, the percentage of all the
Voting Rights allocated among holders of the Offered Certificates shall be the
fraction, expressed as a percentage, the numerator of which is the aggregate
Certificate Principal Balance of all the Certificates of such Class then
outstanding and the denominator of which is the aggregate Certificate Principal
Balance of all the Certificates then outstanding. The Voting Rights allocated to
a Class of Offered Certificates shall be allocated among all holders of each
such Class in proportion to the outstanding certificate balances of such
Certificates. The Class OC Certificates and the Class R Certificates will not
have any Voting Rights.
AMENDMENT
The Pooling and Servicing Agreement may be amended by the Seller, the
Depositor, the Servicer and the Trustee, without the consent of the holders of
the Certificates but with the consent of the Certificate Insurer (if no Insurer
Default exists and is continuing and the Class A Certificates are outstanding or
any amounts are owed to the Certificate Insurer under the Insurance Agreement),
for any of the purposes set forth under "The Agreements--Amendment" in the
Prospectus. In addition, the Pooling and Servicing Agreement may with the
written consent of the Certificate Insurer (if no Insurer Default exists and is
continuing and the Class A Certificates are outstanding or any amounts are owed
to the Certificate Insurer under the Insurance Agreement) be amended by the
Seller, the Depositor, the Servicer and the Trustee and the holders of a
majority in interest of any Class of Offered Certificates affected thereby for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of the Pooling and Servicing Agreement or of modifying in
any manner the rights of the holders of any Class of Offered Certificates;
provided, however, that no such amendment may (i) reduce in any manner the
amount of, or delay the timing of, distributions required to be made on any
Class of Offered Certificates without the consent of the holders of such
Certificates; (ii) adversely affect in any material respect the interests of the
holders of any Class of Offered Certificates in a manner other than as described
in clause (i) above, without the consent of the holders of such Class evidencing
percentage interests aggregating at least 66%; or (iii) reduce the aforesaid
percentage of aggregate outstanding principal amounts of Offered Certificates,
the holders of which are required to consent to any such amendment, without the
consent of the holders of all such Certificates.
TERMINATION
The Seller, or if the Seller does not exercise such option, the Certificate
Insurer, will have the right to repurchase all of the Mortgage Loans and REO
Properties and thereby effect the early retirement of the Certificates, on any
Distribution Date on which the aggregate Principal Balance of such Mortgage
Loans and REO Properties in either Loan Group is less than 10% of the aggregate
Principal Balance of the Mortgage Loans in such Loan Group as of the Cut-off
Date. The first Distribution Date on which such option could be exercised is
referred to herein as the "Optional Termination Date". In the event that the
option is exercised, the repurchase will be made at a price (the "Termination
Price") generally equal to par plus accrued interest for each Mortgage Loan at
the related Loan Rate to but not including the first day of the month in which
such repurchase price is distributed plus the amount of any unreimbursed
Advances and Servicing Advances made by the Servicer plus any amounts due to the
Certificate Insurer under the Insurance Agreement. Proceeds from such repurchase
will be included in Available Funds and will be distributed to the holders of
the Certificates in accordance with the Pooling and Servicing Agreement. Any
such repurchase of the Mortgage Loans and REO Properties will result in the
early retirement of the Certificates.
OPTIONAL PURCHASE OF DEFAULTED LOANS
As to any Mortgage Loan which is delinquent in payment by 60 days or more,
the Seller may, at its option, purchase such Mortgage Loan from the Trust Fund
at the Purchase Price for such Mortgage Loan.
EVENTS OF SERVICING TERMINATION
Events of Servicing Termination will consist, among other things, of: (i)
(a) any failure by the Servicer to make an Advance and (b) any other failure by
the Servicer to deposit in the Collection Account or Distribution Account the
required amounts or remit to the Trustee any payment which continues unremedied
for one Business Day following written notice to the Servicer; (ii) any failure
of the Servicer to make any Advance or to cover any Prepayment Interest
Shortfalls, as described herein, which failure continues unremedied for one
Business Day; (iii) any failure by the Servicer to observe or perform in any
material respect any other of its covenants or agreements in the Pooling and
Servicing Agreement, which continues unremedied for 30 days after the first date
on which (x) the Servicer has knowledge of such failure or (y) written notice of
such failure is given to the Servicer; (iv) insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings, and certain
actions by or on behalf of the Servicer indicating its insolvency or inability
to pay its obligations; or (v) cumulative Realized Losses or Delinquencies as of
any Distribution Date exceed the amount specified in the Pooling and Servicing
Agreement.
RIGHTS UPON EVENT OF SERVICING TERMINATION
So long as an Event of Servicing Termination under the Pooling and
Servicing Agreement remains unremedied, the Trustee at the direction of the
Certificate Insurer (so long as (i) no Insurer Default exists and is continuing
and (ii) the Class A Certificates are outstanding or any amounts are owed to the
Certificate Insurer under the Insurance Agreement) or the holders of Offered
Certificates (if an Insurer Default exists and is continuing or the Class A
Certificates are no longer outstanding and no amounts are owed to the
Certificate Insurer under the Insurance Agreement) evidencing not less than 51%
of the Voting Rights may terminate all of the rights and obligations of the
Servicer in its capacity as servicer with respect to the Mortgage Loans, as
provided in the Pooling and Servicing Agreement, whereupon the Trustee will
succeed to all of the responsibilities and duties of the Servicer under the
Pooling and Servicing Agreement, including the obligation to make Advances. No
assurance can be given that termination of the rights and obligations of the
Servicer under the Pooling and Servicing Agreement would not adversely affect
the servicing of the related Mortgage Loans, including the delinquency
experience of such Mortgage Loans.
No holder of an Offered Certificate, solely by virtue of such holder's
status as a holder of an Offered Certificate, will have any right under the
Pooling and Servicing Agreement to institute any proceeding with respect
thereto, unless such holder previously has given to the Trustee written notice
of default and unless (i) if no Insurer Default exists and is continuing, the
Certificate Insurer so agrees or (ii) if an Insurer Default exists and is
continuing, the holders of Offered Certificates having not less than 51% of the
Voting Rights evidenced by the Offered Certificates so agree and have offered
reasonable indemnity to the Trustee.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement. Set forth below are summaries of the specific terms and provisions
pursuant to which the Offered Certificates will be issued. The following
summaries do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, the provisions of the Pooling and Servicing
Agreement. When particular provisions or terms used in the Pooling and Servicing
Agreement are referred to, the actual provisions (including definitions of
terms) are incorporated by reference.
C-BASS Trust 1998-3 will issue the Class AF and Class AV Certificates
(together, the " Class A Certificates"), the Class BF and Class BV Certificates
(together, the "Class B Certificates"), the Class OC-I and Class OC-II
Certificates (together, the "Class OC Certificates") and the Class R
Certificates (the "Residual Certificates"). The Class A Certificates, Class B
Certificates, the Class OC Certificates and the Residual Certificates are
collectively referred to herein as the "Certificates." Only the Class A and
Class B Certificates are offered hereby (the "Offered Certificates").
The Class A Certificates will be covered by an irrevocable and
unconditional certificate guaranty insurance policy (the "Policy") issued by
MBIA Insurance Corporation (the "Certificate Insurer") for the benefit of the
holders of the Class A Certificates, pursuant to which the Certificate Insurer
will guarantee payments to such Certificateholders as described herein.
The Offered Certificates will have the respective Original Certificate
Principal Balances specified on the cover hereof, subject to a permitted
variance of plus or minus one percent . The Class OC and Class R Certificates
will not have Original Certificate Principal Balances and will not bear
interest.
The Offered Certificates will be issued in book-entry form as described
below. The Offered Certificates will be issued in minimum dollar denominations
of $50,000 and integral multiples of $1,000 in excess thereof (except that one
certificate of each Class may be issued in a denomination which is not an
integral multiple thereof). The assumed final maturity date (each, an "Assumed
Final Distribution Date") for the Class AF and Class BF Certificates is January
2033 and for the Class AV and Class BV Certificates is January 2031.
Distributions on the Offered Certificates will be made by the Trustee on
the 25th day of each month, or if such day is not a Business Day, on the first
Business Day thereafter, commencing in December 1998 (each, a "Distribution
Date"), to the persons in whose names such Certificates are registered at the
close of business on the Record Date. With respect to the Group I Certificates,
the "Record Date" is the last day of the month immediately preceding the month
in which the related Distribution Date occurs. With respect to the Group II
Certificates, the "Record Date" is the day immediately preceding such
Distribution Date; provided, however, that if any Group II Certificate becomes a
Definitive Certificate (as defined herein), the Record Date for such Certificate
will be the last day of the month immediately preceding the month in which the
related Distribution Date occurs.
BOOK-ENTRY CERTIFICATES
The Offered Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the Offered
Certificates ("Certificate Owners") will hold such Certificates through DTC in
the United States, or Cedelbank or Euroclear (in Europe) if they are
participants of such systems, or indirectly through organizations which are
participants in such systems. The Book-Entry Certificates will be issued in one
or more certificates which equal the aggregate Certificate Principal Balance of
such Certificates and will initially be registered in the name of Cede & Co.,
the nominee of DTC. Cedelbank and Euroclear will hold omnibus positions on
behalf of their participants through customers' securities accounts in
Cedelbank's and Euroclear's names on the books of their respective depositaries
which in turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank will act as depositary for
Cedelbank and The Chase Manhattan Bank will act as depositary for Euroclear (in
such capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). Investors may hold such beneficial interests in the
Book-Entry Certificates in minimum denominations of $50,000. Except as described
below, no person acquiring a Book-Entry Certificate (each, a "beneficial owner")
will be entitled to receive a physical certificate representing such Certificate
(a "Definitive Certificate"). Unless and until Definitive Certificates are
issued, it is anticipated that the only "Certificateholder" of the Offered
Certificates will be Cede & Co., as nominee of DTC. Certificate Owners will not
be Certificateholders as that term is used in the Agreement. Certificate Owners
are only permitted to exercise their rights indirectly through Participants and
DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant and on
the records of Cedelbank or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Book-Entry Certificates from the Trustee through DTC and DTC
participants. While the Book-Entry Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Book-Entry Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Book-Entry Certificates.
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Book-Entry Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates representing their respective interests in the
Book-Entry Certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their interest.
Certificateholders will not receive or be entitled to receive certificates
representing their respective interests in the Book-Entry Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Certificateholders who are not Participants may
transfer ownership of Book-Entry Certificates only through Participants and
indirect participants by instructing such Participants and indirect participants
to transfer Book-Entry Certificates, by book-entry transfer, through DTC for the
account of the purchasers of such Book-Entry Certificates, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfers of ownership of Book-Entry Certificates
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the Participants and indirect
participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing Certificateholders.
Because of time zone differences, credits of securities received in
Cedelbank 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 Cedelbank Participants on such business day. Cash received in
Cedelbank or Euroclear as a result of sales of securities by or through a
Cedelbank Participant (as defined below) or Euroclear Participant (as defined
below) to a DTC Participant will be received with value on the DTC settlement
date but will be available in the relevant Cedelbank or Euroclear cash account
only as of the business day following settlement in DTC. For information with
respect to tax documentation procedures relating to the Certificates, see
"Certain Material Federal Income Tax Considerations--Tax Treatment of Foreign
Investors" and "--Backup Withholding" in the Prospectus and "Global Clearance,
Settlement and Tax Documentation Procedures--Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedelbank 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 Cedelbank
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedelbank Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
DTC which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the Rules, as
in effect from time to time.
Cedelbank ("Cedelbank"), 67 Bd Grande-Duchesse Charlotte, L-1331
Luxembourg, was incorporated in 1970 as a limited company under Luxembourg law.
Cedelbank is owned by banks, securities dealers and financial institutions, and
currently has about 100 shareholders, including U.S. financial institutions or
their subsidiaries. No single entity may own more than five percent of
Cedelbank's stock.
Cedelbank is registered as a bank in Luxembourg, and as such is subject to
regulation by the Institute Monetaire Luxembourgeois, "IML", the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Cedelbank holds securities for its customers ("Cedelbank Participants") and
facilitates the clearance and settlement of securities transactions by
electronic book-entry transfers between their accounts. Cedelbank provides
various services, including safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. Cedelbank also deals with domestic securities markets in several
countries through established depository and custodial relationships. Cedelbank
has established an electronic bridge with Morgan Guaranty Trust as the Euroclear
Operator in Brussels to facilitate settlement of trades between systems.
Cedelbank currently accepts over 70,000 securities issues on its books.
Cedelbank's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Cedelbank's United States customers are limited to
securities brokers and dealers and banks. Currently, Cedelbank has approximately
3,000 customers located in over 60 countries, including all major European
countries, Canada, and the United States. Indirect access to Cedelbank is
available to other institutions which clear through or maintain a custodial
relationship with an account holder of Cedelbank.
The Euroclear System ("Euroclear") was created in 1968 to hold securities
for its participants ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may be settled in any of 29 currencies,
including United States dollars. Euroclear includes various other services,
including securities lending and borrowing and interfaces with domestic markets
in several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan Guaranty Trust Company of New York (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by the
Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Remittance Date by the Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC participants in
accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede & Co. Distributions with respect to
Certificates held through Cedelbank or Euroclear will be credited to the cash
accounts of Cedelbank Participants or Euroclear Participants in accordance with
the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. Such distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "Certain
Material Federal Income Tax Considerations--Tax Treatment of Foreign Investors"
and "--Miscellaneous Tax Aspects--Backup Withholding" in the Prospectus. Because
DTC can only act on behalf of Financial Intermediaries, the ability of a
beneficial owner to pledge Book-Entry Certificates to persons or entities that
do not participate in the Depository system, or otherwise take actions in
respect of such Book-Entry Certificates, may be limited due to the lack of
physical certificates for such Book-Entry Certificates. In addition, issuance of
the Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust Fund will be provided to Cede &
Co., as nominee of DTC, and may be made available by Cede & Co. to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting the Depository, and to the Financial Intermediaries to
whose DTC accounts the Book-Entry Certificates of such beneficial owners are
credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Certificates under the Agreement only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Certificates are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Certificates. Cedelbank or
the Euroclear Operator, as the case may be, will take any other action permitted
to be taken by a Certificateholder under the Agreement on behalf of a Cedelbank
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 Book-Entry Certificates which
conflict with actions taken with respect to other Book-Entry Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, with the consent of the Trustee, elects to terminate a book-entry
system through DTC or (c) after the occurrence of an Event of Default,
beneficial owners having Percentage Interests aggregating not less than 51% of
the Book-Entry Certificates advise the Trustee and DTC through the Financial
Intermediaries and the DTC participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Agreement.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Certificates among
participants of DTC, Cedelbank and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
Neither the Depositor, the Servicer nor the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
DTC management is aware that some computer applications, systems, and the
like for processing date ("Systems") that are dependent upon calendar dates,
including dates before, on, and after January 1, 2000, may encounter "Year 2000
problems." DTC has informed its Participants and other members of the financial
community (the "Industry") that it has developed and is implementing a program
so that its Systems, as the same relate to the timely payment of distributions
(including principal and income payments) to securityholders, book-entry
deliveries, and settlement of trades within DTC ("DTC Services"), continue to
function appropriately. This program includes a technical assessment and a
remediation plan, each of which is complete. Additionally, DTC's plan includes a
testing phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information of the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to: (i)
impress upon them the importance of such services being year 2000 compliant; and
(ii) determine the extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services. In addition, DTC is in the process of
developing such contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty, or contract modification of any kind.
ALLOCATION OF AVAILABLE FUNDS
Distributions to holders of each Class of Offered Certificates will be made
on each Distribution Date from Available Funds. Available Funds will be
determined for each Loan Group (the "Group I Available Funds" and the "Group II
Available Funds", respectively) and in each case will be equal to the sum of the
following amounts with respect to the related Mortgage Loans, net of amounts
reimbursable therefrom to the Servicer, of (i) the aggregate amount of monthly
payments on the related Mortgage Loans due on the related Due Date and received
by the Trustee three business days prior to the related Distribution Date, after
deduction of the Servicing Fee, any accrued and unpaid Servicing Fee and the
Successor Servicer Fee, if any, (ii) certain unscheduled payments in respect of
the Mortgage Loans, including prepayments, insurance proceeds, Net Liquidation
Proceeds and proceeds from repurchases of and substitutions for such Mortgage
Loans occurring during the related Prepayment Period, excluding prepayment
penalties, and (iii) and payments from the Servicer in connection with Advances
and Prepayment Interest Shortfalls for such Distribution Date. "Available Funds"
for any Distribution Date will equal the sum of the Group I Available Funds and
the Group II Available Funds.
The "Prepayment Period" is the prior calendar month.
Subject to the paragraph following clause D below, on each Distribution
Date the Trustee shall withdraw from the Distribution Account the sum of (a) the
Group I Available Funds and (b) the Group II Available Funds, and make the
following disbursements and transfers as described below and to the extent of
Available Funds.
(A) With respect to the Group I Certificates, the Group I Available Funds
in the following order of priority:
(i) to the Trustee, the Trustee fee for such Loan Group for such
Distribution Date and to the Certificate Insurer, the amount owing to the
Certificate Insurer under the Insurance Agreement for the premium payable in
respect of the Class AF Certificates;
(ii) first, to the Class AF Certificates, the related Interest
Distributable Amount for such Class for such Distribution Date;
second, to the Class BF Certificates, the related Monthly Interest
Distributable Amount for such Distribution Date;
(iii) to the Certificate Insurer, the amount owing to the Certificate
Insurer under the Insurance Agreement for reimbursement for prior draws made on
the Policy in respect of the Class AF Certificates and any other amounts owing
to the Certificate Insurer under the Insurance Agreement with respect to the
Class AF Certificates;
(iv) from the Group I Principal Distribution Amount (giving effect first
to the component of the Group I Principal Distribution Amount equal to the Group
I Basic Principal Distribution Amount and then to the component of the Group I
Principal Distribution Amount equal to the Group I Extra Principal Distribution
Amount):
(a) on each Distribution Date to the holders of the Class AF
Certificates, the Class AF Principal Distribution Amount;
and
(b) on each Distribution Date to the holders of the Class BF
Certificates, the lesser of (x) the excess of (i) the Group
I Principal Distribution Amount over (ii) the amount
distributed to the Class AF Certificateholders in clause
(A)(iv)(a) above and (y) the Class BF Principal Distribution
Amount, until the Certificate Principal Balance thereof is
reduced to zero;
(v) to the Servicer, Special Servicer Fees in respect of Loan Group I and
certain other amounts in respect of indemnification that may be required to be
paid by the Trust Fund pursuant to the Pooling and Servicing Agreement;
(vi) to the Class BF Certificateholders, first, for any related Unpaid
Interest Shortfall and second, for any related Loss Reimbursement, for such
Distribution Date;
(vii) to the Class OC-I Certificates, such amounts, if any, as described in
the Pooling and Servicing Agreement;
(B) With respect to the Group II Certificates, the Group II Available
Funds in the following order of priority:
(i) to the Trustee, the Trustee fee for Loan Group II for such Distribution
Date and to the Certificate Insurer, the amount owing to the Certificate Insurer
under the Insurance Agreement for the premium payable in respect of the Class AV
Certificates;
(ii)first, to the Class AV Certificates, the related Interest Distributable
Amount for such Class for such Distribution Date;
second, to the Class BV Certificates, the related Monthly Interest
Distributable Amount for such Distribution Date;
(iii) to the Certificate Insurer, the amount owing to the Certificate
Insurer under the Insurance Agreement for reimbursement for prior draws made on
the Policy in respect of the Class AV Certificates and any other amounts owing
to the Certificate Insurer under the Insurance Agreement with respect to the
Class AV Certificates;
(iv) from the Group II Principal Distribution Amount (giving effect first
to the component of the Group II Principal Distribution Amount equal to the
Group II Basic Principal Distribution Amount and then to the component of the
Group II Principal Distribution Amount equal to the Group II Extra Principal
Distribution Amount):
(a) on each Distribution Date to the holders of the Class AV
Certificates, the Class AV Principal Distribution Amount; and
(b) on each Distribution Date to the holders of the Class BV
Certificates, the lesser of (x) the excess of (i) the Group II
Principal Distribution Amount over (ii) the amount distributed to
the Class AV Certificateholders in clause (B)(iv)(a) above and
(y) the Class BV Principal Distribution Amount, until the
Certificate Principal Balance thereof is reduced to zero;
(v) to the Servicer, Special Servicer Fees in respect of Loan Group II and
certain other amounts in respect of indemnification that may be required to be
paid by the Trust Fund pursuant to the Pooling and Servicing Agreement;
(vi) to the Class BV Certificateholders, first, for any related Unpaid
Interest Shortfall and second, for any related Loss Reimbursement, for such
Distribution Date;
(vii) to the Class OC-II Certificates for deposit into the Excess Reserve
Fund Account first to cover any Group II Available Funds Cap Carryover Amount
(to the extent not covered by amounts already on deposit in the Excess Reserve
Fund Account) and then to cover any Required Reserve Amount, and then to be
released to the Class OC-II Certificates, such amounts, if any, as described in
the Pooling and Servicing Agreement.
(C) If a successor Servicer has been appointed, to the Successor Servicer,
the Certificate Insurer or the Trustee, as applicable, any Transition
Costs.
(D) To the holders of the Class R Certificates, the remaining amount.
Notwithstanding the foregoing, on any Distribution Date, remaining
Available Funds for either Loan Group after principal distributions are made to
the related Classes of Class A and Class B Certificates, will be available to
make the distributions required to be made on such Distribution Date with
respect to the other Loan Group pursuant to subclauses (i) through (iv) of
clause A or B above, as applicable, to the extent of a shortfall in related
Available Funds or any remaining Overcollateralization Deficiency Amount.
On each Distribution Date, all amounts representing prepayment
penalties from the Mortgage Loans in each Loan Group received during the related
Due Period will be distributed to the Seller.
DEFINITIONS
Many of the defined terms listed below may apply to both Loan Groups /
Certificate Groups and are sometimes used in this Prospectus Supplement to refer
to a particular Loan Group / Certificate Group by the adjectival use of the
words "Group I" and "Group II".
The "Accrual Period" for the Group I Certificates for a given Distribution
Date will be the calendar month preceding the month of such Distribution Date
based on a 360-day year consisting of twelve 30-day months.
The "Accrual Period" for the Group II Certificates for a given Distribution
Date will be the actual number of days (based on a 360-day year) included in the
period commencing on the immediately preceding Distribution Date and ending on
the day immediately preceding the current Distribution Date; provided, however,
that the initial Accrual Period for the Group II Certificates will be the actual
number of days included in the period commencing on the Closing Date and ending
on December 27, 1998.
The "Allocable Loss Amount" with respect to each Distribution Date and each
Certificate Group means the excess, if any, of the aggregate Certificate
Principal Balance of the related Certificate Group (after giving effect to all
distributions on such date) over the related Loan Group Balance as of the end of
the preceding Due Period.
The "Basic Principal Distribution Amount" means with respect to each
Certificate Group and any Distribution Date the excess of (i) the related
Principal Remittance Amount for such Distribution Date over (ii) the related
Overcollateralization Release Amount, if any, for such Distribution Date.
The "Certificate Principal Balance" of any Class of Certificates and any
Distribution Date, will be equal to the Certificate Principal Balance thereof on
the Closing Date (the "Original Certificate Principal Balance") reduced by the
sum of (i) all amounts actually distributed in respect of principal of such
Class on all prior Distribution Dates and (ii) with respect to the Class B
Certificates, Allocable Loss Amounts.
"Class AF Principal Distribution Amount" means as of any Distribution Date
(a) prior to the Group I Stepdown Date or with respect to which a Group I
Trigger Event or an Overcollateralization Step-up Trigger Event is in effect,
the lesser of (i) 100% of the Group I Principal Distribution Amount and (ii) the
Certificate Principal Balance of the Class AF Certificates and (b) on or after
the Group I Stepdown Date and as long as a Group I Trigger Event or an
Overcollateralization Step-up Trigger Event is not in effect, the positive
difference, if any, of the excess of (x) the Certificate Principal Balance of
the Class AF Certificates immediately prior to such Distribution Date over (y)
the lesser of (A) the product of (i) approximately 91.50% and (ii) the Group I
Loan Balance as of the last day of the related Due Period and (B) the Group I
Loan Balance as of the last day of the related Due Period minus approximately
$496,673.
"Class AV Principal Distribution Amount" means as of any Distribution Date
(a) prior to the Group II Stepdown Date or with respect to which a Group II
Trigger Event or an Overcollateralization Step-up Trigger Event is in effect,
the lesser of (i) 100% of the Group II Principal Distribution Amount and (ii)
the Certificate Principal Balance of the Class AV Certificates and (b) on or
after the Group II Stepdown Date and as long as a Group II Trigger Event or an
Overcollateralization Step-up Trigger Event is not in effect, the positive
difference, if any, of the excess of (x) the Certificate Principal Balance of
the Class AV Certificates immediately prior to such Distribution Date over (y)
the lesser of (A) the product of (i) approximately 84.70% and (ii) the Group II
Loan Balance as of the last day of the related Due Period and (B) the Group II
Loan Balance as of the last day of the related Due Period minus approximately
$410,396.
"Class BF Principal Distribution Amount" means as of any Distribution Date
(a) prior to the Group I Stepdown Date or with respect to which a Group I
Trigger Event or an Overcollateralization Step-up Trigger Event is in effect,
the lesser of (i) 100% of the Group I Principal Distribution Amount and (ii) the
Certificate Principal Balance of the Class BF Certificates and (b) on or after
the Group I Stepdown Date and as long as a Group I Trigger Event or an
Overcollateralization Step-up Trigger Event is not in effect, the positive
difference, if any, of the excess of (x) the sum of (i) the Certificate
Principal Balance of the Class AF Certificates (after taking into account the
payment of the Class AF Principal Distribution Amount on such Distribution Date)
and (ii) the Certificate Principal Balance of the Class BF Certificates
immediately prior to such Distribution Date over (y) the lesser of (A) the
product of (i) approximately 95.50% and (ii) the Group I Loan Balance as of the
last day of the related Due Period and (B) the Group I Loan Balance as of the
last day of the related Due Period minus approximately $496,673.
"Class BV Principal Distribution Amount" means as of any Distribution Date
(a) prior to the Group II Stepdown Date or with respect to which a Group II
Trigger Event or an Overcollateralization Step-up Trigger Event is in effect,
the lesser of (i) 100% of the Group II Principal Distribution Amount and (ii)
the Certificate Principal Balance of the Class BV Certificates and (b) on or
after the Group II Stepdown Date and as long as a Group II Trigger Event or an
Overcollateralization Step-up Trigger Event is not in effect, the positive
difference, if any, of the excess of (x) the sum of (i) the Certificate
Principal Balance of the Class AV Certificates (after taking into account the
payment of the Class AV Principal Distribution Amount on such Distribution Date)
and (ii) the Certificate Principal Balance of the Class BV Certificates
immediately prior to such Distribution Date over (y) the lesser of (A) the
product of (i) approximately 90.20% and (ii) the Group II Loan Balance as of the
last day of the related Due Period and (B) the Group II Loan Balance as of the
last day of the related Due Period minus approximately $410,396.
"Class B Adjustment" means for any Distribution Date and Class of Class B
Certificates, an amount equal to the Certificate Principal Balance of such Class
of Class B Certificates immediately prior to such Distribution Date plus the
difference of the Overall Overcollateralization Target Amount minus the
Overcollateralization Target Amount, in each case for such Distribution Date.
"Cumulative Annual Loss Percentage" (with respect to each Loan Group) means
the aggregate Realized Losses over the most recent 12 months expressed as a
percentage of the average outstanding Loan Group Balance over the same 12 month
period.
A "Cumulative Loss Trigger" has occurred with respect to a Loan Group on a
Distribution Date if cumulative Realized Losses in such Loan Group as of such
Distribution Date equal or exceed the percentages of the Loan Group Balance as
of the Cut-off Date set forth below with respect to such Distribution Date.
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
GROUP I LOAN GROUP II LOAN
BALANCE AS OF THE BALANCE AS OF THE
DISTRIBUTION DATE CUT-OFF DATE CUT-OFF DATE
<S> <C> <C>
December 1998 to November 1999 0.50% 0.75%
December 1999 to November 2000 1.25% 1.75%
December 2000 to November 2001 2.00% 2.50%
December 2001 to November 2002 2.75% 3.25%
December 2002 to November 2003 3.50% 4.00%
December 2003 to November 2004 4.25% 4.75%
December 2004 and thereafter 5.00% 5.50%
</TABLE>
The "Delinquency Percentage," with respect to a Loan Group, any
Distribution Date and the related Due Period, is the rolling three month average
of a fraction, expressed as a percentage, the numerator of which is the sum of
the aggregate Principal Balances of all Mortgage Loans that are (i) 90 or more
days Delinquent, (ii) in bankruptcy and 90 or more days delinquent under the
applicable Mortgage Note, (iii) in foreclosure or (iv) REO Properties as of the
close of business on the last day of the related Due Period, and the denominator
of which is the related Loan Balance as of the close of business on the last day
of such Due Period.
A Mortgage Loan is "Delinquent" if any monthly payment due on a Due Date is
not made by the close of business on the next scheduled Due Date for such
Mortgage Loan. A Mortgage Loan is "30 days Delinquent" if such monthly payment
has not been received by the close of business on the corresponding day of the
month immediately succeeding the month in which such monthly payment was due or,
if there was no such corresponding day (e.g., as when a 30-day month follows a
31-day month in which a payment was due on the 31st day of such month), then on
the last day of such immediately succeeding month; and similarly for "60 days
Delinquent" and "90 days Delinquent", etc.
A "Due Period" with respect to any Distribution Date is the period
commencing on the second day of the month preceding the month in which such
Distribution Date occurs and ending on the first day of the month in which such
Distribution Date occurs.
The "Extra Principal Distribution Amount" for a Certificate Group and any
Distribution Date, is the lesser of (x) the related General Excess Available
Amount for such Distribution Date and (y) the related Overcollateralization
Deficiency Amount for such Distribution Date.
The "General Excess Available Amount" means with respect to a Certificate
Group and each Distribution Date, the amount, if any, by which the related
Available Funds for such Distribution Date exceeds the aggregate amount
distributed on such Distribution Date pursuant to subclauses (i) through (iv) of
clauses A or B, as applicable, under "--Allocation of Available Funds" above
(other than the Extra Principal Distribution Amount) and as may be increased as
a result of the transfer of Available Funds from one Loan Group to the other as
described above.
The "Interest Distributable Amount" for any Distribution Date and each
Class of Offered Certificates equals the sum of (i) the related Monthly Interest
Distributable Amount for such Class for such Distribution Date and (ii) the
related Unpaid Interest Shortfall Amount for such Class for such Distribution
Date.
An "Insurer Default" will occur in the event the Certificate Insurer fails
to make a payment under the Policy or if certain events of bankruptcy or
insolvency occur with respect to the Certificate Insurer.
"Loss Reimbursement" means, with respect to any Distribution Date and each
Class of Class B Certificates, the amount of the related Allocable Loss Amounts
applied to the reduction of the Certificate Principal Balance of such Class and
not reimbursed pursuant to "--Allocation of Available Funds" above as of such
Distribution Date.
The "Monthly Interest Distributable Amount" for any Distribution Date and
each Class of Offered Certificates equals the amount of interest accrued during
the related Accrual Period at the related Pass-Through Rate on the Certificate
Principal Balance of such Class immediately prior to such Distribution Date (or,
in the case of the first Distribution Date, from the Closing Date).
An "Overcollateralization Deficiency Amount" with respect to any
Distribution Date and each Certificate Group equals the amount, if any, by which
the related Overcollateralization Target Amount exceeds the related
Overcollateralized Amount on such Distribution Date (after giving effect to
distributions in respect of the related Basic Principal Distribution Amount but
without giving effect to any related Allocable Loss Amounts on such Distribution
Date).
"Overcollateralization Release Amount" means, with respect to each
Certificate Group and any Distribution Date (A) prior to the Stepdown Date,
zero, and (B) on or after the related Stepdown Date on which an
Overcollateralization Step-up Trigger Event or Trigger Event for such
Certificate Group is not in effect, the lesser of (x) the related Principal
Remittance Amount for such Distribution Date and (y) the excess, if any, of (i)
the related Overcollateralized Amount for such Distribution Date, assuming that
100% of the related Principal Remittance Amount is applied as a principal
payment on the related Certificate Group on such Distribution Date over (ii) the
related Overcollateralization Target Amount for such Distribution Date over
(iii) the related Class B Adjustment for such Distribution Date.
An "Overcollateralization Step-up Trigger Event" with respect to a
Certificate Group, means the occurrence on any Distribution Date or for any of
the prior six months, of any of the following: (i) the related Cumulative Loss
Trigger has occurred or (ii) the Delinquency Percentage for either Loan Group is
greater than or equal to 20.00% or (iii) the Cumulative Annual Loss Percentage
for Loan Group I is greater than or equal to 1.00% or for Loan Group II is
greater than or equal to 1.25%.
The "Overcollateralization Target Amount" means with respect to each
Certificate Group and (a) any Distribution Date occurring prior to the related
Stepdown Date, an amount equal to 4.25% (Group I) or 7.65% (Group II) of the
related Loan Group Balance as of the Cut-off Date; and (b) any Distribution Date
on or after the related Stepdown Date as long as a Trigger Event or
Overcollateralization Step-up Trigger Event is not in effect, an amount equal to
the greater of (x) 8.50% (Group I) or 15.30% (Group II) of the related Loan
Group Balance as of the end of the related Due Period and (y) approximately
$496,673 (Group I) or $410,396 (Group II) provided, however, for any
Distribution Date occurring after the Stepdown Date and with respect to which a
Trigger Event is in effect but an Overcollateralization Step-up Trigger Event is
not in effect, the Overcollateralization Target Amount for such Loan Group shall
be no less than the Overcollateralization Target Amount for the prior
Distribution Date; and (c) for a Distribution Date where an
Overcollateralization Step-up Trigger Event has been breached, the product of
5.3125% (Group I) or 9.5625% (Group II) and the related original aggregate Loan
Group Balance as of the Cut-off Date.
The "Overall Overcollateralization Target Amount" means with respect to
each Certificate Group and (a) any Distribution Date occurring prior to the
related Stepdown Date, an amount equal to 2.25% (Group I) or 4.90% (Group II) of
the related Loan Group Balance as of the Cut-off Date; and (b) any Distribution
Date on or after the related Stepdown Date as long as a Trigger Event or an
Overcollateralization Step-up Trigger Event is not in effect, an amount equal to
the greater of (x) 4.50% (Group I) or 9.80% (Group II) of the related Loan Group
Balance as of the end of the related Due Period and (y) approximately $496,673
(Group I) or $410,396 (Group II) provided, however, for any Distribution Date
occurring after the Stepdown Date and with respect to which a Trigger Event is
in effect but an Overcollateralization Step-up Trigger Event is not in effect,
the Overall Overcollateralization Target Amount for such Loan Group shall be no
less than the Overall Overcollateralization Target Amount for the prior
Distribution Date; and (c) for a Distribution Date where an
Overcollateralization Step-up Trigger Event has been breached, the product of
2.8125% (Group I) or 6.1250% (Group II) and the related original aggregate Loan
Group Balance as of the Cut-off Date.
The "Overcollateralized Amount" for any Distribution Date and each Class of
Class A Certificates is the amount, if any, by which (i) the related Loan Group
Balance on the last day of the immediately preceding Due Period exceeds (ii) the
Certificate Principal Balance of such Class of Class A Certificates as of such
Distribution Date after giving effect to distributions to be made on such Class
A Certificates on such Distribution Date.
The "Principal Distribution Amount" for each Loan Group and any
Distribution Date will equal the sum of (i) the related Basic Principal
Distribution Amount and (ii) the related Extra Principal Distribution Amount for
such Distribution Date.
The "Principal Remittance Amount" means with respect to each Loan Group and
any Distribution Date, the sum of (i) each scheduled payment of principal
collected or advanced on the related Mortgage Loans by the Servicer in the
related Due Period, (ii) the principal portion of all partial and full principal
prepayments of such Mortgage Loans applied by the Servicer during such Due
Period, (iii) the principal portion of all related Net Liquidation Proceeds and
Insurance Proceeds received during such Due Period, (iv) that portion of the
Purchase Price, representing principal of any repurchased Mortgage Loan in such
Loan Group, required to be deposited to the Collection Account during such Due
Period, (v) the principal portion of any related Substitution Adjustments
required to be deposited in the Collection Account during such Due Period, and
(vi) on the Distribution Date on which the Trust Fund is to be terminated in
accordance with the Pooling and Servicing Agreement, that portion of the
Termination Price, in respect of principal for such Loan Group.
A "Realized Loss" with respect to any defaulted Mortgage Loan that is
finally liquidated (a "Liquidated Mortgage Loan") is the amount of loss realized
equal to the portion of the Principal Balance remaining unpaid after application
of all liquidation proceeds net of amounts reimbursable to the Servicer for
related Advances, Servicing Advances, Servicing Fees and any Successor Servicer
Fee (such amount, the "Net Liquidation Proceeds") in respect of such Mortgage
Loan.
The "Senior Credit Enhancement Percentage," with respect to each Class of
Class A Certificates and any Distribution Date, is the percentage obtained by
dividing (i) the related Overcollateralized Amount after giving effect to the
distributions of principal on such Distribution Date, by (ii) the related Loan
Group Balance as of the end of the related Due Period.
The "Senior Specified Enhancement Percentage" on any date of determination
thereof, with respect to the Class AF and Class AV Certificates, means 8.50% and
15.30%, respectively.
The "Stepdown Date" with respect to each Certificate Group means the
earlier of (A) the Distribution Date on which the Certificate Principal Balance
of the related Class A Certificates equals zero and (B) the latest to occur of
(x) the Distribution Date in December 2001 and (y) the first Distribution Date
on which the related Senior Credit Enhancement Percentage (calculated for this
purpose only using the related Loan Group Balance as of the end of the related
Due Period but prior to any application of related Principal Distribution Amount
to the Certificates) is greater than or equal to the related Senior Specified
Enhancement Percentage and (z) the date upon which the aggregate balance of the
Mortgage Loans has been reduced to 50% of the aggregate balance of the Mortgage
Loans as of the Cut-off Date.
The "Successor Servicer Fee" means the amount, if any, of the fees payable
to the successor Servicer that is in excess of the Servicing Fee; provided,
however, the rate at which the Successor Servicer Fee will be calculated shall
not increase above 0.50% per annum on the Principal Balance of each Mortgage
Loan.
A "Transition Cost" means any documented fees and expenses and allocated
costs reasonably incurred by a successor Servicer, the Certificate Insurer or
the Trustee in connection with a transfer of servicing from the Servicer to a
successor Servicer.
A "Trigger Event" with respect to a Certificate Group, has occurred on any
Distribution Date, if the related Delinquency Percentage for any of the prior
six months exceeds 15%.
The "Unpaid Interest Shortfall Amount" means (i) for each Class of Offered
Certificates and the first Distribution Date, zero, and (ii) with respect to
each Class of Offered Certificates and any Distribution Date after the first
Distribution Date, the amount, if any, by which (a) the sum of (1) the Monthly
Interest Distributable Amount for such Class for the immediately preceding
Distribution Date and (2) the outstanding Unpaid Interest Shortfall Amount, if
any, for such Class for such preceding Distribution Date exceeds (b) the
aggregate amount distributed on such Class in respect of interest pursuant to
clause (a) of this definition on such preceding Distribution Date, plus interest
on the amount of interest due but not paid on the Certificates of such Class on
such preceding Distribution Date, to the extent permitted by law, at the
Pass-Through Rate for such Class for the related Accrual Period.
PASS-THROUGH RATES
The "Pass-Through Rate" on any Distribution Date on or prior to the
Optional Termination Date with respect to the Group I Certificates will equal
6.50% per annum. With respect to any Distribution Date after the Optional
Termination Date, the Pass-Through Rate for the Group I Certificates will equal
7.50%. Interest in respect of any Distribution Date will accrue on the Group I
Certificates during the related Accrual Period on the basis of a 360-day year
consisting of twelve 30-day months.
The "Pass-Through Rate" on any Distribution Date with respect to the Group
II Certificates will equal the lesser of (a) the Group II Formula Rate and (b)
the Group II Available Funds Cap for such Distribution Date. With respect to the
Group II Certificates, interest in respect of any Distribution Date will accrue
during the related Accrual Period on the basis of a 360-day year and the actual
number of days elapsed. The "Group II Formula Rate" is the sum of the interbank
offered rate for one-month United States dollar deposits in the London market
(the "Certificate Index") as of the related LIBOR Determination Date (as defined
herein) plus a margin (the "Certificate Margin"). The Certificate Margin on each
Distribution Date on or prior to the Optional Termination Date will equal 0.65%
and on each Distribution Date after the Optional Termination Date, the
Certificate Margin will equal 1.30%. The "Group II Available Funds Cap" for any
Distribution Date shall equal the difference between (A) the average of the Loan
Rates of the Group II Mortgage Loans as of the first day of the month preceding
the month of such Distribution Date (or, in the case of the first Distribution
Date, the Closing Date), weighted on the basis of the related Principal Balances
as of such date and (B) the sum of the Servicing Fee Rate (as increased, if
applicable, to reflect any increase in servicing fees due to the appointment of
a successor servicer) and the rates at which the Trustee Fee and the premium
payable to the Certificate Insurer with respect to the Class AV Certificates are
calculated and, beginning with the Distribution Date in December 1999, 0.50%
(computed on the basis of a 360-day year and the actual number of days elapsed
during the related Accrual Period).
If on any Distribution Date, the Pass-Through Rate for the Class AV
Certificates is based upon the Group II Available Funds Cap, the excess of (i)
the amount of interest such Class of Certificates would have been entitled to
receive on such Distribution Date had such Pass-Through Rate not been subject to
the Group II Available Funds Cap, up to the Maximum Cap, over (ii) the amount of
interest such Class of Certificates received on such Distribution Date based on
the Group II Available Funds Cap, together with the unpaid portion of any such
excess from prior Distribution Dates (and interest accrued thereon at the then
applicable Pass-Through Rate on such Class of Certificates, without giving
effect to the Group II Available Funds Cap) is the "Group II Available Funds Cap
Carryover Amount". Any Group II Available Funds Cap Carryover Amount on the
Class AV Certificates will be paid on future Distribution Dates from and to the
extent of funds available therefor in the Group II Excess Reserve Fund Account
(as described herein). The Policy does not cover the payment, nor do the ratings
assigned to the Class AV Certificates address the likelihood of the payment, of
any Group II Available Funds Cap Carryover Amount.
The "Maximum Cap" for any Distribution Date is the weighted average of the
Maximum Loan Rates on the Group II Mortgage Loans, excluding those Mortgage
Loans that have no fixed Maximum Loan Rate.
CALCULATION OF ONE-MONTH LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Accrual Period following the initial Accrual Period (each
such date, a "LIBOR Determination Date"), the Trustee (except for the first
Accrual Period) will determine the Certificate Index for such Accrual Period for
the Group II Certificates on the basis of the offered rates of the Reference
Banks for one-month United States dollar deposits, as such rates appear on the
Telerate Page 3750, as of 11:00 a.m. (London time) on such LIBOR Determination
Date. As used in this section, "LIBOR Business Day" means a day on which banks
are open for dealing in foreign currency and exchange in London and New York
City; "Telerate Page 3750" means the display page currently so designated on the
Dow Jones Telerate Service (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices); and
"Reference Banks" means leading banks selected by the Depositor and engaged in
transactions in Eurodollar deposits in the international Eurocurrency market (i)
with an established place of business in London, (ii) whose quotations appear on
the Telerate Page 3750 on the LIBOR Determination Date in question, (iii) which
have been designated as such by the Depositor and (iv) not controlling,
controlled by or under common control with, the Depositor, the Servicer or any
successor Servicer. On the Closing Date, the Certificate Index for the initial
Accrual Period will be determined on the second LIBOR Business Day preceding the
Closing Date.
On each LIBOR Determination Date, the Certificate Index for the related
Accrual Period for the Group II Certificates will be established by the Trustee
as follows:
(a) If on such LIBOR Determination Date two or more Reference Banks
provide such offered quotations, the Certificate Index for the related
Accrual Period will be the arithmetic mean of such offered quotations
(rounded upwards if necessary to the nearest whole multiple of 0.0625%).
(b) If on such LIBOR Determination Date fewer than two Reference Banks
provide such offered quotations, the Certificate Index for the related
Accrual Period will be the higher of (x) the Certificate Index as
determined on the previous LIBOR Determination Date and (y) the Reserve
Interest Rate. The "Reserve Interest Rate" will be the rate per annum that
the Trustee determines to be either (i) the arithmetic mean (rounded
upwards if necessary to the nearest whole multiple of 0.0625%) of the
one-month United States dollar lending rates which New York City banks
selected by the Depositor are quoting on the relevant LIBOR Determination
Date to the principal London offices of leading banks in the London
interbank market or (ii) in the event that the Trustee can determine no
such arithmetic mean, (A) in the case of any LIBOR Determination Date after
the initial LIBOR Determination Date, the lowest one-month United States
dollar lending rate which New York City banks selected by the Depositor are
quoting on such LIBOR Determination Date to leading European banks or (B)
in the case of the initial LIBOR Determination Date, 5.53547%.
The establishment of the Certificate Index on each LIBOR Determination Date
by the Trustee and the Trustee's calculation of the rate of interest applicable
to the Group II Certificates for the related Accrual Period will (in the absence
of manifest error) be final and binding.
APPLICATION OF ALLOCABLE LOSS AMOUNTS
Following any reduction of the Overcollateralized Amount in a Loan Group to
zero, any related Allocable Loss Amounts will be applied in reduction of the
Certificate Principal Balances of the related Class B Certificates, until their
respective Certificate Principal Balances have been reduced to zero. The
Certificate Principal Balance of the Class A Certificates will not be reduced by
any application of any Allocable Loss Amounts. The reduction of the Certificate
Principal Balance of a Class of Class B Certificates by the application of
Allocable Loss Amounts entitles such Class to reimbursement in an amount equal
to the Loss Reimbursement. Each such Class of Class B Certificates will be
entitled to receive its Loss Reimbursement, or any portion thereof, in
accordance with the payment priorities specified herein. Payment in respect of
Loss Reimbursement will not reduce the Certificate Principal Balance of the
related Class or Classes.
EXCESS RESERVE FUND ACCOUNT
The Pooling and Servicing Agreement establishes for the Class AV
Certificates an account (the "Excess Reserve Fund Account"), which is held in
trust, as part of the Trust Fund, by the Trustee on behalf of the Class AV
Certificateholders. The Excess Reserve Fund Account will not be an asset of any
REMIC. Holders of the Class AV Certificates will be entitled to receive payments
from the Excess Reserve Fund Account to the extent of amounts on deposit therein
in an amount equal to any Group II Available Funds Cap Carryover Amount. On the
Closing Date, $1,000 will be deposited into the Excess Reserve Fund Account.
Thereafter, if the Group II Available Funds Cap does not exceed the Certificate
Rate by at least 0.25%, the amount to be held in the Excess Reserve Fund on any
Distribution Date thereafter will equal the greater of (i) 0.50% of the
outstanding Certificate Principal Balance of the Class AV Certificates as of
such Distribution Date and (ii) $5,000 and will be funded from amounts otherwise
to be paid to the Class OC-II Certificates. Thereafter, if the Group II
Available Funds Cap for any Distribution Date exceeds the Certificate Rate by
0.25% or more, the Required Reserve Amount for such Distribution Date will be
$5,000. Any distribution by the Trustee from amounts in the Excess Reserve Fund
Account shall be made on the applicable Distribution Date. The amount required
to be on deposit in the Excess Reserve Fund Account at any time is referred to
herein as the "Required Reserve Amount."
Amounts on deposit in the Excess Reserve Fund Account in excess of the
Required Reserve Amount will be released therefrom and distributed to the
holders of the Class OC-II Certificates on any Distribution Date on which the
Group II Available Funds Cap exceeds the Certificate Rate by 0.25% or more.
THE POLICY
The following information has been supplied by the Certificate Insurer for
inclusion in this Prospectus Supplement. Accordingly, none of the Depositor, the
Seller or the Servicer makes any representation as to the accuracy and
completeness of such information.
The Certificate Insurer, in consideration of the payment of the premium and
subject to the terms of the Policy, thereby unconditionally and irrevocably
guarantees to any Owner that an amount equal to each full and complete Insured
Payment will be received by the Trustee, or its successor, as trustee for the
Owners, on behalf of the Owners from the Certificate Insurer, for distribution
by the Trustee to each Owner of each Owner's proportionate share of the Insured
Payment. The Certificate Insurer's obligations under the Policy with respect to
a particular Insured Payment shall be discharged to the extent funds equal to
the applicable Insured Payment are received by the Trustee, whether or not such
funds are properly applied by the Trustee. Insured Payments shall be made only
at the time set forth in the Policy and no accelerated Insured Payments shall be
made regardless of any acceleration of the Class A Certificates, unless such
acceleration is at the sole option of the Certificate Insurer.
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the Trust Fund, the Master
REMIC or any Subsidiary REMIC or the Trustee for withholding taxes, if any
(including interest and penalties in respect of any such liability). The Policy
does not cover any Prepayment Interest Shortfalls, any Available Funds Cap
Carryover Amounts or any Relief Act Interest Shortfalls.
The Certificate Insurer will pay any Insured Payment that is a Preference
Amount on the Business Day following receipt on a Business Day by the Fiscal
Agent (as described below) of (i) a certified copy of the order requiring the
return of a preference payment, (ii) an opinion of counsel satisfactory to the
Certificate Insurer that such order is final and not subject to appeal, (iii) an
assignment in such form as is reasonably required by the Certificate Insurer,
irrevocably assigning to the Certificate Insurer all rights and claims of the
Owner relating to or arising under the Class A Certificates against the debtor
that made such preference payment or otherwise with respect to such Preference
Amount and (iv) appropriate instruments to effect the appointment of the
Certificate Insurer as agent for such Owner in any legal proceeding related to
such Preference Amount, such instruments being in a form satisfactory to the
Certificate Insurer, provided that if such documents are received after 12:00
noon New York City time on such Business Day, they will be deemed to be received
on the following Business Day. Such payments shall be disbursed to the receiver
or trustee in bankruptcy named in the final order of the court exercising
jurisdiction on behalf of the Owners and not any Owner directly unless such
Owner has returned principal or interest paid on the Class A Certificates to
such receiver or trustee in bankruptcy, in which case such payment shall be
disbursed to such Owner.
The Certificate Insurer will pay any other amount payable under the Policy
no later than 12:00 noon New York City time on the later of the Distribution
Date on which the Deficiency Amount is due or the second Business Day following
receipt in New York, New York on a Business Day by State Street Bank and Trust
Company, N.A., as Fiscal Agent for the Certificate Insurer or any successor
fiscal agent appointed by the Certificate Insurer (the "Fiscal Agent") of a
Notice (as described below); provided that if such Notice is received after
12:00 noon New York City time on such Business Day, it will be deemed to be
received on the following Business Day. If any such Notice received by the
Fiscal Agent is not in proper form or is otherwise insufficient for the purpose
of making claim under the Policy it shall be deemed not to have been received by
the Fiscal Agent for purposes of this paragraph, and the Certificate Insurer or
the Fiscal Agent, as the case may be, shall promptly so advise the Trustee and
the Trustee may submit an amended Notice.
Insured Payments due under the Policy unless otherwise stated therein will
be disbursed by the Fiscal Agent to the Trustee on behalf of the Owners by wire
transfer of immediately available funds in the amount of the Insured Payment
less, in respect of Insured Payments related to Preference Amounts, any amount
held by the Trustee for the payment of such Insured Payment and legally
available therefor.
The Fiscal Agent is the agent of the Certificate Insurer only and the
Fiscal Agent shall in no event be liable to the Owners for any acts of the
Fiscal Agent or any failure of the Certificate Insurer to deposit or cause to be
deposited, sufficient funds to make payments due under the Policy.
As used in the Policy, the following terms shall have the following
meanings:
"Agreement" means the Pooling and Servicing Agreement, dated as
of November 1, 1998, among the Seller, the Servicer, the Depositor and
the Trustee, without regard to any amendment or supplement thereto
unless such amendment or modification has been approved in writing by
the Certificate Insurer.
"Business Day" means any day other than a Saturday, a Sunday or
a day on which the Certificate Insurer, banking institutions in New York
City or the city in which the corporate trust office of the Trustee
under the Agreement is located are authorized or obligated by law or
executive order to close.
"Deficiency Amount" means for any Distribution Date (A) the
excess, if any, of (i) the Interest Distributable Amount for the Class A
Certificates (net of any Relief Act Interest Shortfalls and any
Prepayment Interest Shortfalls) over (ii) funds on deposit in the
Distribution Account available to be distributed therefor on such
Distribution Date and (B) the Guaranteed Principal Amount.
"Final Distribution Date" means the Distribution Date in
January 2034.
"Guaranteed Principal Amount" means (a) for any Distribution
Date (other than the Final Distribution Date) the amount, if any, by
which the sum of the Certificate Principal Balances of the Class AF and
the Class AV Certificates exceeds the aggregate principal balance of the
Mortgage Loans at the end of the previous month (after giving effect to
all distributions of principal on the Class A Certificates on such
Distribution Date) and (b) on the Final Distribution Date (after giving
effect to all other distributions of principal on the Class A
Certificates), an amount equal to the Class A Certificate Principal
Balance.
"Insured Payment" means (i) as of any Distribution Date, any
Deficiency Amount and (ii) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing (in the case of a telephonic notice) by telecopy,
substantially in the form of Exhibit A attached to the Policy, the
original of which is subsequently delivered by registered or certified
mail, from the Trustee specifying the Insured Payment which shall be due
and owing on the applicable Distribution Date.
"Owner" means each Holder (as defined in the Agreement) (other
than the Trustee or the Servicer) who, on the applicable Distribution
Date, is entitled under the terms of the applicable Class A Certificates
to payment under the Policy.
"Preference Amount" means any amount previously distributed to
an Owner on the Class A Certificates that is recoverable and sought to
be recovered as a voidable preference by a trustee in bankruptcy
pursuant to the United States Bankruptcy Code (11 U.S.C.), as amended
from time to time in accordance with a final nonappealable order of a
court having competent jurisdiction.
Capitalized terms used in the Policy and not otherwise defined in the
Policy shall have the respective meanings set forth in the Agreement as of the
date of execution of the Policy, without giving effect to any subsequent
amendment or modification to the Agreement unless such amendment or modification
has been approved in writing by the Certificate Insurer.
Any notice under the Policy or service of process on the Fiscal Agent may
be made at the address listed below for the Fiscal Agent or such other address
as the Certificate Insurer shall specify to the Trustee in writing.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York 10006, Attention: Municipal Registrar and Paying Agent, or such
other address as the Fiscal Agent shall specify to the Trustee in writing.
The Policy is being issued under and pursuant to, and shall be construed
under, the laws of the State of New York, without giving effect to the conflict
of laws principles thereof.
The insurance provided by the Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The Policy is not cancelable for any reason. The premium on the Policy is
not refundable for any reason including payment, or provision being made for
payment, prior to the maturity of the Class A Certificates.
OVERCOLLATERALIZATION
The weighted average net Loan Rate for the Mortgage Loans in each Loan
Group is generally expected to be higher than the weighted average of the
Pass-Through Rates on the Certificates in the related Certificate Group. As a
result, excess interest collections will be generated and will be applied
initially to principal distributions on the Class A Certificates related to such
Loan Group. This acceleration feature creates, with respect to each Certificate
Group, overcollateralization (i.e., the excess of the related Loan Group Balance
over the aggregate Certificate Principal Balance of the related Certificate
Group). Once the required level of overcollateralization is reached for a
Certificate Group, and subject to the provisions described in the next
paragraph, the acceleration feature for such Certificates Group will cease,
until necessary to maintain the required level of overcollateralization for such
Certificate Group.
The Group I Loan Balance as of the Cut-off Date will equal the aggregate
Certificate Principal Balance of the Class AF and Class BF Certificates. As of
the Cut-off Date, the Group II Loan Balance will exceed the aggregate of the
Class AV and Class BV Certificates by approximately $820,792, which represents
1.50% of the Group II Loan Balance.
The Pooling and Servicing Agreement provides that, subject to certain
floors, caps and triggers, the required level of overcollateralization with
respect to a Loan Group may increase or decrease over time. Any decrease in the
required level of overcollateralization for a Loan Group will occur only at the
sole discretion of the Certificate Insurer. Any such decrease will have the
effect of reducing the amortization of the Offered Certificates of the related
Loan Group below what it otherwise would have been.
CROSSCOLLATERALIZATION
Certain Available Funds with respect to one Loan Group will be available to
make certain distributions with respect to the Offered Certificates relating to
the other Loan Group, as described above under "--Priority of Distributions".
Funds generated by Loan Group I are not, however, available to pay any Group II
Available Funds Cap Carryover Amount due Class AV Certificates.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will forward to each holder of a
Certificate, the Certificate Insurer and the Rating Agencies a statement
generally setting forth, among other things:
(i) the amount of the distributions, separately identified, with respect
to each Class of the Offered Certificates;
(ii) the amount of such distributions set forth in clause (i) allocable to
principal, separately identifying the aggregate amount of any
principal prepayments or other unscheduled recoveries of principal
included therein;
(iii)the amount of such distributions set forth in clause (i) allocable to
interest and the calculation thereof;
(iv) the amount of any Unpaid Interest Shortfall Amount with respect to
each Class of Certificates, separately identified;
(v) the Certificate Principal Balance of each Class Offered Certificates
after giving effect to the distribution of principal on such
Distribution Date;
(vi) the Pool Balance at the end of the related Prepayment Period;
(vii)the amount of the Servicing Fee and any Special Servicing Fee paid to
or retained by the Servicer;
(viii) the amount of the Trustee Fee paid to the Trustee;
(ix) the amount of Advances for the related Prepayment Period;
(x) the number and aggregate Principal Balance of Mortgage Loans that were
(A) Delinquent (exclusive of Mortgage Loans in foreclosure) (1) 30 to
59 days, (2) 60 to 89 days and (3) 90 or more days, (B) in foreclosure
and Delinquent (1) 30 to 59 days, (2) 60 to 89 days and (3) 90 or more
days and (C) in bankruptcy as of the close of business on the last day
of the calendar month preceding such Distribution Date;
(xi) with respect to any Mortgage Loan that became an REO Property during
the preceding calendar month, the loan number, the Principal Balance
of such Mortgage Loan as of the close of business on the last day of
the related Prepayment Period and the date of acquisition thereof;
(xii)the total number and principal balance of any REO Properties as of
the close of business on the last day of the prior calendar month;
(xiii) the Pass-Through Rate for the Offered Certificates for such
Distribution Date; and
(xiv)the amount on deposit on the Excess Reserve Fund Account on such
Distribution Date and the Available Funds Cap Carryover Amount for
each Certificate Group after giving effect to distributions thereof on
such Distribution Date.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each holder of a
Certificate of record during the previous calendar year a statement containing
information necessary to enable holders of the Certificates to prepare their tax
returns. Such statements will not have been examined and reported upon by an
independent public accountant.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity of the Offered Certificates will be sensitive to
defaults on the Mortgage Loans in the related Loan Group. If a purchaser of an
Offered Certificate calculates its anticipated yield based on an assumed rate of
default and amount of losses that is lower than the default rate and amount of
losses actually incurred, its actual yield to maturity will be lower than that
so calculated. In general, the earlier a loss occurs, the greater is the effect
on an investor's yield to maturity. There can be no assurance as to the
delinquency, foreclosure or loss experience with respect to the Mortgage Loans.
Because the Mortgage Loans were underwritten in accordance with standards less
stringent than those generally acceptable to FNMA and FHLMC with regard to a
borrower's credit standing and repayment ability, the risk of delinquencies with
respect to, and losses on, the Mortgage Loans will be greater than that of
mortgage loans underwritten in accordance with FNMA and FHLMC standards.
The rate of principal payments, the aggregate amount of distributions and
the yields to maturity of the Offered Certificates will be related to the rate
and timing of payments of principal on the Mortgage Loans in the related Loan
Group. The rate of principal payments on the Mortgage Loans will in turn be
affected by the amortization schedules of the Mortgage Loans and by the rate of
principal prepayments (including for this purpose prepayments resulting from
refinancing, liquidations of the Mortgage Loans due to defaults, casualties or
condemnations and repurchases by the Seller or Servicer). Because certain of the
Mortgage Loans contain prepayment penalties, the rate of principal payments may
be less than the rate of principal payments for mortgage loans which did not
have prepayment penalties. The Mortgage Loans are subject to the "due-on-sale"
provisions included therein. See "The Mortgage Pool" herein.
Prepayments, liquidations and purchases of the Mortgage Loans in a Loan
Group (including any optional purchase) will result in distributions on the
related Certificate Group of principal amounts which would otherwise be
distributed over the remaining terms of the Mortgage Loans. Since the rate of
payment of principal on the Mortgage Loans will depend on future events and a
variety of other factors, no assurance can be given as to such rate or the rate
of principal prepayments. The extent to which the yield to maturity of a Class
of Offered Certificates may vary from the anticipated yield will depend upon the
degree to which such Class of Certificates is purchased at a discount or
premium, and the degree to which the timing of payments thereon is sensitive to
prepayments, liquidations and purchases of the Mortgage Loans in the related
Loan Group. Further, an investor should consider the risk that, in the case of
any Offered Certificate purchased at a discount, a slower than anticipated rate
of principal payments (including prepayments) on the Mortgage Loans in the
related Loan Group could result in an actual yield to such investor that is
lower than the anticipated yield and, in the case of any Offered Certificate
purchased at a premium, a faster than anticipated rate of principal payments on
the Mortgage Loans in the related Loan Group could result in an actual yield to
such investor that is lower than the anticipated yield.
The rate of principal payments (including prepayments) on pools of mortgage
loans may vary significantly over time and may be influenced by a variety of
economic, geographic, social and other factors, including changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties and servicing decisions. In general, if prevailing interest
rates were to fall significantly below the Loan Rates on the Mortgage Loans,
such Mortgage Loans could be subject to higher prepayment rates than if
prevailing interest rates were to remain at or above the Loan Rates on such
Mortgage Loans. Conversely, if prevailing interest rates were to rise
significantly, the rate of prepayments on such Mortgage Loans would generally be
expected to decrease. As is the case with the Group I Mortgage Loans, the Group
II Mortgage Loans may be subject to a greater rate of principal prepayments in a
low interest rate environment. For example, if prevailing interest rates were to
fall, mortgagors with adjustable-rate Mortgage Loans may be inclined to
refinance their adjustable-rate Mortgage Loans with a fixed-rate loan to "lock
in" a lower interest rate. The existence of the applicable Periodic Rate Cap and
Maximum Rate also may affect the likelihood of prepayments resulting from
refinancings. No assurances can be given as to the rate of prepayments on the
Mortgage Loans in stable or changing interest rate environments. In addition,
the delinquency and loss experience of the Group II Mortgage Loans may differ
from that on the Group I Mortgage Loans because the amount of the monthly
payments on the Group II Mortgage Loans are subject to adjustment on each
Adjustment Date. In addition, a majority of the Group II Mortgage Loans will not
have their initial Adjustment Date for two to five years after the origination
thereof. The prepayment experience of the Delayed First Adjustment Mortgage
Loans may differ from that of the other Group II Mortgage Loans. The Delayed
First Adjustment Mortgage Loans may be subject to greater rates of prepayments
as they approach their initial Adjustment Dates even if market interest rates
are only slightly higher or lower than the Loan Rates on the Delayed First
Adjustment Mortgage Loans as borrowers seek to avoid changes in their monthly
payments.
Except in the limited circumstances described herein, principal
distributions on the Group I Certificates relate to principal payments on the
Group I Mortgage Loans and principal distributions on the Group II Certificates
relate to principal payments on the Group II Mortgage Loans.
ADDITIONAL INFORMATION
The Depositor has filed certain yield tables and other computational
materials with respect to certain Classes of the Class A Certificates with the
Commission in a report on Form 8-K and may file certain additional yield tables
and other computational materials with respect to one or more Classes of Class A
Certificates with the Commission in a report on Form 8-K. Such tables and
materials were prepared by Greenwich Capital Markets, Inc. (the "Underwriter")
at the request of certain prospective investors, based on assumptions provided
by, and satisfying the special requirements of, such prospective investors. Such
tables and assumptions may be based on assumptions that differ from the
Structuring Assumptions. Accordingly, such tables and other materials may not be
relevant to or appropriate for investors other than those specifically
requesting them.
WEIGHTED AVERAGE LIVES
The timing of changes in the rate of principal prepayments on the Mortgage
Loans may significantly affect an investor's actual yield to maturity, even if
the average rate of principal prepayments is consistent with such investor's
expectation. In general, the earlier a principal prepayment on the Mortgage
Loans occurs, the greater the effect of such principal prepayment on an
investor's yield to maturity. The effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the Offered
Certificates may not be offset by a subsequent like decrease (or increase) in
the rate of principal prepayments.
The projected weighted average life of any Class of Offered Certificates is
the average amount of time that will elapse from the Closing Date, until each
dollar of principal is scheduled to be repaid to the investors in such Class of
Offered Certificates. Because it is expected that there will be prepayments and
defaults on the Mortgage Loans, the actual weighted average lives of the Classes
of Offered Certificates are expected to vary substantially from the weighted
average remaining terms to stated maturity of the Mortgage Loans as set forth
herein under "The Mortgage Pool."
The "Assumed Final Maturity Date" for each Class of Offered Certificates is
as set forth herein under "Description of the Certificates--General". The
Assumed Final Maturity Date for each Class of Offered Certificates is the
Distribution Date in the month following the latest maturity date of any
Mortgage Loan in a Loan Group. The weighted average life of each Class of
Offered Certificates is likely to be shorter than would be the case if payments
actually made on the Mortgage Loans conformed to the foregoing assumptions, and
the final Distribution Date with respect to the Offered Certificates could occur
significantly earlier than the related Assumed Final Maturity Date because (i)
prepayments are likely to occur, (ii) excess cashflow, if any, will be applied
as principal of the Offered Certificates as described herein, (iii) the
Overcollateralization Target Amount is as defined herein and (iv) the Seller or
the Certificate Insurer may cause a termination of the Trust Fund as provided
herein.
The model used in this Prospectus Supplement, the "Constant Prepayment
Rate" or "CPR" represents an assumed rate of prepayment each month expressed as
an annual rate relative to the then outstanding principal balance of a pool of
mortgage loans for the life of such mortgage loans. CPR 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.
Each of the Prepayment Scenarios in the table below assumes the respective
percentages of CPR described thereunder.
The tables on pages S-74 through S-77 were prepared on the basis of the
assumptions in the following paragraph and the tables set forth below. There are
certain differences between the loan characteristics included in such
assumptions and the characteristics of the actual Mortgage Loans. Any such
discrepancy may have an effect upon the percentages of Original Certificate
Principal Balances outstanding and weighted average lives of the Offered
Certificates set forth in the tables on pages S-74 through S-77. In addition,
since the actual Mortgage Loans in the Trust Fund will have characteristics that
differ from those assumed in preparing the tables set forth below, the
distributions of principal of the Offered Certificates may be made earlier or
later than indicated in the tables.
The percentages and weighted average lives in the tables on pages S-74
through S-77 were determined assuming that (the "Structuring Assumptions"): (i)
the Mortgage Loans consist of 18 sub-pools of loans with the characteristics set
forth in the table below, (ii) the closing date for the Offered Certificates
occurs on December 14, 1998 and the Offered Certificates were sold to investors
on such date, (iii) distributions on the Certificates are made on the 25th day
of each month regardless of the day on which the Distribution Date actually
occurs, commencing in December 1998, in accordance with the allocation of
Available Funds set forth above under "Description of the
Certificates--Allocation of Available Funds", (iv) the prepayment rates are the
percentages of CPR set forth in the "Prepayment Scenarios" table below, (v)
prepayments include thirty days' interest thereon, (vi) the Seller is not
required to substitute or repurchase any or all of the Mortgage Loans pursuant
to the Pooling and Servicing Agreement and no optional termination is exercised,
except with respect to the entries identified by the row heading "Weighted
Average Life (years) to Optional Termination" in the tables below, (vii) the
Overcollateralization Target Amounts are set initially as specified herein and
thereafter decreases as described in the definition thereof, (viii) scheduled
payments for all Mortgage Loans are received on the first day of each month
commencing in December 1998, the principal portion of such payments is computed
prior to giving effect to prepayments received in such month and there are no
losses or delinquencies with respect to such Mortgage Loans, (ix) all Mortgage
Loans prepay at the same rate and all such payments are treated as prepayments
in full of individual Mortgage Loans, with no shortfalls in collection of
interest, (x) such prepayments are received on the last day of each month
commencing in the month prior to the Closing Date, (xi) the Certificate Index is
at all times equal to 5.53547%, (xii) the Pass-Through Rates for the Offered
Certificates are as set forth herein, (xiii) the Loan Rate for each Adjustable
Rate Mortgage Loan is adjusted on its next Adjustment Date (and on subsequent
Adjustment Dates, if necessary) to equal the sum of (a) the assumed level of the
Index and (b) the respective Gross Margin (such sum being subject to the
applicable Periodic Rate Caps, Minimum Loan Rates and Maximum Loan Rates), and
(xiv) with respect to the Adjustable Rate Mortgage Loans, the National Monthly
Median COFI Index is equal to 4.762%; the 1 Year T-Bill Index is equal to 4.41%;
the 3 Year T-Bill Index is equal to 4.33%; the Prime Rate is equal to 7.75%; 6
Month LIBOR is equal to 5.07813%; the 5 Year T-Bill Index is equal to 4.31%; the
6 Month T-Bill Index is equal to 4.48%; the 10 Year T-Bill Index is equal to
4.58% and the FHLB Closed Loan Index is equal to 4.96%. Nothing contained in the
foregoing assumptions should be construed as a representation that the Mortgage
Loans will not experience delinquencies or losses.
<TABLE>
<CAPTION>
PREPAYMENT SCENARIOS
Loan Group Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI
<S> <C> <C> <C> <C> <C> <C>
Group I (Non FHA/VA)(1) 0.0 % 12.5 % 25.0 % 32.5 % 37.5 % 50.0 %
Group I (FHA/VA) (1) 0.0 6.0 12.0 15.6 18.0 24.0
Group II(1) 0.0 17.5 35.0 45.5 52.5 70.0
</TABLE>
- --------------------------------------
(1) percentage of CPR.
<TABLE>
<CAPTION>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
NUMBER OF
MONTHS MONTHS REMAINING
BETWEEN TO NEXT MAXIMUM MINIMUM INITIAL PERIODIC TERM TO
PRINCIPAL LOAN RATE ADJUSTMENT ADJUSTMENT GROSS LOAN RATE LOAN RATE PERIODIC RATE CAP MATURITY
DESCRIPTION BALANCE ($) (%) DATES DATE MARGIN (%) (%) (%) RATE CAP (%) (%) (MONTHS)
- ----------- ----------- --------- ---------- ---------- ---------- --------- --------- ------------ -------- ----------
Loan Group I:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FHA/VA - 15 Yr 109,921.63 8.50000 N/A N/A N/A N/A N/A N/A N/A 125
FHA/VA - 30 Yr 21,344,195.25 9.35613 N/A N/A N/A N/A N/A N/A N/A 249
Fixed Rate -
Other 15 Yr 7,924,660.81 9.18060 N/A N/A N/A N/A N/A N/A N/A 133
Fixed Rate -
Other 30 Yr 30,848,714.64 9.57559 N/A N/A N/A N/A N/A N/A N/A 298
Fixed Rate -
Other Balloon 5,995,530.89 10.39603 N/A N/A N/A N/A N/A N/A N/A 127*
Loan Group II:
6 Month Treasury 80,532.75 7.41500 6 6 4.07500 None None 1.00000 1.00000 198
1 Year Treasury 6,829,613.81 8.03583 12 12 2.85415 13.50863 0.77496 1.72112 1.72112 274
3 Year Treasury 714,139.39 8.69641 36 25 2.69866 15.05931 2.66995 2.00324 2.00324 230
5 Year Treasury 121,256.40 8.75000 60 38 2.75000 14.50000 None 2.00000 2.00000 218
10 Year Treasury 56,312.67 7.00000 300 10 2.50000 13.00000 None None None 286
6 Month Libor 5,810,586.41 10.54900 6 7 6.18042 16.13598 8.27255 1.58743 1.05249 346
6 Month Libor 1,821,219.26 9.28951 6 8 5.65186 15.28951 9.28951 1.00000 1.00000 311
6 Month Libor 30,708,300.60 9.67022 6 18 6.49227 15.87842 9.29362 1.41406 1.07047 354
6 Month Libor 1,789,544.59 9.36923 6 30 6.58930 15.80437 7.86455 1.43749 1.17832 354
6 Month Libor 141,791.77 10.75000 6 45 5.00000 17.70000 None 3.00000 1.00000 345
Cost of Funds 5,479,192.77 7.66418 4 7 2.70956 13.96127 3.33269 0.54148 0.54148 267
FHLBB 758,995.23 7.20313 6 4 0.65620 18.00000 0.05921 0.22302 0.22302 177
Prime Rate 408,005.97 9.55050 1 1 1.54919 17.37500 0.86005 0.08290 0.08290 96
</TABLE>
* This loan has a remaining amortization term of 323 months.
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of each Class of Offered Certificates, and set
forth the percentages of the Original Certificate Principal Balance of each such
Class that would be outstanding after each of the dates shown, at various
Prepayment Scenarios.
**
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
<TABLE>
<CAPTION>
CLASS AF
PREPAYMENT SCENARIO
--------------------------------------------------------------------------------
Distribution Date Scenario Scenario Scenario
Scenario I II III Scenario IV Scenario V VI
------------ ----------- ------------ ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100% 100% 100% 100% 100% 100%
November, 1999.................... 96 86 75 69 65 55
November, 2000.................... 94 75 58 49 43 31
November, 2001.................... 92 65 44 34 29 17
November, 2002.................... 89 57 35 26 21 13
November, 2003.................... 87 49 28 20 15 9
November, 2004.................... 84 43 22 15 11 6
November, 2005.................... 81 37 17 11 8 4
November, 2006.................... 78 32 14 8 6 2
November, 2007.................... 74 28 11 6 4 2
November, 2008.................... 70 24 9 5 3 1
November, 2009.................... 57 19 6 3 2 0
November, 2010.................... 54 16 5 2 1 0
November, 2011.................... 51 14 4 2 1 0
November, 2012.................... 47 12 3 1 0 0
November, 2013.................... 44 10 2 1 0 0
November, 2014.................... 40 8 1 0 0 0
November, 2015.................... 36 6 1 0 0 0
November, 2016.................... 31 4 0 0 0 0
November, 2017.................... 26 3 0 0 0 0
November, 2018.................... 20 1 0 0 0 0
November, 2019.................... 15 0 0 0 0 0
November, 2020.................... 11 0 0 0 0 0
November, 2021.................... 8 0 0 0 0 0
November, 2022.................... 3 0 0 0 0 0
November, 2023.................... 0 0 0 0 0 0
November, 2024.................... 0 0 0 0 0 0
November, 2025.................... 0 0 0 0 0 0
November, 2026.................... 0 0 0 0 0 0
November, 2027.................... 0 0 0 0 0 0
November, 2028.................... 0 0 0 0 0 0
Weighted Average Life (years)
to maturity (1) 13.36 6.35 3.82 2.99 2.57 1.84
Weighted Average Life (years)
to Optional Termination(1)...... 13.25 5.53 2.79 2.04 1.70 1.11
</TABLE>
* Rounded to the nearest whole percentage.
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the principal
amount on each Distribution Date on such Class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing
the sum by the aggregate amount of the assumed net reductions in
principal amount on such Class of Certificates.
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
<TABLE>
<CAPTION>
CLASS AV
PREPAYMENT SCENARIO
--------------------------------------------------------------------------------
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI
----------- ----------- ------------ ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100% 100% 100% 100% 100% 100%
November, 1999.................... 96 78 60 49 42 24
November , 2000................... 94 62 35 22 15 1
November , 2001................... 93 49 20 8 3 0
November , 2002................... 92 39 15 7 3 0
November, 2003.................... 91 32 10 4 2 0
November, 2004.................... 89 26 6 2 0 0
November, 2005.................... 87 21 4 1 0 0
November, 2006.................... 86 17 2 0 0 0
November, 2007.................... 84 14 1 0 0 0
November, 2008.................... 82 11 0 0 0 0
November, 2009.................... 80 9 0 0 0 0
November, 2010.................... 77 7 0 0 0 0
November, 2011.................... 75 6 0 0 0 0
November, 2012.................... 72 5 0 0 0 0
November, 2013.................... 69 4 0 0 0 0
November, 2014.................... 65 3 0 0 0 0
November, 2015.................... 62 2 0 0 0 0
November, 2016.................... 58 1 0 0 0 0
November, 2017.................... 53 1 0 0 0 0
November, 2018.................... 49 0 0 0 0 0
November, 2019.................... 44 0 0 0 0 0
November, 2020.................... 39 0 0 0 0 0
November, 2021.................... 34 0 0 0 0 0
November, 2022.................... 30 0 0 0 0 0
November, 2023.................... 26 0 0 0 0 0
November, 2024.................... 21 0 0 0 0 0
November, 2025.................... 15 0 0 0 0 0
November, 2026.................... 9 0 0 0 0 0
November, 2027.................... 3 0 0 0 0 0
November, 2028.................... 0 0 0 0 0 0
Weighted Average Life (years)
to maturity (1) 18.23 4.32 2.00 1.38 1.08 0.64
Weighted Average Life (years)
to Optional Termination(1)...... 16.86 4.00 1.83 1.26 1.01 64 0.64
</TABLE>
* Rounded to the nearest whole percentage.
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the principal
amount on each Distribution Date on such Class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing
the sum by the aggregate amount of the assumed net reductions in
principal amount on such Class of Certificates.
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
<TABLE>
<CAPTION>
CLASS BF
PREPAYMENT SCENARIO
----------------------------------------------------------------------------------
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI
----------- ----------- ------------ ------------ ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100% 100% 100% 100% 100% 100%
November, 1999.................... 100 100 100 100 100 100
November, 2000.................... 100 100 100 100 100 100
November, 2001.................... 100 100 100 100 100 100
November, 2002.................... 100 100 75 56 46 21
November, 2003.................... 100 100 59 42 33 2
November, 2004.................... 100 91 47 29 14 0
November, 2005.................... 100 80 37 13 0 0
November, 2006.................... 100 69 26 1 0 0
November, 2007.................... 100 60 13 0 0 0
November, 2008.................... 100 51 2 0 0 0
November, 2009.................... 100 40 0 0 0 0
November, 2010.................... 100 35 0 0 0 0
November, 2011.................... 100 25 0 0 0 0
November, 2012.................... 100 16 0 0 0 0
November, 2013.................... 94 7 0 0 0 0
November, 2014.................... 85 0 0 0 0 0
November, 2015.................... 76 0 0 0 0 0
November, 2016.................... 66 0 0 0 0 0
November, 2017.................... 55 0 0 0 0 0
November, 2018.................... 43 0 0 0 0 0
November, 2019.................... 29 0 0 0 0 0
November, 2020.................... 14 0 0 0 0 0
November, 2021.................... 0 0 0 0 0 0
November, 2022.................... 0 0 0 0 0 0
November, 2023.................... 0 0 0 0 0 0
November, 2024.................... 0 0 0 0 0 0
November, 2025.................... 0 0 0 0 0 0
November, 2026.................... 0 0 0 0 0 0
November, 2027.................... 0 0 0 0 0 0
November, 2028.................... 0 0 0 0 0 0
Weighted Average Life (years)
to maturity (1) 19.13 10.23 6.05 4.78 4.26 3.56
Weighted Average Life (years)
to Optional Termination(1)...... 19.12 9.23 4.63 3.49 3.03 1.86
</TABLE>
* Rounded to the nearest whole percentage.
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the principal
amount on each Distribution Date on such Class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing
the sum by the aggregate amount of the assumed net reductions in
principal amount on such Class of Certificates.
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
<TABLE>
<CAPTION>
CLASS BV
PREPAYMENT SCENARIO
----------------------------------------------------------------------------------
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI
---------- ----------- ------------ ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100% 100% 100% 100% 100% 100%
November, 1999.................... 100 100 100 100 100 100
November , 2000................... 100 100 100 100 100 100
November , 2001................... 100 100 100 100 100 68
November , 2002................... 100 89 34 17 51 1
November, 2003.................... 100 72 22 0 0 0
November, 2004.................... 100 59 12 0 0 0
November, 2005.................... 100 48 0 0 0 0
November, 2006.................... 100 38 0 0 0 0
November, 2007.................... 100 31 0 0 0 0
November, 2008.................... 100 25 0 0 0 0
November, 2009.................... 100 20 0 0 0 0
November, 2010.................... 100 16 0 0 0 0
November, 2011.................... 100 9 0 0 0 0
November, 2012.................... 100 2 0 0 0 0
November, 2013.................... 100 0 0 0 0 0
November, 2014.................... 100 0 0 0 0 0
November, 2015.................... 100 0 0 0 0 0
November, 2016.................... 100 0 0 0 0 0
November, 2017.................... 100 0 0 0 0 0
November, 2018.................... 100 0 0 0 0 0
November, 2019.................... 99 0 0 0 0 0
November, 2020.................... 88 0 0 0 0 0
November, 2021.................... 77 0 0 0 0 0
November, 2022.................... 68 0 0 0 0 0
November, 2023.................... 58 0 0 0 0 0
November, 2024.................... 47 0 0 0 0 0
November, 2025.................... 35 0 0 0 0 0
November, 2026.................... 21 0 0 0 0 0
November, 2027.................... 0 0 0 0 0 0
November, 2028.................... 0 0 0 0 0 0
Weighted Average Life (years)
to maturity (1) 25.43 7.58 4.07 3.75 4.01 3.11
Weighted Average Life (years)
to Optional Termination(1)...... 22.38 7.23 3.89 3.61 3.03 1.86
</TABLE>
* Rounded to the nearest whole percentage.
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the principal
amount on each Distribution Date on such Class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing
the sum by the aggregate amount of the assumed net reductions in
principal amount on such Class of Certificates.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Class A
Certificates against the purchase price of the Mortgage Loans transferred to the
Trust Fund.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The Pooling and Servicing Agreement provides that the Trust Fund, exclusive
of the assets held in the Excess Reserve Fund Account, will comprise several
Subsidiary REMICs and a Master REMIC organized in a tiered "real estate mortgage
investment conduit" ("REMIC") structure. Each Subsidiary REMIC will issue
uncertificated regular interests and those interests will be held entirely by
the REMIC immediately above it in the tiered structure. Each of the Subsidiary
REMICs and the Master REMIC will designate a single class of interests as the
residual interest in that REMIC. The Class R Certificates will represent
ownership of the residual interests in each of the REMICs. Elections will be
made to treat each Subsidiary REMIC and the Master REMIC as a REMIC for federal
income tax purposes.
Each Class of Offered Certificates and the Class OC Certificates will
represent beneficial ownership of regular interests issued by the Master REMIC.
In addition, the Class AV, Class AF and Class BF Certificates will represent a
beneficial interest in the right to receive payments from the Excess Reserve
Fund Account.
Upon the issuance of the Offered Certificates, Brown & Wood LLP ("Tax
Counsel"), will deliver its opinion concluding, assuming compliance with the
Pooling and Servicing Agreement, for federal income tax purposes, each
Subsidiary REMIC and the Master REMIC will qualify as a REMIC within the meaning
of Section 860D of the Internal Revenue Code of 1986, as amended (the "Code").
In addition, Tax Counsel will deliver an opinion concluding that the Excess
Reserve Fund Account is an "outside reserve fund" that is beneficially owned by
the Certificateholders of the Class OC-II Certificates. Moreover, Tax Counsel
will deliver an opinion concluding that the rights of the Certificateholders of
the Class AV Certificates to receive payments from the Excess Reserve Fund
Account represent, for federal income tax purposes, interests in an interest
rate cap contract.
Any interest paid to the Class AF and Class BF Certificateholders in excess
of the weighted average net mortgage rate of the Group I Mortgage Loans will be
treated as paid from the Excess Reserve Fund Account pursuant to an interest
rate cap agreement entered into with the Class OC-I Certificates treated as a
notional principal contract.
TAXATION OF REGULAR INTERESTS
A holder of an Offered Certificate will be treated for federal income tax
purposes as owning a regular interest in the Master REMIC. The Class AV, Class
AF and Class BF Certificates will also represent beneficial ownership of an
interest in a limited recourse interest rate cap contract (the "Cap Contract").
A Certificateholder of a Class AV, Class AF and Class BF Certificate must
allocate its purchase price for such Certificate between its two components the
REMIC regular interest component and the Cap Contract component (the value of
which should be nominal). For information reporting purposes, the Trustee will
assume that, with respect to any Class AV, Class AF and Class BF Certificate,
the Cap Contract component will have only nominal value relative to the value of
the regular interest component. The IRS could, however, argue that the Cap
Contract component has a greater than de minimis value, and if that argument
were to be sustained, the regular interest component could be viewed as having
been issued with original issue discount ("OID") (which could cause the total
amount of discount to exceed a statutorily defined de minimis amount). See
"Certain Material Federal Income Tax Considerations" in the Prospectus.
Upon the sale, exchange, or other disposition of a Class AV, Class AF and
Class BF Certificate, the Certificateholder must allocate the amount realized
between the two components of the Class AV, Class AF or Class BF Certificate
based on the relative fair market values of those components at the time of
sale. Assuming that a Class AV, Class AF or Class BF Certificate is held as a
"capital asset" within the meaning of section 1221 of the Code, gain or loss on
the disposition of an interest in the Cap Contract component should be capital
gain or loss, and, gain or loss on the disposition of the regular interest
component should, subject to the limitation described below, be capital gain or
loss. Gain attributable to the regular interest component of a Class AV, Class
AF or Class BF Certificate will be treated as ordinary income, however, to the
extent such gain does not exceed the excess, if any, of (i) the amount that
would have been includible in the Certificateholder's gross income with respect
to the regular interest component had income thereon accrued at a rate equal to
110% of the applicable federal rate as defined in section 1274(d) of the Code
determined as of the date of purchase of such Certificate over (ii) the amount
actually included in such Certificateholder's income.
Interest on a regular interest must be included in income by a
Certificateholder under the accrual method of accounting, regardless of the
Certificateholder's regular method of accounting. In addition, a Regular
interest could be considered to have been issued with OID. See "Certain Material
Federal Income Tax Considerations" in the Prospectus. The prepayment assumption
that will be used to in determining the accrual of any OID, market discount, or
bond premium, if any, will equal the rate described above under "Yield,
Prepayment and Maturity Considerations--Weighted Average Lives" for Scenario
III. No representation is made that the Mortgage Loans will prepay at such a
rate or at any other rate. OID must be included in income as it accrues on a
constant yield method, regardless of whether the Certificateholder receives
currently the cash attributable to such OID.
STATUS OF THE OFFERED CERTIFICATES
The regular interest component of the Class AV, Class AF and Class BF
Certificates (and the Class BV Certificate itself) will be treated as assets
described in Section 7701(a)(19)(C) of the Code, and as "real estate assets"
under Section 856(c)(5)(B) of the Code, generally, in the same proportion that
the assets of the Trust Fund, exclusive of the Excess Reserve Fund Account,
would be so treated. In addition, to the extent a regular interest represents
real estate assets under section 856(c)(5)(B) of the Code, the interest derived
from that component would be interest on obligations secured by interests in
real property for purposes of section 856(c)(3) of the Code. The Cap Contract
component of a Class AV, Class AF or Class BF Certificate will not, however,
qualify as an asset described in Section 7701(a)(19)(C) of the Code or as a real
estate asset under Section 856(c)(5)(B) of the Code.
THE EXCESS RESERVE FUND ACCOUNT
As indicated above, a portion of the purchase price paid by a
Certificateholder to acquire a Class AV, Class AF or Class BF Certificate will
be attributable to the Cap Contract component of such Certificate. The portion
of the overall purchase price attributable to the Cap Component must be
amortized over the life of any such Certificate, taking into account the
declining balance of the related regular interest component. Treasury
regulations concerning notional principal contracts provide alternative methods
for amortizing the purchase price of an interest rate cap contract. Under one
method the level yield constant interest method - the price paid for an interest
rate cap is amortized over the life of the cap as though it were the principal
amount of a loan bearing interest at a reasonable rate. Certificateholders are
urged to consult their tax advisors concerning the methods that can be employed
to amortize the portion of the purchase price paid for the Cap Contract
component of a Class AV, Class AF or Class BF Certificate.
Any payments made to a Certificateholder from the Excess Reserve Fund
Account will be treated as periodic payments on an interest rate cap contract.
To the extent the sum of such periodic payments for any year exceed that year's
amortized cost of the Cap Contract component, such excess is ordinary income. If
for any year the amount of that year's amortized cost exceeds the sum of the
periodic payments, such excess is allowable as an ordinary deduction.
NON-U.S. PERSONS
Interest paid to or accrued by a Certificateholder who is a non-U.S. Person
will be considered "portfolio interest", and will not be subject to U.S. federal
income tax and withholding tax, if the interest is not effectively connected
with the conduct of a trade or business within the United States by the non-U.S.
Person and the non-U.S. Person (i) is not actually or constructively a "10
percent shareholder" of the Trust Fund or a "controlled foreign corporation"
with respect to which the Trust Fund is a "related person" within the meaning of
the Code and (ii) provides the Trust Fund or other person who is otherwise
required to withhold U.S. tax with respect to the Offered Certificates with an
appropriate statement (on Form W-8 or a similar form), signed under penalties of
perjury, certifying that the beneficial owner of the Offered Certificate is a
non-U.S. Person and providing the non-U.S. Person's name and address. If an
Offered Certificate is held through a securities clearing organization or
certain other financial institutions, the organization or institution may
provide the relevant signed statement to the withholding agent; in that case,
however, the signed statement must be accompanied by a Form W-8 or substitute
form provided by the non-U.S. Person that owns the Certificate.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of an Offered Certificate by a non-U.S. Person will be
exempt from United States federal income and withholding tax, provided that (i)
such gain is not effectively connected with the conduct of a trade or business
in the United States by the non-U.S. Person and (ii) in the case of an
individual, the individual is not present in the United States for 183 days or
more in the taxable year.
For purposes of the foregoing discussion, the term "non-U.S. Person" means
any person other than (i) a citizen or resident of the United States; (ii) a
corporation (or entity treated as a corporation for tax purposes) created or
organized in the United States or under the laws of the United States or of any
state thereof, including, for this purpose, the District of Columbia; (iii) a
partnership (or entity treated as a partnership for tax purposes) organized in
the United States or under the laws of the United States or of any state
thereof, including, for this purpose, the District of Columbia (unless provided
otherwise by future Treasury regulations); (iv) an estate whose income is
includible in gross income for United States income tax purposes regardless of
its source; or (v) a trust, if a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more U.S. Persons have authority to control all substantial decisions of the
trust. Notwithstanding the last clause of the preceding sentence, to the extent
provided in Treasury regulations, certain trusts in existence on August 20,
1996, and treated as U.S. Persons prior to such date, may elect to continue to
be U.S. Persons.
PROHIBITED TRANSACTIONS TAX AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (the "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions, a prohibited transaction means the
disposition of a Mortgage Loan, the receipt of income from a source other than a
Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the Certificates. It is not anticipated that the Trust Fund will
engage in any prohibited transactions in which it would recognize a material
amount of net income.
In addition, certain contributions to a trust fund that elects to be
treated as a REMIC made after the day on which such trust fund issues all of its
interests could result in the imposition of a tax on the trust fund equal to
100% of the value of the contributed property (the "Contributions Tax"). The
Trust Fund will not accept contributions that would subject it to such tax.
In addition, a trust fund that elects to be treated as a REMIC may also be
subject to federal income tax at the highest corporate rate on "net income from
foreclosure property," determined by reference to the rules applicable to real
estate investment trusts. "Net income from foreclosure property" generally means
gain from the sale of a foreclosure property other than qualifying rents and
other qualifying income for a real estate investment trust. It is not
anticipated that the Trust Fund will recognize net income from foreclosure
property subject to federal income tax.
BACKUP WITHHOLDING
Certain Certificate Owners may be subject to backup withholding at the rate
of 31% with respect to interest paid on the Offered Certificates if the
Certificate Owners, upon issuance, fail to supply the Trustee or their broker
with their taxpayer identification number, furnish an incorrect taxpayer
identification number, fail to report interest, dividends, or other "reportable
payments" (as defined in the Code) properly, or, under certain circumstances,
fail to provide the Trustee or their broker with a certified statement, under
penalty of perjury, that they are not subject to backup withholding.
The Trustee will be required to report annually to the Internal Revenue
Service (the "IRS"), and to each Certificateholder of record, the amount of
interest paid (and OID accrued, if any) on the Offered Certificates (and the
amount of interest withheld for federal income taxes, if any) for each calendar
year, except as to exempt holders (generally, holders that are corporations,
certain tax-exempt organizations or nonresident aliens who provide certification
as to their status as nonresidents). As long as the only holder of record of a
Class of Offered Certificates is Cede & Co., as nominee of DTC, the IRS and
Certificate Owners of such Class will receive tax and other information,
including the amount of interest paid on such Certificates owned, from
Participants and Financial Intermediaries rather than from the Trustee. (The
Trustee, however, will respond to requests for necessary information to enable
Participants, Financial Intermediaries and certain other persons to complete
their reports.) Each non-exempt Certificate Owner will be required to provide,
under penalty of perjury, a certificate on IRS form W-9 containing his or her
name, address, correct federal taxpayer identification number and a statement
that he or she is not subject to backup withholding. Should a nonexempt
Certificate Owner fail to provide the required certification, the Participants
or Financial Intermediaries (or the Paying Agent) will be required to withhold
31% of the interest (and principal) otherwise payable to the holder, and remit
the withheld amount to the IRS as a credit against the holder's federal income
tax liability.
Such amounts will be deemed distributed to the affected Certificate Owner
for all purposes of the related Certificates and the Pooling and Servicing
Agreement.
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Offered Certificates under the tax
laws of any state. Investors considering an investment in the Offered
Certificates should consult their own tax advisors regarding such tax
consequences.
All investors should consult their own tax advisors regarding the federal,
state, local or foreign income tax consequences of the purchase, ownership and
disposition of the Offered Certificates.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), prohibits "parties in interest" with respect to an employee
benefit plan subject to ERISA and/or a plan or other arrangement subject to the
excise tax provisions set forth under Section 4975 of the Code (each of the
foregoing, a "Plan") from engaging in certain transactions involving such Plan
and its assets unless a statutory, regulatory or administrative exemption
applies to the transaction. Section 4975 of the Code imposes certain excise
taxes on prohibited transactions involving plans described under that Section;
ERISA authorizes the imposition of civil penalties for prohibited transactions
involving plans not covered under Section 4975 of the Code. Any Plan fiduciary
which proposes to cause a Plan to acquire any of the Offered Certificates should
consult with its counsel with respect to the potential consequences under ERISA
and the Code of the Plan's acquisition and ownership of such Certificates. See
"ERISA Considerations" in the Prospectus.
Certain employee benefit plans, including governmental plans and certain
church plans, are not subject to ERISA's requirements. Accordingly, assets of
such plans may be invested in the Offered Certificates without regard to the
ERISA considerations described herein and in the Prospectus, subject to the
provisions of other applicable federal and state law. Any such plan which is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code
may nonetheless be subject to the prohibited transaction rules set forth in
Section 503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's general
fiduciary requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary which decides to
invest the assets of a Plan in the Offered Certificates should consider, among
other factors, the extreme sensitivity of the investments to the rate of
principal payments (including prepayments) on the Mortgage Loans.
The U.S. Department of Labor (the "DOL") has granted to Greenwich Capital
Markets, Inc. (the "Underwriter") an administrative exemption (Prohibited
Transaction Exemption 90-59; Exemption Application No. D-8374) (the "Exemption")
from certain of the prohibited transaction rules of ERISA and the related excise
tax provisions of Section 4975 of the Code with respect to the initial purchase,
the holding and the subsequent resale by Plans of certificates in pass-through
trusts that consist of certain receivables, loans and other obligations that
meet the conditions and requirements of the Exemption. The Exemption applies to
mortgage loans such as the Mortgage Loans in the Trust Fund.
Among the conditions that must be satisfied for the Exemption to apply are
the following:
(1) the acquisition of the certificates by a Plan is on terms (including
the price for the certificates) that are at least as favorable to the Plan as
they would be in an arm's length transaction with an unrelated party;
(2) the rights and interests evidenced by the certificates acquired by the
Plan are not subordinated to the rights and interests evidenced by other
certificates of the trust fund;
(3) the certificates acquired by the Plan have received a rating at the
time of such acquisition that is one of the three highest generic rating
categories from Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Credit
Rating Co. ("DCR") or Fitch IBCA, Inc. ("Fitch" and, together with S&P, Moody's
and DCR, the "Exemption Rating Agencies");
(4) the trustee must not be an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the underwriters in
connection with the distribution of the certificates represents not more than
reasonable compensation for underwriting the certificates; the sum of all
payments made to and retained by the seller pursuant to the assignment of the
loans to the trust fund represents not more than the fair market value of such
loans; the sum of all payments made to and retained by the servicer and any
other servicer represents not more than reasonable compensation for such
person's services under the agreement pursuant to which the loans are pooled and
reimbursements of such person's reasonable expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933.
The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets of the
type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated
in one of the three highest generic rating categories by an Exemption
Rating Agency for at least one year prior to the Plan's acquisition of
certificates; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of certificates.
Moreover, the Exemption provides relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire certificates in a trust holding receivables as to which
the fiduciary (or its affiliate) is an obligor provided that, among other
requirements, (i) in the case of an acquisition in connection with the initial
issuance of certificates, at least fifty percent (50%) of each class of
certificates in which Plans have invested is acquired by persons independent of
the Restricted Group; (ii) such fiduciary (or its affiliate) is an obligor with
respect to five percent (5%) or less of the fair market value of the obligations
contained in the trust; (iii) the Plan's investment in certificates of any class
does not exceed twenty-five percent (25%) of all of the certificates of that
class outstanding at the time of the acquisition; and (iv) immediately after the
acquisition, no more than twenty-five percent (25%) of the assets of any Plan
with respect to which such person is a fiduciary are invested in certificates
representing an interest in one or more trusts containing assets sold or
serviced by the same entity. The Exemption does not apply to Plans sponsored by
the Underwriter, the Trustee, the Servicer, any obligor with respect to Mortgage
Loans included in the Trust Fund constituting more than five percent of the
aggregate unamortized principal balance of the assets in the Trust Fund, or any
affiliate of such parties (the "Restricted Group").
It is expected that the Exemption will apply to the acquisition and holding
by Plans of the Class A Certificates and that all conditions of the Exemption
other than those within the control of the investors will be met.
Because the characteristics of the Class B Certificates may not meet the
requirements of Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1"), the
Exemption or any other issued exemption under ERISA, the purchase and holding of
such Certificates by a Plan or by individual retirement accounts or other plans
subject to Section 4975 of the Code or by persons acquiring such Certificates on
behalf of or with assets of a Plan may result in prohibited transactions or the
imposition of excise taxes or civil penalties. Consequently, transfers of the
Class B Certificates will not be registered by the Trustee unless the Trustee
receives: (i) a representation from the transferee of such Certificate,
acceptable to and in form and substance satisfactory to the Trustee, to the
effect that such transferee is not an employee benefit plan subject to Section
406 of ERISA or a plan or arrangement subject to Section 4975 of the Code, nor a
person acting on behalf of any such plan or arrangement nor using the assets of
any such plan or arrangement to effect such transfer; (ii) if the purchaser is
an insurance company, a representation that the purchaser is an insurance
company which is purchasing such Certificates with funds contained in an
"insurance company general account" (as such term is defined in Section V(e) of
Prohibited Transaction Class Exemption 95-60 ("PTCE 95-60")) and that the
purchase and holding of such Certificates are covered under Sections I and III
of PTCE 95-60; or (iii) an opinion of counsel satisfactory to the Trustee that
the purchase or holding of such Certificate by a Plan, any person acting on
behalf of a Plan or using such Plan's assets, will not constitute a prohibited
transaction, will not result in the assets of the Trust being deemed to be "plan
assets" and subject to the prohibited transaction requirements of ERISA and the
Code and will not subject the Trustee to any obligation in addition to those
undertaken in the Pooling and Servicing Agreement. Such representation as
described above shall be deemed to have been made to the Trustee by the
transferee's acceptance of a Class B Certificate. In the event that such
representation is violated, or any attempt to transfer to a plan or person
acting on behalf of a Plan or using such Plan's assets is attempted without such
opinion of counsel, such attempted transfer or acquisition shall be void and of
no effect.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 83-1
described in the Prospectus and the Exemption, and the potential consequences in
their specific circumstances, prior to making an investment in the Offered
Certificates. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification, an
investment in the Offered Certificates is appropriate for the Plan, taking into
account the overall investment policy of the Plan and the composition of the
Plan's investment portfolio.
LEGAL INVESTMENT CONSIDERATIONS
The Class AV Certificates will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") so
long as they are rated in one of the two highest rating categories by at least
one nationally recognized statistical rating organization and, as such, are
legal investments for certain entities to the extent provided for in SMMEA. The
Class AF Certificates will NOT constitute "mortgage related securities" for the
purposes of SMMEA because Loan Group I includes Owner-Financed Mortgage Loans
that were originated by individuals and not by financial institutions or
mortgagees approved by the Secretary of Housing and Urban Development. The Class
BF and Class BV Certificates also will NOT constitute "mortgage related
securities" for purposes of SMMEA.
There may be restrictions on the ability of certain investors, including
depository institutions, either to purchase the Offered Certificates or to
purchase Offered Certificates representing more than a specified percentage of
the investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Offered Certificates constitute legal
investments for such investors. See "Legal Investment" in the Prospectus.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1997 and December 31, 1996 and the related
consolidated statements of income, changes in shareholder's equity and cash
flows for each of the three years in the period ended December 31, 1997
incorporated by reference in this Prospectus Supplement, have been incorporated
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, between the Depositor and the Underwriter (an affiliate of the
Depositor), the Depositor has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase from the Depositor, the Class A Certificates.
Distribution of the Class A Certificates will be made by the Underwriter
from time to time in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. The Underwriter may effect such transactions
by selling Class A Certificates to or through dealers and such dealers may
receive from the Underwriter, for which they act as agent, compensation in the
form of underwriting discounts, concessions or commissions. The Underwriter and
any dealers that participate with the Underwriter in the distribution of such
Class A Certificates may be deemed to be underwriters, and any discounts,
commissions or concessions received by them, and any profits on resale of the
Certificates purchased by them, may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933, as amended (the "Act").
The Depositor has been advised by the Underwriter that it intends to make a
market in the Class A Certificates but has no obligation to do so. There can be
no assurance that a secondary market for the Class A Certificates will develop
or, if it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the Act.
The Class B and Class OC Certificates will be transferred to the Seller as
partial consideration for the Mortgage Loans. Such Certificates may be offered
by the Seller from time to time directly or through underwriters or agents in
one or more negotiated transactions, or otherwise, at varying prices to be
determined at the time of sale, in one or more separate transactions. Any
underwriters or agents that participate in the distribution of such Certificates
may be deemed to be "underwriters" within the meaning of the Securities Act of
1933, as amended, and any profit on the sale of such Certificates, discounts,
commissions, concessions, or other compensation received by any such underwriter
or agent may be deemed to be underwriting discounts and commissions under such
Act.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Offered
Certificates will be passed upon for the Seller by Thacher Proffitt & Wood, New
York, New York. Certain federal income tax consequences with respect to the
Certificates will be passed upon for the Trust Fund by Brown & Wood LLP, New
York, New York. Brown & Wood LLP, New York, New York, will act as counsel for
the Depositor and the Underwriter.
RATINGS
It is a condition to the issuance of the Offered Certificates that (i) the
Class A Certificates be rated "AAA" by Standard & Poor's ("S&P") and "Aaa" by
Moody's Investors Service, Inc. ("Moody's" and, together with S&P the "Rating
Agencies) and (ii) the Class B Certificates be rated "BBB" by S&P and "Baa3" by
Moody's.
A securities rating addresses the likelihood of the receipt by a
certificateholder of distributions on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the certificates. The ratings on the
Offered Certificates do not, however, constitute statements regarding the
likelihood or frequency of prepayments on the Mortgage Loans, the payment of any
Available Funds Cap Carryover Amount or the possibility that a holder of an
Offered Certificate might realize a lower than anticipated yield.
The ratings assigned to the Class A Certificates will depend primarily upon
the creditworthiness of the Certificate Insurer. Any reduction in a rating
assigned to the claims-paying ability of the Certificate Insurer below the
ratings initially assigned to the Class A Certificates may result in a reduction
of one or more of the ratings assigned to the Class A Certificates.
The Depositor has not engaged any rating agency other than the Rating
Agencies to provide ratings on the Offered Certificates. However, there can be
no assurance as to whether any other rating agency will rate the Offered
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. Any rating on the Offered Certificates by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Offered
Certificates by the Rating Agencies.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to any
of the Offered Certificates by the Rating Agencies are subsequently lowered for
any reason, no person or entity is obligated to provide any additional support
or credit enhancement with respect to such Offered Certificates.
INDEX OF DEFINED TERMS
Accrual Period..............................................................S-59
Act.........................................................................S-84
Adjustment Date.............................................................S-29
Advance.....................................................................S-49
Agreement...................................................................S-67
Allocable Loss Amount.......................................................S-59
Arrearage...................................................................S-20
Assignment Program..........................................................S-42
Assumed Final Distribution Date.............................................S-53
Assumed Final Maturity Date.................................................S-71
Available Funds.............................................................S-57
Balloon Loan................................................................S-21
Balloon Payment.............................................................S-21
Bankruptcy Code.............................................................S-20
Bankruptcy Plan Mortgage Loan...............................................S-20
Basic Principal Distribution Amount.........................................S-60
Beneficial Owner............................................................S-54
Book-Entry Certificates.....................................................S-53
Business Day................................................................S-67
Cap Contract................................................................S-78
Cedelbank...................................................................S-55
Cedelbank Participants......................................................S-55
Certificate Index...........................................................S-64
Certificate Insurer.........................................................S-53
Certificate Margin..........................................................S-64
Certificate Owners..........................................................S-53
Certificate Principal Balance...............................................S-60
Certificateholder...........................................................S-54
Certificates................................................................S-53
Class A Certificates........................................................S-53
Class AF Principal Distribution Amount......................................S-60
Class AV Principal Distribution Amount......................................S-60
Class B Adjustment..........................................................S-60
Class B Certificates........................................................S-53
Class BF Principal Distribution Amount......................................S-60
Class BV Principal Distribution Amount......................................S-60
Class OC Certificates.......................................................S-53
CMAC........................................................................S-17
Code........................................................................S-78
Collection Account..........................................................S-49
Company.....................................................................S-16
Compensating Interest.......................................................S-51
Constant Prepayment Rate....................................................S-71
Contributions Tax...........................................................S-80
Cooperative.................................................................S-55
CPR.........................................................................S-71
Cumulative Annual Loss Percentage...........................................S-61
Cumulative Loss Trigger.....................................................S-61
Cut-off Date................................................................S-19
Cut-off Date Principal Balance..............................................S-19
DCR.........................................................................S-82
Defective Mortgage Loans....................................................S-48
Deferred Interest...........................................................S-42
Deficiency Amount...........................................................S-67
Definitions.................................................................S-59
Definitive Certificate......................................................S-54
Delayed First Adjustment Mortgage Loan......................................S-29
Delinquency Percentage......................................................S-61
Delinquent............................................................S-20, S-61
Determination Date..........................................................S-51
Distribution Account........................................................S-49
Distribution Date...........................................................S-53
DOL.........................................................................S-81
DTC.........................................................................S-91
DTC Services................................................................S-57
Due Date....................................................................S-21
Due Period..................................................................S-61
EFSG........................................................................S-44
Eleventh District COFI......................................................S-40
Eligible Account............................................................S-49
Eligible Substitute Mortgage Loan...........................................S-48
ERISA.......................................................................S-81
Euroclear...................................................................S-55
Euroclear Operator..........................................................S-55
Euroclear Participants......................................................S-55
European Depositaries.......................................................S-53
Excess Reserve Fund Account.................................................S-65
Exemption...................................................................S-81
Exemption Rating Agencies...................................................S-82
Extra Principal Distribution Amount.........................................S-61
FHA.........................................................................S-42
FHA Mortgage Loans..........................................................S-42
Final Distribution Date.....................................................S-67
Financial Intermediary......................................................S-54
Fiscal Agent................................................................S-66
Fitch.......................................................................S-82
Forbearance Plan Mortgage Loan..............................................S-20
Full Documentation..........................................................S-44
GAAP........................................................................S-17
General Excess Available Amount.............................................S-61
Global Securities...........................................................S-91
Gross Margin................................................................S-29
Group I Available Funds.....................................................S-57
Group I Loan Balance........................................................S-19
Group I Mortgage Loans......................................................S-19
Group II Available Funds....................................................S-57
Group II Available Funds Cap................................................S-64
Group II Available Funds Cap Carryover Amount...............................S-64
Group II Formula Rate.......................................................S-64
Group II Loan Balance.......................................................S-19
Group II Mortgage Loans.....................................................S-19
Guaranteed Principal Amount.................................................S-67
HUD.........................................................................S-42
IML.........................................................................S-55
Index.......................................................................S-29
Industry....................................................................S-57
Initial Periodic Rate Cap...................................................S-29
Insured Payment.............................................................S-67
Insurer Default.............................................................S-62
Interest Distributable Amount...............................................S-61
IRS.........................................................................S-80
LIBOR Business Day..........................................................S-65
LIBOR Determination Date....................................................S-64
Liquidated Mortgage Loan....................................................S-63
Litton......................................................................S-46
Loan Group..................................................................S-19
Loan Group Balance..........................................................S-19
Loan Group I................................................................S-19
Loan Group II...............................................................S-19
Loan Rate...................................................................S-21
Loss Reimbursement..........................................................S-62
Maximum Cap.................................................................S-64
Maximum Loan Rate...........................................................S-29
MBIA........................................................................S-16
MGIC........................................................................S-44
Minimum Loan Rate...........................................................S-29
Modified Scheduled Payments.................................................S-20
Monthly Interest Distributable Amount.......................................S-62
Moody's................................................................S-9, S-84
Mortgage....................................................................S-21
Mortgage Loan Purchase Agreement............................................S-19
Mortgage Loan Schedule......................................................S-47
Mortgage Loans..............................................................S-19
Mortgage Pool...............................................................S-19
mortgage related securities...........................................S-10, S-83
Mortgaged Property..........................................................S-21
National Housing Act........................................................S-42
National Monthly Median COFI................................................S-40
Negative Amortization Mortgage Loans........................................S-41
Net income from foreclosure property........................................S-80
Net Liquidation Proceeds....................................................S-63
no-bid......................................................................S-43
Non-U.S. Person.............................................................S-80
Notice......................................................................S-67
Offered Certificates........................................................S-53
OID.........................................................................S-78
One Year CMT................................................................S-40
Optional Termination Date...................................................S-52
Original Certificate Principal Balance......................................S-60
outside reserve fund........................................................S-78
Overall Overcollateralization Target Amount.................................S-62
Overcollateralization Deficiency Amount.....................................S-62
Overcollateralization Release Amount........................................S-62
Overcollateralization Step-up Trigger Event.................................S-62
Overcollateralization Target Amount.........................................S-62
Overcollateralized Amount...................................................S-63
Owner.......................................................................S-67
Owner-Financed Mortgage Loan................................................S-21
Pass-Through Rate...........................................................S-64
Payment Cap.................................................................S-41
Performing Mortgage Loan....................................................S-19
Periodic Rate Cap...........................................................S-29
Plan........................................................................S-81
plan assets.................................................................S-83
Policy......................................................................S-53
Pool Balance................................................................S-19
Pooling and Servicing Agreement.............................................S-47
Preference Amount...........................................................S-67
Prepayment Interest Shortfall...............................................S-51
Prepayment Period...........................................................S-57
Principal Balance...........................................................S-19
Principal Distribution Amount...............................................S-63
Principal Remittance Amount.................................................S-63
Prohibited Transactions Tax.................................................S-80
PTCE 83-1...................................................................S-83
PTCE 95-60..................................................................S-83
Purchase Price..............................................................S-48
Rating Agencies.............................................................S-84
Realized Loss...............................................................S-63
Record Date.................................................................S-53
Reference Banks.............................................................S-65
regular interests............................................................S-9
Regular Scheduled Payments..................................................2S-0
Related Documents...........................................................S-47
Relevant Depositary.........................................................S-53
Relief Act..................................................................S-49
REMIC.......................................................................S-78
REMICs.......................................................................S-9
REO Property................................................................S-20
Re-Performance Test.........................................................S-20
Re-Performing Mortgage Loan.................................................S-20
Required Reserve Amount.....................................................S-66
Reserve Interest Rate.......................................................S-65
Residual Certificates.......................................................S-53
residual interests...........................................................S-9
Restricted Group............................................................S-83
Rules.......................................................................S-54
S&P..............................................................S-9, S-82, S-84
SAP.........................................................................S-17
Senior Credit Enhancement Percentage........................................S-63
Senior Specified Enhancement Percentage.....................................S-63
Servicing Advance...........................................................S-50
Servicing Fee...............................................................S-50
Servicing Fee Rate..........................................................S-50
Six Month LIBOR.............................................................S-40
SMMEA.......................................................................S-83
Special Servicing Fee.......................................................S-51
Stepdown Date...............................................................S-63
Structuring Assumptions.....................................................S-72
Sub-Performing Mortgage Loan................................................S-20
Substitution Adjustment.....................................................S-48
Successor Servicer Fee......................................................S-63
Systems.....................................................................S-57
Tax Counsel.................................................................S-78
Telerate Page 3750..........................................................S-65
Termination Price...........................................................S-52
Terms and Conditions........................................................S-56
Transition Cost.............................................................S-63
Trigger Event...............................................................S-64
Trust Fund..................................................................S-19
Trustee Fee.................................................................S-50
Trustee Fee Rate............................................................S-50
U.S. Person.................................................................S-94
Underwriter...........................................................S-71, S-81
United States Housing Act...................................................S-42
Unpaid Interest Shortfall Amount............................................S-64
VA..........................................................................S-42
VA Mortgage Loans...........................................................S-42
Year 2000 problems..........................................................S-57
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Offered Certificates will be
offered globally (the "Global Securities") and will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of The Depository Trust Company ("DTC"), Cedelbank or
Euroclear. The Global Securities will be tradable 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 Cedelbank 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 Cedelbank or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedelbank and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedelbank and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to conventional eurobonds, except that there
will be no temporary global security and no "lock-up" or restricted period.
Investor securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedelbank or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no `lock-up' or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset backed certificates issues in same-day funds.
Trading between Cedelbank and/or Euroclear Participants. Secondary market
trading between Cedelbank Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and Cedelbank or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedelbank Participant or a Euroclear Participant, the purchaser
will send instructions to Cedelbank or Euroclear through a Cedelbank Participant
or Euroclear Participant at least one business day prior to settlement.
Cedelbank or Euroclear will instruct the respective Depositary, as the case may
be, to receive the Global Securities against payment. Payment will include
interest accrued on the Global Securities from and including the last coupon
payment date to and excluding the settlement date, on the basis of the actual
number of days in such accrual period and a year assumed to consist of 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. Payment
will then be made by the respective Depositary of the DTC Participant's account
against delivery of the Global Securities. After settlement has been completed,
the Global Securities will be system and by the clearing system, in accordance
with its usual procedures, to the Cedelbank 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 Cedelbank or Euroclear cash
debt will be valued instead as of the actual settlement date.
Cedelbank 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 Cedelbank or Euroclear. Under
this approach, they may take on credit exposure to Cedelbank or Euroclear until
the Global Securities are credited to their accounts one day later.
As an alternative, if Cedelbank or Euroclear has extended a line of credit
to them, Cedelbank Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Cedelbank Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will depend
on each Cedelbank Participant's or Euroclear Participant's particular cost of
funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Cedelbank Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between Cedelbank or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedelbank Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedelbank or Euroclear through a Cedelbank Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Cedelbank or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of the actual number of days in such accrual period and a year
assumed to consist of 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. The payment will then be reflected in the account of the
Cedelbank Participant or Euroclear Participant the following day, and receipt of
the cash proceeds in the Cedelbank 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 Cedelbank 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 Cedelbank Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Cedelbank or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedelbank Participants
or Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedelbank or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedelbank or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their Cedelbank or Euroclear account in order
to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the Cedelbank Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Cedelbank or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are Certificate Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owners
or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity treated as a corporation
or partnership for United States federal income tax purposes organized in or
under the laws of the United States or any state thereof or the District of
Columbia or (iii) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. This summary does not deal
with all aspects of U.S. Federal income tax withholding that may be relevant to
foreign holders of the Global Securities. Investors are advised to consult their
own tax advisors for specific tax advice concerning their holding and disposing
of the Global Securities.
$120,121,722
(APPROXIMATE)
C-BASS TRUST 1998-3
FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
CREDIT-BASED ASSET SERVICING AND
SECURITIZATION LLC
SELLER
LITTON LOAN SERVICING LP
SERVICER
ASSET-BACKED CERTIFICATES, SERIES 1998-3
--------------------
PROSPECTUS SUPPLEMENT
--------------------
GREENWICH CAPITAL MARKETS, INC.
You should rely only 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 Asset-Backed Certificates, Series 1998-3 in any
state where the offer is not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting
as underwriters of the Asset-Backed Certificates, Series 1998-3 and with respect
to their unsold allotments or subscriptions. In addition, all dealers selling
the Asset-Backed Certificates, Series 1998-3 will be required to deliver a
prospectus supplement and prospectus for ninety days following the date of this
prospectus supplement.
December 14, 1998
SUBJECT TO COMPLETION, DATED , 1998
------------
PROSPECTUS
Asset Backed Securities
(Issuable in Series)
FINANCIAL ASSET SECURITIES CORP.
Depositor
Consider carefully the risk factors beginning on page 4 of this prospectus.
The securities represent obligations of the trust only and do not represent an
interest in or obligation of the depositor, the seller, the master servicer or
any of their affiliates.
This prospectus may be used to offer and sell the securities only if
accompanied by a prospectus supplement.
The Securities
Financial Asset Securities Corp., as depositor, will sell the securities, which
may be in the form of asset backed certificates or asset backed notes. Each
issue of securities will have its own series designation and will evidence
either:
o the ownership of certain trust assets or
o debt obligations secured by certain trust assets.
Each series of securities will consist of one or more classes. Each class of
securities will represent the entitlement to a specified portion of future
interest payments and a specified portion of future principal payments on the
assets in the related trust. In each case, the specified portion may equal from
100% to 0%. A series may include one or more classes of securities that are
senior in right of payment to one or more other classes. One or more classes of
securities may be entitled to receive distributions of principal, interest or
both prior to one or more other classes or before or after certain specified
events have occurred. The related prospectus supplement will specify each of
these features.
The Trust and Its Assets
As specified in the related prospectus supplement, the assets of a trust will
include primarily the following:
o closed-end and/or revolving home equity loans secured by senior
or junior liens on one- to four-family residential properties;
o home improvement installment sales contracts and installment
loan agreements that are either unsecured or secured generally
by junior liens on one- to four-family residential properties or
by purchase money security interests in the related home
improvements; and/or
o private asset backed securities.
Each trust may be subject to early termination in certain circumstances.
Market for the Securities
No market will exist for the securities of any series before they are issued.
In addition, even after the securities of a series have been issued and sold,
there can be no assurance that a resale market will develop.
Offers of the Securities
Offers of the securities may be made through one or more different methods,
including through underwriters. All certificates will be distributed by, or
sold through underwriters managed by, Greenwich Capital Markets, Inc.
Neither the Securities and Exchange Commission nor any state securities
commission has approved these securities or determined that this prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
<PAGE>
TABLE OF CONTENTS
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT..............................3
RISK FACTORS.............................................................4
THE TRUST FUND..........................................................13
USE OF PROCEEDS.........................................................20
THE DEPOSITOR...........................................................20
LOAN PROGRAM............................................................21
DESCRIPTION OF THE SECURITIES...........................................23
CREDIT ENHANCEMENT......................................................36
YIELD AND PREPAYMENT CONSIDERATIONS.....................................43
THE AGREEMENTS..........................................................47
CERTAIN LEGAL ASPECTS OF THE LOANS......................................63
CERTAIN MATERIAL FEDERAL INCOME TAX CONSIDERATIONS......................79
STATE TAX CONSIDERATIONS...............................................108
ERISA CONSIDERATIONS...................................................108
LEGAL INVESTMENT.......................................................113
METHOD OF DISTRIBUTION.................................................115
LEGAL MATTERS..........................................................115
FINANCIAL INFORMATION..................................................116
AVAILABLE INFORMATION..................................................116
RATING.................................................................116
INDEX OF DEFINED TERMS.................................................118
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in two separate
documents:
o this prospectus, which provides general information, some of
which may not apply to a particular series; and
o the accompanying prospectus supplement for a particular series,
which describes the specific terms of the securities of that
series. If the prospectus supplement contains information about
a particular series that differs from the information contained
in this prospectus, you should rely on the information in the
prospectus supplement.
You should rely only on the information contained in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide
you with information that is different from that contained in this prospectus
and the accompanying prospectus supplement. The information in this prospectus
is accurate only as of the date of this prospectus.
Beginning with the section titled "The Trust Fund", certain capitalized terms
are used in this prospectus to assist you in understanding the terms of the
securities. The capitalized terms used in this prospectus are defined on the
pages indicated under the caption "Index of Defined Terms" beginning on page
118 in this prospectus.
---------------------
If you require additional information, the mailing address of our principal
executive offices is Financial Asset Securities Corp., 600 Steamboat Road,
Greenwich, Connecticut 06830 and the telephone number is (203) 625-2756. For
other means of acquiring additional information about us or a series of
securities, see The Trust Fund--"Incorporation of Certain Information by
Reference" beginning on page of this prospectus.
---
---------------------
<PAGE>
RISK FACTORS
You should carefully consider the following information, since it
identifies certain significant sources of risk associated with an investment in
these securities.
Limited Liquidity.......................... No market will exist for the
securities of any series before
they are issued. In addition,
there can be no assurance that a
resale market will develop
following the issuance and sale
of any series of the securities.
Even if a resale market does
develop, it might not provide
investors with liquidity of
investment or continue for the
life of the securities.
Limited Assets............................. Unless the applicable prospectus
supplement provides otherwise,
the securities of each series
will be payable solely from the
assets of the related trust,
including any applicable credit
enhancement, and will not have
any claims against the assets of
any other trust. Moreover, at the
times specified in the related
prospectus supplement, certain
assets of the trust and/or the
related security account may be
released to the depositor, master
servicer, any servicer, credit
enhancement provider or other
person, if:
o all payments then due on the
related securities have been
made;
o adequate provision for future
payments on certain classes of
the securities has been made;
and
o any other payments specified
in the related prospectus
supplement have been made.
Once released, such
assets will no longer be
available to make payments to
securityholders.
There will be no
recourse against the depositor or
the master servicer if any
required distribution on the
securities is not made.
The securities will not
represent an interest in the
depositor, the master servicer,
any servicer or any of their
respective affiliates, nor will
the securities represent an
obligation of any of them. The
only obligations of the depositor
with respect to the related trust
or the securities would arise
from the representations and
warranties that the depositor may
make concerning the related
assets. The depositor does not
have significant assets and is
<PAGE>
unlikely to have significant
assets in the future. If the
depositor should be required to
repurchase a loan from a trust
because of the breach of a
representation or warranty, the
depositor's sole source of funds
for the repurchase would be:
o funds obtained from enforcing
any similar obligation of the
seller or originator of the
loan, or
o funds from a reserve account
or similar credit enhancement
established to pay for loan
repurchases.
In addition, the master
servicer may be obligated to make
certain advances if loans are
delinquent, but only to the
extent it deems the advances to
be recoverable from amounts it
expects to receive on those
loans.
Credit Enhancement......................... Credit enhancement is intended
to reduce the effect of
delinquent payments or loan
losses on those classes of
securities that have the benefit
of the credit enhancement.
Nevertheless, the amount of any
credit enhancement is subject to
the limits described in the
related prospectus supplement.
Moreover, the amount of credit
enhancement may decline or be
depleted under certain
circumstances before the
securities are paid in full. As a
result, securityholders may
suffer losses. In addition,
credit enhancement may not cover
all potential sources of risk of
loss, such as fraud or negligence
by a loan originator or other
parties.
Prepayment and Yield
Considerations........ The timing of principal payments
on the securities of a series
will be affected by a number of
factors, including the following:
o the extent of prepayments on
the underlying loans in the
trust or, if the trust is
comprised of underlying
securities, on the loans
backing the underlying
securities;
o how payments of principal are
allocated among the classes of
securities of that series as
specified in the related
prospectus supplement;
o if any party has an option to
terminate the related trust
early, the effect of the
exercise of the option;
o the rate and timing of
defaults and losses on the
assets
<PAGE>
in the related trust; and
o repurchases of assets in the
related trust as a result of
material breaches of
representations and warranties
made by the depositor or
master servicer.
The rate of prepayment
of the loans included in or
underlying the assets in each
trust may affect the yield to
maturity of the securities.
Interest payable on the
securities on any given
distribution date will include
all interest accrued during the
related interest accrual period.
The interest accrual period for
the securities of each series
will be specified in the
applicable prospectus supplement.
If the interest accrual period
ends two or more days before the
related distribution date, your
effective yield will be less than
it would be if the interest
accrual period ended the day
before the distribution date. As
a result, your effective yield at
par would be less than the
indicated coupon rate.
Balloon Payments........................... Certain of the underlying loans
may not be fully amortizing and
may require a substantial
principal payment (i.e., a
"balloon" payment) at their
stated maturity. Loans of this
type involve a greater degree of
risk than fully amortizing loans
since the related borrower must
generally be able to refinance
the loan or sell the related
property prior to the loan's
maturity date. The borrower's
ability to do so will depend on
such factors as the level of
available mortgage rates at the
time of sale or refinancing, the
relative strength of the local
housing market, the borrower's
equity in the property, the
borrower's general financial
condition and tax laws.
Nature of Mortgages........................ The following factors, among
others, could adversely affect
property values in such a way
that the outstanding balance of
the related loans, together with
any senior financing on the same
properties, would equal or exceed
those values:
o an overall decline in the
residential real estate
markets where the properties
are located,
o failure of borrowers to
maintain their properties
adequately, and
o natural disasters that are not
necessarily covered by
<PAGE>
hazard insurance, such as
earthquakes and floods.
If a home equity loan is
in a junior lien position, a
decline in property values could
extinguish the value of the
junior mortgageholder in the
property before having any effect
on the interest of the senior
mortgageholder. If property
values decline, actual rates of
delinquencies, foreclosures and
losses on the underlying loans
could be higher than those
currently experienced by the
mortgage lending industry in
general.
Even if you assume that
the properties provide adequate
security for the loans,
substantial delays could occur
before defaulted loans are
liquidated and the proceeds
forwarded to investors. Property
foreclosure actions are regulated
by state statutes and rules and
are subject to many of the delays
and expenses that characterize
other types of lawsuits if
defenses or counterclaims are
made. As a result, foreclosure
actions can sometimes take
several years to complete.
Moreover, some states prohibit a
mortgage lender from obtaining a
judgment against the borrower for
amounts not covered by property
proceeds if the property is sold
outside of a judicial proceeding.
As a result, if a borrower
defaults, these restrictions may
impede the servicer's ability to
dispose of the borrower's
property and obtain sufficient
proceeds to repay the loan in
full. In addition, the servicer
is entitled to deduct from
liquidation proceeds all the
expenses it reasonably incurs in
trying to recover on the
defaulted loan, including payment
to the holders of any senior
mortgages, legal fees and costs,
real estate taxes, and property
preservation and maintenance
expenses.
In general, the expenses
of liquidating defaulted loans do
not vary directly with the unpaid
amount. So, assuming that a
servicer would take the same
steps to recover a defaulted loan
with a small unpaid balance as it
would a loan with a large unpaid
balance, the net amount realized
after paying liquidation expenses
would be a smaller percentage of
the balance of the small loan
than of the large loan. Since the
mortgages or deeds of trust
securing home equity loans
typically will be in a junior
lien position, the proceeds from
any liquidation will be applied
first to the claims of the
related senior mortgageholders,
including foreclosure costs. In
addition, a junior mortgage
lender may only foreclose subject
to any related senior mortgage.
As a result, the junior mortgage
lender generally must either pay
the related senior mortgage
<PAGE>
lender in full at or before the
foreclosure sale or agree to make
the regular payments on the
senior mortgage. Since the trust
will not have any source of funds
to satisfy any senior mortgages
or to continue making payments on
them, the trust's ability as a
practical matter to foreclose on
any junior mortgage will be quite
limited.
State laws generally
regulate interest rates and other
loan charges, require certain
disclosures, and often require
licensing of loan originators and
servicers. In addition, most
states have other laws and public
policies for the protection of
consumers that prohibit unfair
and deceptive practices in the
origination, servicing and
collection of loans. Depending on
the provisions of the particular
law or policy and the specific
facts and circumstances involved,
violations may limit the ability
of the servicer to collect
interest or principal on the
loans. Also, the borrower may be
entitled to a refund of amounts
previously paid and the servicer
may be subject to damage claims
and administrative sanctions.
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 that
secure the loans. Failure to
comply with these laws and
regulations can result in fines
and penalties that could be
assessed against the trust as
owner of the related property.
In some states, a lien
on the property due to
contamination has priority over
the lien of an existing mortgage.
Further, a mortgage lender may be
held liable as an "owner" or
"operator" for costs associated
with the release of petroleum
from an underground storage tank
under certain circumstances. If
the trust is considered the owner
or operator of a property, it
will suffer losses as a result of
any liability imposed for
environmental hazards on the
property.
Certain Other Legal Considerations
Regarding the Loans........................ The loans may also be subject to
federal laws relating to the
origination and underwriting.
These laws
o require certain disclosures to
the borrowers regarding the
terms of the loans;
<PAGE>
o 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;
o regulate the use and reporting
of information related to the
borrower's credit experience;
and
o require additional application
disclosures, limit changes
that may be made to the loan
documents without the
borrower's consent and
restrict a lender's ability to
declare a default or to
suspend or reduce a borrower's
credit limit to certain
enumerated events.
Certain loans are also
subject to federal laws which
impose additional disclosure
requirements on creditors with
respect to non-purchase money
mortgage loans with high interest
rates or high up-front fees and
charges. These laws can impose
specific statutory liabilities
upon creditors that fail to
comply and may affect the
enforceability of the related
loans. In addition, any assignee
of the creditor (including the
trust) would generally be subject
to all claims and defenses that
the borrower could assert against
the creditor, including the right
to rescind the loan.
Certain loans relating
to home improvement contracts are
subject to federal laws that
protect the borrower from
defective or incomplete work by a
contractor. These laws permit the
borrower to withhold payment if
the work does not meet the
quality and durability standards
agreed to between the borrower
and the contractor. These laws
have the effect of subjecting any
assignee of the seller (including
the trust) to all claims and
defenses which the borrower in a
sale transaction could assert
against the seller of defective
goods.
If certain provisions of
these federal laws are violated,
the master servicer may be unable
to collect all or part of the
principal or interest on the
loans. The trust also could be
subject to damages and
administrative enforcement.
Ratings of the Securities.................. Any class of securities is
issued under this prospectus and
the accompanying prospectus
supplement will be rated in one
of the four highest rating
categories of a nationally
recognized rating agency. A
rating is based
<PAGE>
on the adequacy of the value of
the trust assets and any credit
enhancement for that class and
reflects the rating agency's
assessment of how likely it is
that holders of the class of
securities will receive the
payments to which they are
entitled. A rating does not
constitute an assessment of how
likely it is that principal
prepayments on the underlying
loans will be made, the degree to
which the rate of prepayments
might differ from that originally
anticipated or the likelihood of
early, optional termination of
the securities. You must not view
a rating as a recommendation to
purchase, hold or sell securities
because it does not address the
market price or suitability of
the securities for any particular
investor.
There is no assurance
that any rating will remain in
effect for any given period of
time or that the rating agency
will not lower or withdraw it
entirely in the future. The
rating agency could lower or
withdraw its rating due to:
o any decrease in the adequacy
of the value of the trust
assets or any related credit
enhancement;
o an adverse change in the
financial or other condition
of a credit enhancement
provider; or
o a change in the rating of the
credit enhancement provider's
long-term debt.
Book-Entry Registration.................... Limit on Liquidity of
Securities. Securities issued in
book-entry form may have only
limited liquidity in the resale
market, since investors may be
unwilling to purchase securities
for which they cannot obtain
physical instruments.
Limit on Ability to
Transfer or Pledge. Transactions
in book-entry securities can be
effected only through The
Depository Trust Company ("DTC"),
its participating organizations,
its indirect participants and
certain banks. As a result, your
ability to transfer or pledge
securities issued in book-entry
form may be limited.
Delays in Distributions.
You may experience some delay in
the receipt of distributions on
book-entry securities since the
distributions will be forwarded
by the trustee to DTC for DTC to
<PAGE>
credit the accounts of its
participants. In turn, these
participants will thereafter
credit the distributions to your
account either directly or
indirectly through indirect
participants.
Pre-Funding Accounts....................... The related prospectus
supplement may provide that the
depositor deposit a specified
amount in a pre-funding account
on the date the securities are
issued. In this case, the
deposited funds may only be used
to acquire additional assets for
the trust during a set period
after the initial issuance of the
securities. Any amounts remaining
in the account at the end of the
period will be distributed as a
prepayment of principal to the
holders of the related
securities.
Lower Credit Quality Trust Fund Assets..... Certain of the trust assets may
have been made to lower credit
quality borrowers who fall into
one of two categories:
o customers with moderate
income, limited assets and
other income characteristics
that cause difficulty in
borrowing from banks and other
traditional lenders; and
o customers with a history of
irregular employment, previous
bankruptcy filings,
repossession of property,
charged-off loans or
garnishment of wages.
The average interest
rate charged on loans made to
these types of borrowers is
generally higher than that
charged by lenders that typically
impose more stringent credit
requirements. There is a greater
likelihood of late payments on
loans made to these types of
borrowers than on loans to
borrowers with a higher credit
quality. Payments from borrowers
with a lower credit quality are
more likely to be sensitive to
changes in the economic climate
in the areas in which they
reside.
Delinquent Trust Fund Assets............... No more than 20% (by principal
balance) of the trust assets
for any particular series of
securities will be contractually
delinquent as of the related
cut-off date.
Other Considerations....................... There is no assurance that the
value of the trust assets for any
series of securities at any time
will equal or exceed the
principal amount of the
outstanding securities of the
series. If trust assets have to
be sold because of an event of
default or otherwise, providers
of services to the trust
(including the trustee, the
master servicer and the
<PAGE>
credit enhancer, if any)
generally will be entitled to
receive the proceeds of the sale
to the extent of their unpaid
fees and other amounts due them
before any proceeds are paid to
investors. As a result, the
proceeds of such a sale may be
insufficient to pay the full
amount of interest and principal
of the related securities.
<PAGE>
THE TRUST FUND
The Certificates of each Series will represent interest 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 months 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.
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 Asset Backed 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 be refer to the Pass-Through Rate borne by
the Certificates or Notes of one specific Series and the term "Trust
Fund" will refer to one specific Trust Fund.
The Trust Fund Assets will be acquired by the Depositor, either
directly or through affiliates, from originators or sellers which may be
affiliates of the Depositor (the "Sellers"), and conveyed by the Depositor to
the related Trust Fund. Loans acquired by the Depositor will have been
originated in accordance with the underwriting criteria specified below under
"Loan Program--Underwriting Standards" or as otherwise described in a related
Prospectus Supplement.
The Depositor will cause the Trust Fund Assets to be assigned to the
Trustee named in the related Prospectus Supplement for the benefit of the
holders of the Securities of the related Series. The Master Servicer named in
the related Prospectus Supplement will service the Trust Fund Assets, either
directly or through other servicing institutions ("Sub-Servicers"), pursuant to
a Pooling and Servicing Agreement among the Depositor, the Master Servicer and
the Trustee with respect to a Series of Certificates, or a servicing agreement
(each, a "Servicing Agreement") between the Trustee and the Servicer with
respect to a Series of Notes, and will receive a fee for such services. See
"Loan Program" and "The Pooling and Servicing Agreement". With respect to Loans
serviced by the Master Servicer through a Sub-Servicer, the Master Servicer
will remain liable for its servicing obligations under the related Agreement as
if the Master Servicer alone were servicing such Loans.
As used herein, "Agreement" means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and with
respect to a Series of Notes, the Indenture and the Servicing Agreement, as the
context requires.
<PAGE>
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 or
Substitutions", "The Agreements--Assignment of Trust Fund Assets" and
"--Sub-Servicing of Loans") 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.
As specified in the related Prospectus Supplement, the Trust fund
Assets for a Series of Securities may consist of (i) closed-end and/or
revolving home equity loans (the "Home Equity Loans") secured by senior or
junior liens on one- to four-family residential properties, (ii) have
improvement installment sales contracts and installment loan agreements (the
"Home Improvement Contracts") that are either unsecured or secured primarily by
junior 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 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.
<PAGE>
The Loans
General. The real property which secures repayment of the Loans is
referred to as "Properties". Unless otherwise specified in the related
Prospectus Supplement, the Loans will be secured by mortgages or deeds of trust
or other similar security instruments creating a lien on a Property, which may
be subordinated to one or more senior liens on the related Properties, each as
described in the related Prospectus Supplement. As more fully described in the
related Prospectus Supplement, the Loans may be "conventional" loans or loans
that are insured or guaranteed by a governmental agency such as the FHA or VA.
The proceeds of the Closed-End Loans may have been applied to the purchase of
the related Property.
The Properties relating to Loans will consist primarily of detached or
semi-detached one- to four-family dwelling units, townhouses, rowhouses,
individual condominium units, individual units in planned unit developments,
and certain other dwelling units ("Single Family Properties") or Small
Mixed-Used Properties (as defined herein) which consist of structures of not
more than three stories which include one- to four-family residential dwelling
units and space used for retail, professional or other commercial uses. Such
Properties may include vacation and second homes, investment properties and
leasehold interests. The Properties may be located in any one of the fifty
states, the District of Columbia, Guam, Puerto Rico or any other territory of
the United States.
The payment terms of the Loans to be included in a Trust Fund will be
described in the related Prospectus Supplement and may include any of the
following features (or combination thereof) or other features, all as described
above or in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate
adjustable from time to time in relation to an index (which
will be specified in the related Prospectus Supplement), a
rate that is fixed for a period of time or under certain
circumstances and is followed by an adjustable rate, a rate
that otherwise varies from time to time, or a rate that is
convertible from an adjustable rate to a fixed rate. Changes
to an adjustable rate may be subject to periodic limitations,
maximum rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred and added to
the principal of a loan for such periods and under such
circumstances as may be specified in the related Prospectus
Supplement. Loans may provide for the payment of interest at
a rate lower than the specified interest rate borne by such
Mortgage (the "Loan Rate") for a period of time or for the
life of the Loan, and the amount of any difference may be
contributed from funds supplied by the Seller of the Property
or another source.
(b) Principal may be payable on a level debt service basis to
fully amortize the loan over its term, may be calculated on
the basis of an assumed amortization schedule that is
significantly longer than the original term to maturity or on
an interest rate that is different from the interest rate on
the Loan or may not be amortized during all or a portion of
the original term. Payment of all or a substantial portion of
the principal may be due on maturity a "balloon" payment).
Principal may include interest that has been deferred and
added to the principal balance of the Loan.
<PAGE>
(c) Monthly payments of principal and interest may be fixed
for the life of the loan, may increase over a specified
period of time or may change from period to period. Loans may
include limits on periodic increases or decreases in the
amount of monthly payments and may include maximum or minimum
amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment
fee, which may be fixed for the life of the loan or may
decline over time, and may be prohibited for the life of the
loan or for certain periods ("lockout periods"). Certain
loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a
prepayment fee in connection with any such subsequent
prepayment. Other loans may permit prepayments without
payment of a fee unless the prepayment occurs during
specified time periods. The loans may include "due on sale"
clauses which permit the mortgagee to demand payment of the
entire loan in connection with the sale or certain transfers
of the related Property. Other loans may be assumable by
persons meeting the then applicable underwriting standards of
the Seller.
As more fully described in the related Prospectus Supplement, interest
on each Revolving Credit Line Loan, excluding introduction rates offered from
time to time during promotional periods, is computed and payable monthly on the
average daily outstanding principal balance of such Loan. Principal amounts on
a Revolving Credit Line Loan may be drawn down (up to a maximum amount as set
forth in the related Prospectus Supplement) or repaid under each Revolving
Credit Line Loan from time to time, but may be subject to a minimum periodic
payment. Except to the extent provided in the related Prospectus Supplement,
the Trust Fund will not include any amounts borrowed under a Revolving Credit
Line Loan after the Cut-off Date. The full amount of a Closed-End Loan is
advanced at the inception of the loan and generally is repayable in equal (or
substantially equal) installments of an amount to fully amortize such loan at
its stated maturity. Except to the extent provided in the related Prospectus
Supplement, the original terms to stated maturity of Closed-End Loan will not
exceed 360 months. Under certain circumstances, under either a Revolving Credit
Line Loan or a Closed-End Loan, a borrower may choose an interest only payment
option and is obligated to pay only the amount of interest which accrues on the
loan during the billing cycle. An interest only payment option may be available
for a specified period before the borrower must begin paying at least the
minimum monthly payment of a specified percentage of the average outstanding
balance of the loan.
The aggregate principal balance of Loans secured by Properties that
are owner-occupied will be disclosed in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the sole basis
for a representation that a given percentage of the Loans is secured by Single
Family Property that is owner-occupied will be either (i) the making of a
representation by the borrower at origination of the Loan either that the
underlying Property will be used by the borrower for a period of at least six
months every year or that the borrower intends to use the Property as a primary
residence or (ii) a finding that the address of the underlying Property is the
borrower's mailing address.
The Loans may include fixed-rate, closed-end mortgage loans having
terms to maturity of up to 30 years and secured by first-lien mortgages
originated on Properties containing one to four
<PAGE>
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 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 securing the Home Improvement Contracts will include, but
are not limited to, replacement windows, house siding, new roofs, swimming
pools, satellite dishes, kitchen and bathroom remodeling goods and solar
heating panels.
The initial Loan-to-Value Ratio of a Home Improvement Contract is
computed in the manner described in the related Prospectus Supplement.
Additional Information. Each Prospectus Supplement will contain
information, as of the date of such Prospectus Supplement and to the extent
then specifically known to the Depositor, with respect to the Loans contained
in the related Pool, including (i) the aggregate outstanding principal balance
and the average outstanding principal balance of the Loans as of the applicable
Cut-off Date, (ii) the type of property securing the Loan (e.g., one- to
four-family houses, individual units in condominium apartment buildings,
vacation and second homes or other real property), (iii) the original terms to
maturity of the Loans, (iv) the largest principal balance and the smallest
principal balance of any of the Loans, (v) the earliest origination date and
latest maturity date of any of the Loans, (vi) the Loan-to-Value Ratios or
Combined Loan-to-Value Ratios, as applicable, of the Loans, (vii) the Loan
Rates or annual percentage rates ("APR") or range of Loan Rates or APR's borne
by the Loans, and (viii) the geographical location of the Loans on a
state-by-state basis. If specific information respecting the Loans is not known
to the Depositor at the time the related Securities are initially offered, more
general information of the nature described above will be provided in the
related Prospectus Supplement, and specific information will be set forth in
the Detailed Description.
Except as otherwise specified in the related Prospectus Supplement,
the "Combined Loan-to-Value Ratio" of a Loan at any given time is the ratio,
expressed as a percentage, of (i) the sum of (a) the original principal balance
of the Loan (or, in the case of a Revolving Credit Line Loan, the maximum
amount thereof available) and (b) the outstanding principal balance at the date
of origination of the Loan of any senior mortgage loan(s) or, in the case of
any open-ended senior mortgage loan, the maximum available line of credit with
respect to such mortgage
<PAGE>
loan, regardless of any lesser amount actually outstanding at the date of
origination of the Loan, to (ii) the Collateral Value of the related Property.
Except as otherwise specified in the related Prospectus Supplement, the
"Collateral Value" of the Property, other than with respect to certain Loans
the proceeds of which were used to refinance an existing mortgage loan (each, a
"Refinance Loan"), is the lesser of (a) the appraised value determined in an
appraisal obtained by the originator at origination of such Loan and (b) the
sales price for such Property. In the case of Refinance Loans, the "Collateral
Value" of the related Property is the appraised value thereof determined in an
appraisal obtained at the time of refinancing.
Private Asset Backed Securities
General. Private Asset Backed Securities may consist of (a)
pass-through certificates or participation certificates evidencing an undivided
interest in a pool of home equity or home improvement loans, or (b)
collateralized mortgage obligations secured by home equity or home improvement
loans. Private Asset Backed Securities may include stripped asset backed
securities representing an undivided interest in all or a part of either the
principal distributions (but not the interest distributions) or the interest
distributions (but not the principal distributions) or in some specified
portion of the principal and interest distributions (but not all of such
distributions) on certain home equity or home improvement loans. Private Asset
Backed Securities will have been issued pursuant to a pooling and servicing
agreement, an indenture or similar agreement (a "PABS Agreement"). The
seller/servicer of the underlying Loans will have entered into the PABS
Agreement with the trustee under such PABS Agreement (the "PABS Trustee"). The
PABS Trustee or its agent, or a custodian, will possess the loans underlying
such Private Asset Backed Security. Loans underlying a Private Asset Backed
Security will be serviced by a servicer (the "PABS Servicer") directly or by
one or more subservicers who may be subject to the supervision of the PABS
Servicer. Except as otherwise specified in the related Prospectus Supplement,
the PABS Servicer will be a FNMA or FHLMC approved servicer and, if FHA Loans
underlie the Private Asset Backed Securities, approved by HUD as an FHA
mortgagee.
The issuer of the Private Asset Backed Securities (the "PABS Issuer")
will be a financial institution or other entity engaged generally in the
business of mortgage lending, a public agency or instrumentality of a state,
local or federal government, or a limited purpose corporation organized for the
purpose of, among other things, establishing trusts and acquiring and selling
housing loans to such trusts and selling beneficial interests in such trusts.
The PABS Issuer shall not be an affiliate of the Depositor. The obligations of
the PABS Issuer will generally be limited to certain representations and
warranties with respect to the assets conveyed by it to the related trust.
Except as otherwise specified in the related Prospectus Supplement, the PABS
Issuer will not have guaranteed any of the assets conveyed to the related trust
or any of the Private Asset Backed Securities issued under the PABS Agreement.
Additionally, although the loans underlying the Private Asset Backed Securities
may be guaranteed by an agency or instrumentality of the United States, the
Private Asset Backed Securities themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Asset Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Asset Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Asset
<PAGE>
Backed Securities by the PABS Trustee or the PABS Servicer. The PABS Issuer or
the PABS Servicer may have the right to repurchase assets underlying the
Private Asset Backed Securities after a certain date or under other
circumstances as specified in the related Prospectus Supplement.
Underlying Loans. The home equity or home improvement loans underlying
the Private Asset Backed Securities may consist of fixed rate, level payment,
fully amortizing loans or graduated payment loans, buydown loans, adjustable
rate loans, or loans having balloon or other special payment features. Such
loans may be secured by single family property, multifamily property,
manufactured homes or by an assignment of the proprietary lease or occupancy
agreement relating to a specific dwelling within a cooperative and the related
shares issued by such cooperative. Except as otherwise specified in the related
Prospectus Supplement, the underlying loans will have the following
characterizations: (i) no loan will have had a Loan-to-Value Ratio at
origination in excess of 95%, (ii) each single family loan secured by a
mortgaged property that had a Loan-to-Value ratio in excess of 80% at
origination will be covered by a primary mortgage insurance policy, (iii) each
loan will have had an original term to stated maturity of not less than 5 years
and not more than 40 years, (iv) no loan that was more than 89 days delinquent
as to the payment of principal or interest will have been eligible for
inclusion in the assets under the related PABS Agreement, (v) each loan (other
than a cooperative loan) will be required to be covered by a standard hazard
insurance policy (which may be a blanket policy), and (vi) each loan (other
than a cooperative loan or a contract secured by a manufactured home) will be
covered by a title insurance policy.
Credit Support Relating to Private Asset Backed Securities. Credit
support in the form of reserve funds, subordination of other private
certificates issued under the PABS Agreement, letters of credit, surety bonds,
insurance policies or other types of credit support may be provided with
respect to the loans underlying the Private Asset Backed Securities themselves.
Rating of Private Asset Backed Securities. The PABS upon their
issuance will have been assigned a rating in one of the four highest rating
categories by at least one nationally recognized statistical rating agency.
Additional Information. The Prospectus Supplement for a Series for
which the Trust Fund includes Private Asset Backed Securities will specify (i)
the aggregate approximate principal amount and type of the Private Asset Backed
Securities to be included in the Trust Fund, (ii) certain characteristics of
the loans which comprise the underlying assets for the Private Asset Backed
Securities including (A) the payment features of such loans, (B) the
approximate aggregate principal balance, if known, of underlying loans insured
or guaranteed by a governmental entity, (C) the servicing fee or range of
servicing fees with respect to the loans, and (D) the minimum and maximum
stated maturities of the underlying loans at origination, (iii) the maximum
original term-to-stated maturity of the Private Asset Backed Securities, (iv)
the weighted average term-to-stated maturity of the Private Asset Backed
Securities, (v) the pass-through or certificate rate of the Private Asset
Backed Securities, (vi) the weighted average pass-through or certificate rate
of the Private Asset Backed Securities, (vii) the PABS Issuer, the PABS
Servicer (if other than the PABS Issuer) and the PABS Trustee for such Private
Asset Backed Securities, (viii) certain characteristics of credit support, if
any, such as reserve funds, insurance policies, surety bonds, letters of credit
or guaranties relating to the loans underlying the Private Asset Backed
Securities or to such Private Asset Backed Securities themselves, (ix) the
<PAGE>
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.
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and Exchange
(the "SEC") at 450 Fifth Street, N.W., Washington, D.C. 20549. Investors may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding issuers, including each Trust Fund, that file
electronically with the SEC.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will
be applied by the Depositor to the purchase of Trust Fund Assets or will be
used by the Depositor for general corporate purposes. The Depositor expects to
sell Securities in Series from time to time, but the timing and amount of
offerings of Securities will depend on a number of factors, including the
volume of Trust Fund Assets acquired by the Depositor, prevailing interest
rates, availability of funds and general market conditions.
THE DEPOSITOR
Financial Asset Securities Corp., the Depositor, is a Delaware
corporation organized on August 2, 1995 for the limited purpose of acquiring,
owning and transferring Trust Fund Assets and selling interests therein or
bonds secured thereby. It is an indirect limited purpose finance subsidiary of
National Westminster Bank Plc and an affiliate of Greenwich Capital Markets,
Inc., a registered securities broker-dealer. The Depositor maintains its
principal office at 600 Steamboat Road, Greenwich, Connecticut 06830. Its
telephone number is (203) 625-2700.
Neither the Depositor nor any of the Depositor's affiliates will
insure or guarantee distributions on the Securities of any Series.
LOAN PROGRAM
The Loans will have been purchased by the Depositor, either directly
or through affiliates, from Sellers. Unless otherwise specified in the related
Prospectus Supplement, the Loans so acquired by the Depositor will have been
originated in accordance with the underwriting criteria specified below under
"Underwriting Standards".
Underwriting Standards
Each Seller will represent and warrant that all Loans originated
and/or sold by it to the Depositor or one of its affiliates will have been
underwritten in accordance with standards consistent with those utilized by
mortgage lenders generally during the period of origination for similar types
of loans. As to any Loan insured by the FHA or partially guaranteed by the VA,
the Seller will represent that it has complied with underwriting policies of
the FHA or the VA, as the case may be.
Underwriting standards are applied by or on behalf of a lender to
evaluate the borrower's credit standing and repayment ability, and the value
and adequacy of the Property as collateral. In general, a prospective borrower
applying for a Loan is required to fill out a detailed application designed to
provide to the underwriting officer pertinent credit information, including the
principal balance and payment history with respect to any senior mortgage, if
any, which,
unless otherwise specified in the related Prospectus Supplement, the borrower's
income will be verified by the Seller. As part of the description of the
borrower's financial condition, the borrower generally is required to provide a
current list of assets and liabilities and a statement of income and expenses,
as well as an authorization to apply for a credit report which summarizes the
borrower's credit history with local merchants and lenders and any record of
bankruptcy. In most cases, an employment verification is obtained from an
independent source (typically the borrower's employer) which verification
reports the length of employment with that organization, the current salary,
and whether it is expected that the borrower will continue such employment in
the future. If a prospective borrower is self-employed, the borrower may be
required to submit copies of signed tax returns. The borrower may also be
required to authorize verification of deposits at financial institutions where
the borrower has demand or savings accounts.
In determining the adequacy of the property to be used as collateral,
an appraisal will generally be made of each property considered for financing.
The appraiser is generally required to inspect the property, issue a report on
its condition and, if applicable, verify that construction, if new, has been
completed. The appraisal is based on the market value of comparable homes, the
estimated rental income (if considered applicable by the appraiser) and the
cost of replacing the home. The value of the property being financed, as
indicated by the appraisal, must be such that it currently supports, and is
anticipated to support in the future, the outstanding loan balance.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available (i) to meet the borrower's
monthly obligations on the proposed mortgage loan (generally determined on the
basis of the monthly payments due in the year of origination) and other
expenses related to the property (such as property taxes and hazard insurance)
and (ii) to meet monthly housing expenses and other financial obligations and
monthly living expenses. The underwriting standards applied by Sellers,
particularly with respect to the level of loan documentation and the
mortgagor's income and credit history, may be varied in appropriate cases where
factors such as low Combined Loan-to-Value Ratios or other favorable credit
exist.
Qualifications of Sellers
Unless otherwise specified in the related Prospectus Supplement, each
Seller will be required to satisfy the qualifications set forth herein. Each
Seller must be an institution experienced in originating and servicing loans of
the type contained in the related Pool in accordance with accepted practices
and prudent guidelines, and must maintain satisfactory facilities to originate
and service those loans. Unless otherwise specified in the related Prospectus
Supplement, each Seller will be a seller/servicer approved by either FNMA or
FHLMC.
Representations by Sellers; Repurchases or Substitutions
Each Seller will have made representations and warranties in respect
of the Loans sold by such Seller and evidenced by all, or a part, of a Series
of Securities. Except as otherwise specified in the related Prospectus
Supplement, such representations and warranties include, among other things:
(i) that title insurance (or in the case of Properties located in areas where
such policies are generally not available, an attorney's certificate of title)
and any required
hazard insurance policy (or certificate of title as applicable) remained in
effect on the date of purchase of the Loan from the Seller by or on behalf of
the Depositor; (ii) that the Seller had good title to each such Loan and such
Loan was subject to no offsets, defenses, counterclaims or rights of rescission
except to the extent that any buydown agreement described herein may forgive
certain indebtedness of a borrower; (iii) that each Loan constituted a valid
lien on the Property (subject only to permissible liens disclosed, if
applicable, title insurance exceptions, if applicable, and certain other
exceptions described in the Agreement) and that the Property was free from
damage and was in acceptable condition; (iv) that there were no delinquent tax
or assessment liens against the Property; (v) that no required payment on a
Loan was more than thirty days' delinquent; and (vi) that each Loan was made in
compliance with, and is enforceable under, all applicable local, state and
federal laws and regulations in all material respects.
If so specified in the related Prospectus Supplement, the
representations and warranties of a Seller in respect of a Loan will be made
not as of the Cut-off Date but as of the date on which such Seller sold the
Loan to the Depositor or one of its affiliates. Under such circumstances, a
substantial period of time may have elapsed between such date and the date of
initial issuance of the Series of Securities evidencing an interest in such
Loan. Since the representations and warranties of a Seller do not address
events that may occur following the sale of a Loan by such Seller, its
repurchase obligation described below will not arise if the relevant event that
would otherwise have given rise to such an obligation with respect to a Loan
occurs after the date of sale of such Loan by such Seller to the Depositor or
its affiliates. However, the Depositor will not include any Loan in the Trust
Fund for any Series of Securities if anything has come to the Depositor's
attention that would cause it to believe that the representationes and
warranties of a Seller will not be accurate and complete in all material
respects in respect of such Loan as of the date of initial issuance of the
related Series of Securities. If the Master Servicer is also a Seller of Loans
with respect to a particular Series, such representations will be in addition
to the representations and warranties made by the Master Servicer in its
capacity as a Master Servicer.
The Master Servicer or the Trustee, if the Master Servicer is the
Seller, will promptly notify the relevant Seller of any breach of any
representation or warranty made by it in respect of a Loan which materially and
adversely affects the interests of the Securityholders in such Loan. Unless
otherwise specified in the related Prospectus Supplement, if such Seller cannot
cure such breach within 90 days following notice from the Master Servicer or
the Trustee, as the case may be, then such Seller will be obligated either (i)
to repurchase such Loan from the Trust Fund at a price (the "Purchase Price")
equal to 100% of the unpaid principal balance thereof as of the date of the
repurchase plus accrued interest thereon to the first day of the month
following the month of repurchase at the Loan Rate (less any Advances or amount
payable as related servicing compensation if the Seller is the Master Servicer)
or (ii) to substitute for such Loan a replacement loan that satisfies certain
requirements set forth in the Agreement. If a REMIC election is to be made with
respect to a Trust Fund, unless otherwise specified in the related Prospectus
Supplement, the Master Servicer or a holder of the related residual certificate
generally will be obligated to pay any prohibited transaction tax which may
arise in connection with any such repurchase or substitution and the Trustee
must have received a satisfactory opinion of counsel that such repurchase or
substitution will not cause the Trust Fund to lose its status as a REMIC or
otherwise subject the Trust Fund to a prohibited transaction tax. The Master
Servicer may be entitled to reimbursement for any such payment from the assets
of the related Trust Fund or from any holder of the related residual
certificate. See "Description of the Securities--General". Except in those
cases in which the Master Servicer is the Seller, the
<PAGE>
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 under "The Agreements--Assignment of Trust
Fund Assets".
DESCRIPTION OF THE SECURITIES
Each Series of Certificates will be issued pursuant to separate
agreements (each, a "Pooling and Servicing Agreement" or a "Trust Agreement")
among the Depositor, the Servicer, if the Series relates to Loans, and the
Trustee. A form of Pooling and Servicing Agreement and Trust Agreement has been
filed as an exhibit to the Registration Statement of which this Prospectus
forms a part. Each Series of Notes will be issued pursuant to an indenture (the
"Indenture") between the related Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the "Trustee") with respect to such Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. A Series may consist of both Notes and
Certificates. Each Agreement, dated as of the related Cut-off Date, will be
among the Depositor, the Master Servicer and the Trustee for the benefit of the
holders of the Securities of such Series. The provisions of each Agreement will
vary depending upon the nature of the Securities to be issued thereunder and
the nature of the related Trust Fund. The following summaries describe certain
provisions which may appear in each Agreement. The Prospectus Supplement for a
Series of Securities will describe any provision of the Agreement relating to
such Series that mainly differs from the description thereof contained in this
Prospectus. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
Agreement for each Series of Securities and the applicable Prospectus
Supplement. The Depositor will provide a copy of the Agreement (without
exhibits) relating to any Series without charge upon written request of a
holder of record of a Security of such Series addressed to Financial Asset
Securities Corp., 600 Steamboat Road, Greenwich, Connecticut 06830, Attention:
Asset Backed Finance Group.
General
Unless otherwise specified in the related Prospectus Supplement, the
Certificates of each Series will be issued in book-entry or fully registered
form, in the authorized denominations specified in the related Prospectus
Supplement, will evidence specified beneficial ownership interests in the
related Trust Fund created pursuant to each Agreement and will not be entitled
to payments in respect of the assets included in any other Trust Fund
established by the Depositor. Unless otherwise specified in the related
Prospectus Supplement, the Notes of each Series will be issued in book-entry or
fully registered form, in the authorized denominations specified in the related
Prospectus Supplement, will be secured by the pledge of the assets of the
related Trust
<PAGE>
Fund and will not be entitled to payments in respect of the assets included in
any other Trust Fund established by the Depositor. The Securities will not
represent obligations of the Depositor or any affiliate of the Depositor.
Certain of the Loans may be guaranteed or insured as set forth in the related
Prospectus Supplement. Each Trust Fund will consist of, to the extent provided
in the Agreement, (i) the Trust Fund Assets, as from time to time are subject
to the related Agreement (exclusive of any amounts specified in the related
Prospectus Supplement ("Retained Interest")), including all payments of
interest and principal received with respect to the Loans after the Cut-off
Date (to the extent not applied in computing the Cut-off Date Principal
Balance); (ii) such assets as from time to time are required to be deposited in
the related Security Account, as described below under "The
Agreements--Payments on Loans; Deposits to Security Account"; (iii) property
which secured a Loan and which is acquired on behalf of the Securityholders by
foreclosure or deed in lieu of foreclosure and (iv) any insurance policies or
other forms of credit enhancement required to be maintained pursuant to the
related Agreement. If so specified in the related Prospectus Supplement, a
Trust Fund may also include one or more of the following: reinvestment income
on payments received on the Trust Fund Assets, a Reserve Account, a mortgage
pool insurance policy, a Special Hazard Insurance Policy, a Bankruptcy Bond,
one or more letters of credit, a surety bond, guaranties or similar instruments
or other agreements.
Each Series of Securities will be issued in one or more classes. Each
class of Securities of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Trust Fund Assets in the related Trust Fund. A Series of
Securities may include one or more classes that are senior in right to payment
to one or more other classes of Securities of such Series. One or more classes
of Securities of a Series may be entitled to receive distributions of
principal, interest or any combination thereof. Distributions on one or more
classes of a Series of Securities may be made prior to one or more other
classes, after the occurrence of specified events, in accordance with a
schedule or formula, on the basis of collections from designated portions of
the Trust Fund Assets in the related Trust Fund or on a different basis, in
each case as specified in the related Prospectus Supplement. The timing and
amounts of such distributions may vary among classes or over time as specified
in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal
only or interest only) on the related Securities will be made by the Trustee on
each Distribution Date (i.e., monthly or at such other intervals and on the
dates as are specified in the Prospectus Supplement) in proportion to the
percentages specified in the related Prospectus Supplement. Distributions will
be made to the persons in whose names the Securities are registered at the
close of business on the dates specified in the related Prospectus Supplement
(each, a "Record Date"). Distributions will be made in the manner specified in
the Prospectus Supplement to the persons entitled thereto at the address
appearing in the register maintained for holders of Securities (the "Security
Register"); provided, however, that the final distribution in retirement of the
Securities will be made only upon presentation and surrender of the Securities
at the office or agency of the Trustee or other person specified in the notice
to Securityholders of such final distribution.
The Securities will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made
<PAGE>
for any registration of exchange or transfer of Securities of any Series but
the Trustee may require payment of a sum sufficient to cover any related tax or
other governmental charge.
Under current law the purchase and holding of a class of Securities
entitled only to a specified percentage of payments of either interest or
principal or a notional amount of other interest or principal on the related
Loans or a class of Securities entitled to receive payments of interest and
principal on the Loans only after payments to other classes or after the
occurrence of certain specified events by or on behalf of any employee benefit
plan or other retirement arrangement (including individual retirement accounts
and annuities, Keogh plans and collective investment funds in which such plans,
accounts or arrangements are invested) subject to provisions of ERISA or the
Code may result in prohibited transactions within the meaning of ERISA and the
Code. See "ERISA Considerations". Unless otherwise specified in the related
Prospectus Supplement, the transfer of Securities of such a class will not be
registered unless the transferee (i) represents that it is not, and is not
purchasing on behalf of, any such plan, account or arrangement or (ii) provides
an opinion of counsel satisfactory to the Trustee and the Depositor that the
purchase of Securities of such a class by or on behalf of such plan, account or
arrangement is permissible under applicable law and will not subject the
Trustee, the Master Servicer or the Depositor to any obligation or liability in
addition to those undertaken in the Agreements.
As to each Series, an election may be made to treat the related Trust
Fund or designated portions thereof as a "real estate mortgage investment
conduit" or "REMIC" as defined in the Code. The related Prospectus Supplement
will specify whether a REMIC election is to be made. Alternatively, the
Agreement for a Series may provide that a REMIC election may be made at the
discretion of the Depositor or the Master Servicer and may only be made if
certain conditions are satisfied. As to any such Series, the terms and
provisions applicable to the making of a REMIC election, as well as any
material federal income tax consequences to Securityholders not otherwise
described herein, will be set forth in the related Prospectus Supplement. If
such an election is made with respect to a Series, one of the classes will be
designated as evidencing the sole class of "residual interests" in the related
REMIC, as defined in the Code. All other classes of Securities in such a Series
will constitute "regular interests" in the related REMIC, as defined in the
Code. As to each Series with respect to which a REMIC election is to be made,
the Master Servicer or a holder of the related residual certificate will be
obligated to take all actions required in order to comply with applicable laws
and regulations and will be obligated to pay any prohibited transaction taxes.
The Master Servicer, to the extent set forth in the related Prospectus
Supplement, will be entitled to reimbursement for any such payment from the
assets of the Trust Fund or from any holder of the related residual
certificate.
Distributions on Securities
General. In general, the method of determining the amount of
distributions on a particular Series of Securities will depend on the type of
credit support, if any, that is used with respect to such Series. See "Credit
Enhancement" herein. 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.
<PAGE>
Distributions allocable to principal and interest on the Securities
will be made by the Trustee out of, and only to the extent of, funds in the
related Security Account, including any funds transferred from any Reserve
Account (a "Reserve Account"). As between Securities of different classes and
as between distributions of principal (and, if applicable, between
distributions of Principal Prepayments, as defined below, and scheduled
payments of principal) and interest, distributions made on any Distribution
Date will be applied as specified in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, the distributions to
any class of Securities will be made pro rata to all Securityholders of that
class.
Available Funds. All distributions on the Securities of each Series on
each Distribution Date will be made from the Available Funds described below,
in accordance with the terms described in the related Prospectus Supplement and
specified in the Agreement. Unless otherwise provided in the related Prospectus
Supplement, "Available Funds" for each Distribution Date will equal the sum of
the following amounts:
(i) the aggregate of all previously undistributed payments on
account of principal (including Principal Prepayments, if
any, and prepayment penalties, if so provided in the related
Prospectus Supplement) and interest on the Loans in the
related Trust Fund (including Liquidation Proceeds and
Insurance Proceeds and amounts drawn under letters of credit
or other credit enhancement instruments as permitted
thereunder and as specified in the related Agreement)
received by the Master Servicer after the Cut-off Date and on
or prior to the day of the month of the related Distribution
Date specified in the related Prospectus Supplement (the
"Determination Date") except
(a) all payments which were due on or
before the Cut-off Date;
(b) all Liquidation Proceeds and all
Insurance Proceeds, all Principal Prepayments and all other
proceeds of any Loan purchased by the Depositor, Master
Servicer, any Sub-Servicer or any Seller pursuant to the
Agreement that were received after the prepayment period
specified in the related Prospectus Supplement and all
related payments of interest representing interest for any
period after the interest accrual period;
(c) all scheduled payments of principal and
interest due on a date or dates subsequent to the Due Period
relating to such Distribution Date;
(d) amounts received on particular Loans as
late payments of principal or interest or other amounts
required to be paid by borrowers, but only to the extent of
any unreimbursed advance in respect thereof made by the
Master Servicer (including the related Sub-Servicers, Support
Servicers or the Trustee);
(e) amounts representing reimbursement, to
the extent permitted by the Agreement and as described under
"Advances" below, for advances made by the Master Servicer,
Sub-Servicers, Support Servicers (as defined below) or the
Trustee that were deposited into the Security Account, and
amounts representing
<PAGE>
reimbursement for certain other losses and expenses incurred
by the Master Servicer or the Depositor and described below;
(f) that portion of each collection of
interest on a particular Loan in such Trust Fund which
represents servicing compensation payable to the Master
Servicer or Retained Interest which is to be retained from
such collection or is permitted to be retained from related
Insurance Proceeds, Liquidation Proceeds or proceeds of Loans
purchased pursuant to the Agreement;
(ii) the amount of any advance made by the Master Servicer,
Sub Servicer, Support Servicer or Trustee as described under
"--Advances" below and deposited by it in the Security
Account;
(iii) if applicable, amounts withdrawn from a Reserve
Account;
(iv) if applicable, amounts provided under a letter of
credit, insurance policy, surety bond or other third-party
guaranties; and
(v) if applicable, the amount of prepayment interest
shortfall.
Distributions of Interest. Unless otherwise specified in the related
Prospectus Supplement, interest will accrue on the aggregate Security Principal
Balance (or, in the case of Securities (i) entitled only to distributions
allocable to interest, the aggregate notional principal balance or (ii) which,
under certain circumstances, allow for the accrual of interest otherwise
scheduled for payment to remain unpaid until the occurrence of certain events
specified in the related Prospectus Supplement) of each class of Securities
entitled to interest from the date, at the Pass-Through Rate (which may be a
fixed rate or rate adjustable as specified in such Prospectus Supplement) and
for the periods specified in such Prospectus Supplement. To the extent funds
are available therefor, interest accrued during each such specified period on
each class of Securities entitled to interest (other than a class of Securities
that provides for interest that accrues, but is not currently payable, referred
to hereafter as "Accrual Securities") will be distributable on the Distribution
Dates specified in the related Prospectus Supplement until the aggregate
Security Principal Balance of the Securities of such class has been distributed
in full or, in the case of Securities entitled only to distributions allocable
to interest, until the aggregate notional principal balance of such Securities
is reduced to zero or for the period of time designated in the related
Prospectus Supplement. The original Security Principal Balance of each Security
will equal the aggregate distributions allocable to principal to which such
Security is entitled. Unless otherwise specified in the related Prospectus
Supplement, distributions allocable to interest on each Security that is not
entitled to distributions allocable to principal will be calculated based on
the notional principal balance of such Security. The notional principal balance
of a Security will not evidence an interest in or entitlement to distributions
allocable to principal but will be used solely for convenience in expressing
the calculation of interest and for certain other purposes.
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending two
or more days prior to a Distribution Date, the effective yield to
Securityholders will be reduced from the yield that would otherwise be
obtainable if
<PAGE>
interest payable on the Security were to accrue through the day immediately
preceding each Distribution Date, and the effective yield (at par) to
Securityholders will be less than the indicated coupon rate.
With respect to any class of Accrual Securities, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid on
a given Distribution Date will be added to the aggregate Security Principal
Balance of such class of Securities on that Distribution Date. Distributions of
interest on any class of Accrual Securities will commence only after the
occurrence of the events specified in the related Prospectus Supplement. Prior
to such time, the beneficial ownership interest of such class of Accrual
Securities in the Trust Fund, as reflected in the aggregate Security Principal
Balance of such class of Accrual Securities, will increase on each Distribution
Date by the amount of interest that accrued on such class of Accrual Securities
during the preceding interest accrual period but that was not required to be
distributed to such class on such Distribution Date. Any such class of Accrual
Securities will thereafter accrue interest on its outstanding Security
Principal Balance as so adjusted.
Distributions of Principal. The related Prospectus Supplement will
specify the method by which the amount of principal to be distributed on the
Securities on each Distribution Date will be calculated and the manner in which
such amount will be allocated among the classes of Securities entitled to
distributions of principal. The aggregate Security Principal Balance of any
class of Securities entitled to distributions of principal generally will be
the aggregate original Security Principal Balance of such class of Securities
specified in such Prospectus Supplement, reduced by all distributions reported
to the holders of such Securities as allocable to principal and, (i) in the
case of Accrual Securities, increased by all interest accrued but not then
distributable on such Accrual Securities and (ii) in the case of adjustable
rate Securities, subject to the effect of negative amortization, if applicable.
If so provided in the related Prospectus Supplement, one or more
classes of Securities will be entitled to receive all or a disproportionate
percentage of the payments of principal which are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the month of such payments
("Principal Prepayments") in the percentages and under the circumstances or for
the periods specified in such Prospectus Supplement. Any such allocation of
Principal Prepayments to such class or classes of Securityholders will have the
effect of accelerating the amortization of such Securities while increasing the
interests evidenced by other Securities in the Trust Fund. Increasing the
interests of the other Securities relative to that of certain Securities
allocated by the principal prepayments is intended to preserve the availability
of the subordination provided by such other Securities. See "Credit
Enhancement--Subordination" herein.
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
<PAGE>
unscheduled distribution that is allocable to principal will not exceed the
amount that would otherwise have been required to be distributed as principal
on the Securities on the next Distribution Date. Unless otherwise specified in
the related Prospectus Supplement, the unscheduled distributions will include
interest at the applicable Pass-Through Rate (if any) on the amount of the
unscheduled distribution allocable to principal for the period and to the date
specified in such Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
Securities would have been made on the next Distribution Date, and with respect
to Securities of the same class, unscheduled distributions of principal will be
made on the same basis as such distributions would have been made on the next
Distribution Date on a pro rata basis. Notice of any unscheduled distribution
will be given by the Trustee prior to the date of such distribution.
Advances
To the extent provided in the related Prospectus Supplement, the
Master Servicer will be required to advance on or before each Distribution Date
(from its own funds, funds advanced by Sub-Servicers or Support Servicers or
funds held in the Security Account for future distributions to the holders of
such Securities), an amount equal to the aggregate of payments of interest
and/or principal that were delinquent on the related Determination Date and
were not advanced by any Sub-Servicer, subject to the Master Servicer's
determination that such advances will be recoverable out of late payments by
borrowers, Liquidation Proceeds, Insurance Proceeds or otherwise. In addition,
to the extent provided in the related Prospectus Supplement, a cash account may
be established to provide for Advances to be made in the event of certain Trust
Fund Assets payment defaults or collection shortfalls.
In making Advances, the Master Servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to holders of the
Securities, rather than to guarantee or insure against losses. If Advances are
made by the Master Servicer from cash being held for future distribution to
Securityholders, the Master Servicer will replace such funds on or before any
future Distribution Date to the extent that funds in the applicable Security
Account on such Distribution Date would be less than the amount required to be
available for distributions to Securityholders on such date. Any Master
Servicer funds advanced will be reimbursable to the Master Servicer out of
recoveries on the specific Loans with respect to which such Advances were made
(e.g., late payments made by the related borrower, any related Insurance
Proceeds, Liquidation Proceeds or proceeds of any Loan purchased by a
Sub-Servicer or a Seller under the circumstances described hereinabove).
Advances by the Master Servicer (and any advances by a Sub-Servicer or a
Support Servicer) also will be reimbursable to the Master Servicer (or
Sub-Servicer or a Support Servicer) from cash otherwise distributable to
Securityholders (including the holders of Senior Securities) to the extent that
the Master Servicer determines that any such Advances previously made are not
ultimately recoverable as described above. To the extent provided in the
related Prospectus Supplement, the Master Servicer also will be obligated to
make Advances, to the extent recoverable out of Insurance Proceeds, Liquidation
Proceeds or otherwise, in respect of certain taxes and insurance premiums not
paid by borrowers on a timely basis. Funds so advanced are reimbursable to the
Master Servicer to the extent permitted by the Agreement. The obligations of
the Master Servicer to make advances may be supported by a
<PAGE>
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 (each, 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 "--Distributions on Securities" above.
Compensating Interest
If so specified in the related Prospectus Supplement, the Master
Servicer will be required to remit to the Trustee, with respect to each Loan in
the related Trust Fund as to which a principal prepayment in full or a
principal payment which is in excess of the scheduled monthly payment and is
not intended to cure a delinquency was received during any Due Period, an
amount, from and to the extent of amounts otherwise payable to the Master
Servicer as servicing compensation, equal to the excess, if any, of (a) 30
days' interest on the principal balance of the related Loan at the Loan Rate
net of the per annum rate at which the Master Servicer's servicing fee accrues,
over (b) the amount of interest actually received on such Loan during such Due
Period, net of the Master Servicer's servicing fee.
Reports to Securityholders
Prior to or concurrently with each distribution on a Distribution
Date, the Master Servicer or the Trustee will furnish to each Securityholder of
record of the related Series a statement setting forth, to the extent
applicable to such Series of Securities, among other things:
(i) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any Principal
Prepayments and any applicable prepayment penalties included
therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the aggregate amount (a) otherwise allocable to the
Subordinated Securityholders on such Distribution Date, and
(b) withdrawn from the Reserve Fund, if any, that is included
in the amounts distributed to the Senior Securityholders;
<PAGE>
(v) the outstanding principal balance or notional principal
balance of such class after giving effect to the distribution
of principal on such Distribution Date;
(vi) the percentage of principal payments on the Loans
(excluding prepayments), if any, which such class will be
entitled to receive on the following Distribution Date;
(vii) the percentage of Principal Prepayments on the Loans,
if any, which such class will be entitled to receive on the
following Distribution Date;
(viii) the related amount of the servicing compensation
retained or withdrawn from the Security Account by the Master
Servicer, and the amount of additional servicing compensation
received by the Master Servicer attributable to penalties,
fees, excess Liquidation Proceeds and other similar charges
and items;
(ix) the number and aggregate principal balances of Loans (A)
delinquent (exclusive of Loans in foreclosure) (1) 31 to 60
days, (2) 61 to 90 days and (3) 91 or more days and (B) in
foreclosure and delinquent (1) 31 to 60 days, (2) 61 to 90
days and (3) 91 or more days, as of the close of business on
the last day of the calendar month preceding such
Distribution Date;
(x) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure;
(xi) if a class is entitled only to a specified portion of
payments of interest on the Loans in the related Pool, the
Pass-Through Rate, if adjusted from the date of the last
statement, of the Loans expected to be applicable to the next
distribution to such class;
(xii) if applicable, the amount remaining in any Reserve
Account at the close of business on the Distribution Date;
(xiii) the Pass-Through Rate as of the day prior to the
immediately preceding Distribution Date; and
(xiv) any amounts remaining under letters of credit, pool
policies or other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a
dollar amount per single Security of the relevant class having the Percentage
Interest specified in the related Prospectus Supplement. The report to
Securityholders for any Series of Securities may include additional or other
information of a similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Securityholder of record at any time during such calendar year a report (a) as
to the aggregate of amounts reported pursuant to (i) and (ii) above for such
calendar year or, in the event such person was a Securityholder of record
during a portion of such calendar year, for the applicable portion of such year
and (b) such other
<PAGE>
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. ("Cede"), as nominee of DTC. Security Owners are only
permitted to exercise their rights indirectly through Participants and DTC.
The Security Owner's ownership of a Book-Entry Security will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that maintains
the Security Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Security will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Security Owner's Financial Intermediary is not a Participant and on the
records of CEDEL or Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and
interest on, the Securities from the Trustee through DTC and Participants.
While the Securities are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Securities and
is required to receive and transmit distributions of principal of, and interest
on, the Securities. Participants and indirect participants with whom Security
Owners have accounts with respect to Securities are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Security Owners. Accordingly, although Security Owners will
not possess certificates, the Rules provide a mechanism by which Security
Owners will receive distributions and will be able to transfer their interest.
Security Owners will not receive or be entitled to receive
certificates representing their respective interests in the Securities, except
under the limited circumstances described below.
<PAGE>
Unless and until Definitive Securities are issued, Security Owners who are not
Participants may transfer ownership of Securities only through Participants and
indirect participants by instructing such Participants and indirect
participants to transfer Securities, by book-entry transfer, through DTC for
the account of the purchasers of such Securities, which account is maintained
with their respective Participants. Under the Rules and in accordance with
DTC's normal procedures, transfers of ownership of Securities will be executed
through DTC and the accounts of the respective Participants at DTC will be
debited and credited. Similarly, the Participants and indirect participants
will make debits or credits, as the case may be, on their records on behalf of
the selling and purchasing Security Owners.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL Participant
(as defined herein) or Euroclear Participant (as defined herein) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement in DTC.
Transfers between Participants will occur in accordance with DTC
rules. Transfers between CEDEL Participants and Euroclear Participants will
occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes
in accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust
<PAGE>
companies, clearing corporations and certain other organizations. Indirect
access to CEDEL is also available to others, such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship
with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of
Morgan, under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by
Morgan, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear
through or maintain a custodial relationship with a Euroclear Participant,
either directly or indirectly.
Morgan is the Belgian branch of a New York banking corporation which
is a member bank of the Federal Reserve System. As such, it is regulated and
examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan are
governed by the Terms and Conditions Governing Use of Euroclear and the related
Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities
and cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Under a book-entry format, beneficial owners of the Book-Entry
Securities may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect
to Securities held through CEDEL or Euroclear will be credited to the cash
accounts of CEDEL Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. See "Certain Material
Federal Income Tax Considerations--Tax Treatment of Foreign Investors" and
"--Tax Consequences to Holders of the 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
<PAGE>
Book-Entry Securities. In addition, issuance of the Book-Entry Securities in
book-entry form may reduce the liquidity of such Securities in the secondary
market since certain potential investors may be unwilling to purchase
Securities for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust will be provided to Cede, as
nominee of DTC, and may be made available by Cede to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Securities of such beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Securities are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Securities under the applicable Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Securities are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Securities. CEDEL or the Euroclear Operator, as the case may be, will take any
other action permitted to be taken by a Securityholder under the Agreement on
behalf of a CEDEL Participant or Euroclear Participant only in accordance with
its relevant rules and procedures and subject to the ability of the Relevant
Depositary to effect such actions on its behalf through DTC. DTC may take
actions, at the direction of the related Participants, with respect to some
Securities which conflict with actions taken with respect to other Securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee will recognize the holders of such Definitive Securities as
Securityholders under the applicable Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants of
DTC, CEDEL and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
None of the Servicer, the Depositor or the Trustee will have any
responsibility for any aspect of the records relating, to or payments made on
account of beneficial ownership interests of the Book-Entry Securities held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
CREDIT ENHANCEMENT
General
Credit enhancement may be provided with respect to one or more classes
of a Series of Securities or with respect to the Trust Fund Assets in the
related Trust Fund. Credit enhancement may be in the form of a limited
financial guaranty policy issued by an entity named
<PAGE>
in the related Prospectus Supplement, the subordination of one or more classes
of the Securities of such Series, the establishment of one or more Reserve
Accounts, the use of a cross-support feature, use of a mortgage pool insurance
policy, FHA Insurance, VA Guarantee, bankruptcy bond, special hazard insurance
policy, surety bond, letter of credit, guaranteed investment contract or
another method of credit enhancement described in the related Prospectus
Supplement, or any combination of the foregoing. Unless otherwise specified in
the related Prospectus Supplement, credit enhancement will not provide
protection against all risks of loss and will not guarantee repayment of the
entire principal balance of the Securities and interest thereon. If losses
occur which exceed the amount covered be credit enhancement or which are not
covered by the credit enhancement, Securityholders will bear their allocable
share of deficiencies.
Subordination
Protection afforded to holders of one or more classes of Securities of
a Series by means of the subordination feature may be accomplished by the
preferential right of holders of one or more other classes of such Series (the
"Senior Securities") to distributions in respect of scheduled principal,
Principal Prepayments, interest or any combination thereof that otherwise would
have been payable to holders of Subordinated Securities under the circumstances
and to the extent specified in the related Prospectus Supplement. Protection
may also be afforded to the holders of Senior Securities of a Series by: (i)
reducing the ownership interest of the related Subordinated Securities; (ii) a
combination of the immediately preceding sentence and clause (i) above; or
(iii) as otherwise described in the related Prospectus Supplement. Delays in
receipt of scheduled payments on the Loans and losses on defaulted Loans may be
borne first by the various classes of Subordinated Securities and thereafter by
the various classes of Senior Securities, in each case under the circumstances
and subject to the limitations specified in such related Prospectus Supplement.
The aggregate distributions in respect of delinquent payments on the Loans over
the lives of the Securities or at any time, the aggregate losses in respect of
defaulted Loans which must be borne by the Subordinated Securities by virtue of
subordination and the amount of the distributions otherwise distributable to
the Subordinated Securityholders that will be distributable to Senior
Securityholders on any Distribution Date may be limited as specified in the
related Prospectus Supplement. If aggregate distributions in respect of
delinquent payments on the Loans or aggregate losses in respect of such Loans
were to exceed an amount specified in the related Prospectus Supplement,
holders of Senior Securities would experience losses on the Securities.
In addition to or in lieu of the foregoing, if so specified in the
related Prospectus Supplement, all or any portion of distributions otherwise
payable to holders of Subordinated Securities on any Distribution Date may
instead be deposited into one or more Reserve Accounts established with the
Trustee or distributed to holders of Senior Securities. Such deposits may be
made on each Distribution Date, for specified periods or until the balance in
the Reserve Account has reached a specified amount and, following payments from
the Reserve Account to holders of Senior Securities or otherwise, thereafter to
the extent necessary to restore the balance in the Reserve Account to required
levels, in each case as specified in the related Prospectus Supplement. Amounts
on deposit in the Reserve Account may be released to the holders of certain
classes of Securities at the times and under the circumstances specified in
such Prospectus Supplement.
<PAGE>
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 (each, a "Special Hazard
Insurance Policy") may be obtained for the Pool and issued by the insurer (the
"Special Hazard Insurer") named in the related Prospectus Supplement. Each
Special Hazard Insurance Policy will, subject to limitations described below,
protect holders of the related Securities from (i) loss by reason of damage to
Properties caused by certain hazards (including earthquakes and, to a limited
extent, tidal waves and related water damage or as otherwise specified in the
related Prospectus Supplement) not insured against under the standard form of
hazard insurance policy for the respective states in which the Properties are
located or under a flood insurance policy if the Property is located in a
federally designated flood area, and (ii) loss caused by reason of the
application of the coinsurance clause contained in hazard insurance policies.
See "The Agreements--Hazard Insurance". Each Special Hazard Insurance Policy
will not cover losses occasioned by fraud or conversion by the Trustee or
Master Servicer, war, insurrection, civil war, certain governmental action,
errors in design, faulty workmanship or materials (except under certain
circumstances), nuclear or chemical reactions, flood (if the Property is
located in a federally designated flood area), nuclear or chemical
contamination and certain other risks. The amount of coverage under any Special
Hazard Insurance Policy will be specified in the related Prospectus Supplement.
Each Special Hazard Insurance Policy will provide that no claim may be paid
unless hazard and, if applicable, flood insurance on the Property securing the
Loan have been kept in force and other protection and preservation expenses
have been paid.
Subject to the foregoing limitations, and unless otherwise specified
in the related Prospectus Supplement, each Special Hazard Insurance Policy will
provide that where there has been damage to Property securing a foreclosed Loan
(title to which has been acquired by the insured) and to the extent such damage
is not covered by the hazard insurance policy or flood insurance policy, if
any, maintained by the borrower or the Master Servicer, the Special Hazard
Insurer will pay the lesser of (i) the cost of repair or replacement of such
property or (ii) upon transfer of the Property to the Special Hazard Insurer,
the unpaid principal balance of such Loan at the time of acquisition of such
Property by foreclosure or deed in lieu of foreclosure, plus accrued interest
to the date of claim settlement and certain expenses incurred by the Master
Servicer with respect to such Property. If the unpaid principal balance of a
Loan plus accrued interest and certain expenses is paid by the Special Hazard
Insurer, the amount of further coverage under the related Special Hazard
Insurance Policy will be reduced by such amount less any net proceeds from the
sale of the Property. Any amount paid as the cost of repair of the Property
will further reduce coverage by such amount.
<PAGE>
The Master Servicer may deposit cash, an irrevocable letter of credit
or any other instrument acceptable to each Rating Agency rating the Securities
of the related Series in a special trust account to provide protection in lieu
of or in addition to that provided by a Special Hazard Insurance Policy. The
amount of any Special Hazard Insurance Policy or of the deposit to the special
trust account relating to such Securities in lieu thereof may be reduced so
long as any such reduction will not result in a downgrading of the rating of
such Securities by any such Rating Agency.
Bankruptcy Bonds
A bankruptcy bond ("Bankruptcy Bond") for proceedings under the
federal Bankruptcy Code may be issued by an insurer named in such Prospectus
Supplement. Each Bankruptcy Bond will cover certain losses resulting from a
reduction by a bankruptcy court of scheduled payments of principal and interest
on a Loan or a reduction by such court of the principal amount of a Loan and
will cover certain unpaid interest on the amount of such a principal reduction
from the date of the filing of a bankruptcy petition. The required amount of
coverage under each Bankruptcy Bond will be set forth in the related Prospectus
Supplement. The Master Servicer may deposit cash, an irrevocable letter of
credit or any other instrument acceptable to each Rating Agency rating the
Securities of the related Series in a special trust account to provide
protection in lieu of or in addition to that provided by a Bankruptcy Bond.
Coverage under a Bankruptcy Bond may be cancelled or reduced by the Master
Servicer if such cancellation or reduction would not adversely affect the then
current rating or ratings of the related Securities. See "Certain Legal Aspects
of the Loans--Anti-Deficiency Legislation and Other Limitations on Lenders".
Reserve Accounts
Credit support with respect to a Series of Securities may be provided
by the establishment and maintenance with the Trustee for such Series of
Securities, in trust, of one or more Reserve Accounts for such Series. The
related Prospectus Supplement will specify whether or not any such Reserve
Accounts will be included in the Trust Fund for such Series.
The Reserve Account for a Series will be funded (i) by the deposit
therein of cash, United States Treasury securities, instruments evidencing
ownership of principal or interest payments thereon, letters of credit, demand
notes, certificates of deposit or a combination thereof in the aggregate amount
specified in the related Prospectus Supplement, (ii) by the deposit therein
from time to time of certain amounts, as specified in the related Prospectus
Supplement to which the Subordinate Securityholders, if any, would otherwise be
entitled or (iii) in such other manner as may be specified in the related
Prospectus Supplement.
Any amounts on deposit in the Reserve Account and the proceeds of any
other instrument upon maturity will be held in cash or will be invested in
Permitted Investments which may include obligations of the United States and
certain agencies thereof, certificates of deposit, certain commercial paper,
time deposits and bankers acceptances sold by eligible commercial banks and
certain repurchase agreements of United States government securities with
eligible commercial banks. If a letter of credit is deposited with the Trustee,
such letter of credit will be irrevocable. Any instrument deposited therein
will name the Trustee, in its capacity as trustee for the holders of the
Securities, as beneficiary and will be issued by an entity acceptable to each
<PAGE>
Rating Agency that rates the Securities. Additional information with respect to
such instruments deposited in the Reserve Accounts will be set forth in the
related Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the Reserve Account for distribution to the
holders of Securities for the purposes, in the manner and at the times
specified in the related Prospectus Supplement.
Pool Insurance Policies
A separate pool insurance policy ("Pool Insurance Policy") may be
obtained for the Pool and issued by the insurer (the "Pool Insurer") named in
the related Prospectus Supplement. Each Pool Insurance Policy will, subject to
the limitations described below, cover loss by reason of default in payment on
Loans in the Pool in an amount equal to a percentage specified in such
Prospectus Supplement of the aggregate principal balance of such Loans on the
Cut-off Date which are not covered as to their entire outstanding principal
balances by Primary Mortgage Insurance Policies. As more fully described below,
the Master Servicer will present claims thereunder to the Pool Insurer on
behalf of itself, the Trustee and the holders of the Securities. The Pool
Insurance Policies, however, are not blanket policies against loss, since
claims thereunder may only be made respecting particular defaulted Loans and
only upon satisfaction of certain conditions precedent described below. Unless
otherwise specified in the related Prospectus Supplement, the Pool Insurance
Policies will not cover losses due to a failure to pay or denial of a claim
under a Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will provide that no claims may be validly presented
unless (i) any required Primary Mortgage Insurance Policy is in effect for the
defaulted Loan and a claim thereunder has been submitted and settled; (ii)
hazard insurance on the related Property has been kept in force and real estate
taxes and other protection and preservation expenses have been paid; (iii) if
there has been physical loss or damage to the Property, it has been restored to
its physical condition (reasonable wear and tear excepted) at the time of
issuance of the policy; and (iv) the insured has acquired good and merchantable
title to the Property free and clear of liens except certain permitted
encumbrances. Upon satisfaction of these conditions, the Pool Insurer will have
the option either (a) to purchase the property securing the defaulted Loan at a
price equal to the principal balance thereof plus accrued and unpaid interest
at the Loan Rate to the date of purchase and certain expenses incurred by the
Master Servicer on behalf of the Trustee and Securityholders, or (b) to pay the
amount by which the sum of the principal balance of the defaulted Loan plus
accrued and unpaid interest at the Loan Rate to the date of payment of the
claim and the aforementioned expenses exceeds the proceeds received from an
approved sale of the Property, in either case net of certain amounts paid or
assumed to have been paid under the related Primary Mortgage Insurance Policy.
If any Property securing a defaulted Loan is damaged and proceeds, if any, from
the related hazard insurance policy or the applicable Special Hazard Insurance
Policy are insufficient to restore the damaged Property to a condition
sufficient to permit recovery under the Pool Insurance Policy, the Master
Servicer will not be required to expend its own funds to restore the damaged
Property unless it determines that (i) such restoration will increase the
proceeds to securityholders on liquidation of the Loan after reimbursement of
the Master Servicer for its expenses and (ii) such expenses will be recoverable
by it through proceeds of the sale of the Property or proceeds of the related
Pool Insurance Policy or any related Primary Mortgage Insurance Policy.
<PAGE>
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 Aspects of the Loans -- The Title I Program", herein),
certain Loans will be insured under various FHA programs including the standard
FHA 203(b) program to finance the acquisition of one- to four-family housing
units and the FHA 245 graduated payment mortgage program. These programs
generally limit the principal amount and interest rates of the mortgage loans
insured.
The insurance premiums for Loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development ("HUD") or
by the Master Servicer or any Sub-Servicer and are paid to the FHA. The
regulations governing FHA single-family mortgage insurance programs provide
that insurance benefits are payable either upon foreclosure (or other
acquisition of possession) and conveyance of the mortgaged premises to the
United States of America or upon assignment of the defaulted Loan to the United
States of America. With respect to a defaulted FHA-insured Loan, the Master
Servicer or any Sub-Servicer is limited in its ability to initiate foreclosure
proceedings. When it is determined, either by the Master Servicer or any
Sub-Servicer or HUD, that default was caused by circumstances beyond the
mortgagor's control, the Master Servicer or any Sub-Servicer is expected to
make an effort to avoid foreclosure by entering, if feasible, into one of a
number of available forms of forbearance plans with the mortgagor. Such plans
may involve the reduction or suspension of regular mortgage payments for a
specified period, with such payments to be made upon or before the maturity
date of the mortgage, or the recasting of payments due under the mortgage up to
or, other than Loans originated under the Title I Program of the FHA, beyond
the maturity date. In addition, when a default caused by such circumstances is
accompanied by certain other criteria,
<PAGE>
HUD may provide relief by making payments to the Master Servicer or any
Sub-Servicer in partial or full satisfaction of amounts due under the Loan
(which payments are to be repaid by the mortgagor to HUD) or by accepting
assignment of the loan from the Master Servicer or any Sub-Servicer. With
certain exceptions, at least three full monthly installments must be due and
unpaid under the Loan, and HUD must have rejected any request for relief from
the mortgagor before the Master Servicer or any Sub-Servicer may initiate
foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. The Master Servicer or any Sub-Servicer of each
FHA-insured Single Family Loan will be obligated to purchase any such debenture
issued in satisfaction of such Loan upon default for an amount equal to the
principal amount of any such debenture.
Other than in relation to the Title I Program of the FHA, the amount
of insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted Loan adjusted to reimburse the Master
Servicer or Sub-Servicer for certain costs and expenses and to deduct certain
amounts received or retained by the Master Servicer or Sub-Servicer after
default. When entitlement to insurance benefits results from foreclosure (or
other acquisition of possession) and conveyance to HUD, the Master Servicer or
Sub-Servicer is compensated for no more than two-thirds of its foreclosure
costs, and is compensated for interest accrued and unpaid prior to such date
but in general only to the extent it was allowed pursuant to a forbearance plan
approved by HUD. When entitlement to insurance benefits results from assignment
of the Loan to HUD, the insurance payment includes full compensation for
interest accrued and unpaid to the assignment date. The insurance payment
itself, upon foreclosure of an FHA-insured Loan, bears interest from a date 30
days after the borrower's first uncorrected failure to perform any obligation
to make any payment due under the mortgage and, upon assignment, from the date
of assignment to the date of payment of the claim, in each case at the same
interest rate as the applicable HUD debenture interest rate as described above.
Loans designated in the related Prospectus Supplement as guaranteed by
the VA will be partially guaranteed by the VA under the Serviceman's
Readjustment Act of 1944, as amended (a "VA Guaranty Policy"). The Serviceman's
Readjustment Act of 1944, as amended, permits a veteran (or in certain
instances the spouse of a veteran) to obtain a mortgage loan guarantee by the
VA covering mortgage financing of the purchase of a one- to four-family
dwelling unit at interest rates permitted by the VA. The program has no
mortgage loan limits, requires no down payment from the purchaser and permits
the guarantee of mortgage loans of up to 30 years' duration. However, no Loan
guaranteed by the VA will have an original principal amount greater than five
times the partial VA guarantee for such Loan.
The maximum guarantee that may be issued by the VA under a VA
guaranteed mortgage loan depends upon the original principal amount of the
mortgage loan, as further described in 38 United States Code Section 1803(a),
as amended. As of January 1, 1990, the maximum guarantee that may be issued by
the VA under a VA guaranteed mortgage loan of more than $144,000 is the lesser
of 25% of the original principal amount of the mortgage loan and $46,000. The
liability on the guarantee is reduced or increased pro rata with any reduction
or increase in the amount of indebtedness, but in no event will the amount
payable on the guarantee exceed the
<PAGE>
amount of the original guarantee. The VA may, at its option and without regard
to the guarantee, make full payment to a mortgage holder of unsatisfied
indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA guaranteed Loan, the Master Servicer or
Sub-Servicer is, absent exceptional circumstances, authorized to announce its
intention to foreclose only when the default has continued for three months.
Generally, a claim for the guarantee is submitted after liquidation of the
Property.
The amount payable under the guarantee will be the percentage of the
VA-insured Loan originally guaranteed applied to indebtedness outstanding as of
the applicable date of computation specified in the VA regulations. Payments
under the guarantee will be equal to the unpaid principal amount of the Loan,
interest accrued on the unpaid balance of the Loan to the appropriate date of
computation and limited expenses of the mortgagee, but in each case only to the
extent that such amounts have not been recovered through liquidation of the
Property. The amount payable under the guarantee may in no event exceed the
amount of the original guarantee.
Cross-Support
The beneficial ownership of separate groups of assets included in a
Trust Fund may be evidenced by separate classes of the related Series of
Securities. In such case, credit support may be provided by a cross-support
feature which requires that distributions be made with respect to Securities
evidencing a beneficial ownership interest in, or secured by, other asset
groups within the same Trust Fund. The related Prospectus Supplement for a
Series which includes a cross-support feature will describe the manner and
conditions for applying such cross-support feature.
The coverage provided by one or more forms of credit support may apply
concurrently to two or more related Trust Funds. If applicable, the related
Prospectus Supplement will identify the Trust Funds to which such credit
support relates and the manner of determining the amount of the coverage
provided thereby and of the application of such coverage to the identified
Trust Funds.
Other Insurance, Surety Bonds, Guaranties, Letters of Credit and
Similar Instruments or Agreements
A Trust Fund may also include insurance, guaranties, surety bonds,
letters of credit or similar arrangements for the purpose of (i) maintaining
timely payments or providing additional protection against losses on the assets
included in such Trust Fund, (ii) paying administrative expenses or (iii)
establishing a minimum reinvestment rate on the payments made in respect of
such assets or principal payment rate on such assets. Such arrangements may
include agreements under which Securityholders are entitled to receive amounts
deposited in various accounts held by the Trustee upon the terms specified in
such Prospectus Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Securities
will be affected primarily by the amount and timing of principal payments
received on or in respect of the Trust
<PAGE>
Fund Assets included in the related Trust Fund. With respect to a Trust Fund
which includes Private Asset Backed Securities, the possible effects of the
amount and timing of principal payments received with respect to the underlying
mortgage loans will be described in the related Prospectus Supplement. The
original terms to maturity of the Loans in a given Pool will vary depending
upon the type of Loans included therein. Each Prospectus Supplement will
contain information with respect to the type and maturities of the Loans in the
related Pool. Unless otherwise specified in the related Prospectus Supplement,
Loans may be prepaid without penalty in full or in part at any time. The
prepayment experience on the Loans in a Pool will affect the life of the
related Series of Securities.
The rate of prepayment on the Loans cannot be predicted. Home equity
loans and home improvement contracts have been originated in significant volume
only during the past few years and the Depositor is not aware of any publicly
available studies or statistics on the rate of prepayment of such loans.
Generally, home equity loans and home improvement contracts are not viewed by
borrowers as permanent financing. Accordingly, the Loans may experience a
higher rate of prepayment than traditional first mortgage loans. On the other
hand, because home equity loans such as the Revolving Credit Line Loans
generally are not fully amortizing, the absence of voluntary borrower
prepayments could cause rates of principal payments lower than, or similar to,
those of traditional fully-amortizing first mortgages. The prepayment
experience of the related Trust Fund may be affected by a wide variety of
factors, including general economic conditions, prevailing interest rate
levels, the availability of alternative financing and homeowner mobility and
the frequency and amount of any future draws on any Revolving Credit Line
Loans. Other factors that might be expected to affect the prepayment rate of a
pool of home equity mortgage loans or home improvement contracts include the
amounts of, and interest rates on, the underlying senior mortgage loans, and
the use of first mortgage loans as long-term financing for home purchase and
subordinate mortgage loans as shorter-term financing for a variety of purposes,
including home improvement, education expenses and purchases of consumer
durables such as automobiles. Accordingly, the Loans may experience a higher
rate of prepayment than traditional fixed-rate mortgage loans. In addition, any
future limitations on the right of borrowers to deduct interest payments on
home equity loans for federal income tax purposes may further increase the rate
of prepayments of the Loans. The enforcement of a "due-on-sale" provision (as
described below) will have the same effect as a prepayment of the related Loan.
See "Certain Legal Aspects of the Loans--Due-on-Sale Clauses" herein. 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.
<PAGE>
Unless otherwise specified in the related Prospectus Supplement, the
Loans will contain due-on-sale provisions permitting the mortgagee to
accelerate the maturity of the loan upon sale or certain transfers by the
borrower. Loans insured by the FHA, and Single Family Loans partially
guaranteed by the VA, are assumable with the consent of the FHA and the VA,
respectively. Thus, the rate of prepayments on such Loans may be lower than
that of conventional Loans bearing comparable interest rates. Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer generally
will enforce any due-on-sale or due-on-encumbrance clause, to the extent it has
knowledge of the conveyance or further encumbrance or the proposed conveyance
or proposed further encumbrance of the Property and reasonably believes that it
is entitled to do so under applicable law; provided, however, that the Master
Servicer will not take any enforcement action that would impair or threaten to
impair any recovery under any related insurance policy. See "The
Agreements--Collection Procedures" and "Certain Legal Aspects of the Loans" for
a description of certain provisions of each Agreement and certain legal
developments that may affect the prepayment experience on the Loans.
The rate of prepayments with respect to conventional mortgage loans
has fluctuated significantly in recent years. If prevailing rates fall
significantly below the Loan Rates borne by the Loans, such Loans may be
subject to higher prepayment rates than if prevailing interest rates remain at
or above such Loan Rates. Conversely, if prevailing interest rates rise
appreciably above the Loan Rates borne by the Loans, such Loans may experience
a lower prepayment rate than if prevailing rates remain at or below such Loan
Rates. However, there can be no assurance that such will be the case.
When a full prepayment is made on a Loan, the borrower is charged
interest on the principal amount of the Loan so prepaid only for the number of
days in the month actually elapsed up to the date of the prepayment, rather
than for a full month. Unless the Master Servicer remits amounts otherwise
payable to it as servicing compensation, see "Description of the
Securities--Compensating Interest", the effect of prepayments in full will be
to reduce the amount of interest passed through in the following month to
holders of Securities because interest on the principal amount of any Loan so
prepaid will be paid only to the date of prepayment. Partial prepayments in a
given month may be applied to the outstanding principal balances of the Loans
so prepaid on the first day of the month of receipt or the month following
receipt. In the latter case, partial prepayments will not reduce the amount of
interest passed through in such month. Unless otherwise specified in the
related Prospectus Supplement, neither full nor partial prepayments will be
passed through until the month following receipt.
Even assuming that the Properties provide adequate security for the
Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Loans and corresponding delays in the receipt of
related proceeds by Securityholders could occur. An action to foreclose on a
Property securing a Loan is regulated by state statutes and rules and is
subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a property. In the event of a default
by a borrower, these restrictions among other things, may impede the ability of
the Master Servicer to foreclose on or sell the Property or to obtain
liquidation proceeds sufficient to repay all amounts due on the related Loan.
In addition, the Master Servicer will be entitled to deduct from related
liquidation proceeds all expenses reasonably
<PAGE>
incurred in attempting to recover amounts due on defaulted Loans and not yet
repaid, including payments to senior lienholders, legal fees and costs of legal
action, real estate taxes and maintenance and preservation expenses.
Liquidation expenses with respect to defaulted mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a large remaining
principal balance, the amount realized after expenses of liquidation would be
smaller as a percentage of the remaining principal balance of the small
mortgage loan than would be the case with the other defaulted mortgage loan
having a large remaining principal balance.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of certain
originators and servicers of Loans. In addition, most have other laws, public
policy and general principles of equity relating to the protection of
consumers, unfair and deceptive practices and practices which may apply to the
origination, servicing and collection of the Loans. Depending on the provisions
of the applicable law and the specific facts and circumstances involved,
violations of these laws, policies and principles may limit the ability of the
Master Servicer to collect all or part of the principal of or interest on the
Loans, may entitle the borrower to a refund of amounts previously paid and, in
addition, could subject the Master Servicer to damages and administrative
sanctions.
If the rate at which interest is passed through to the holders of
Securities of a Series is calculated on a Loan-by-Loan basis, disproportionate
principal prepayments among Loans with different Loan Rates will affect the
yield on such Securities. In most cases, the effective yield to Securityholders
will be lower than the yield otherwise produced by the applicable Pass-Through
Rate and purchase price, because while interest will accrue on each Loan from
the first day of the month (unless otherwise specified in the related
Prospectus Supplement), the distribution of such interest will not be made
earlier than the month following the month of accrual.
Under certain circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or any person specified in the related Prospectus
Supplement may have the option to purchase the assets of a Trust Fund thereby
effecting earlier retirement of the related Series of Securities. See "The
Agreements--Termination; Optional Termination".
Factors other than those identified herein and in the related
Prospectus Supplement could significantly affect principal prepayments at any
time and over the lives of the Securities. The relative contribution of the
various factors affecting prepayment may also vary from time to time. There can
be no assurance as to the rate of payment of principal of the Trust Fund Assets
at any time or over the lives of the Securities.
The Prospectus Supplement relating to a Series of Securities will
discuss in greater detail the effect of the rate and timing of principal
payments (including prepayments), delinquencies and losses on the yield,
weighted average lives and maturities of such Securities.
<PAGE>
THE AGREEMENTS
Set forth below is a summary of certain provisions of each Agreement
which are not described elsewhere in this Prospectus. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of each Agreement. Where particular provisions or
terms used in the Agreements are referred to, such provisions or terms are as
specified in the Agreements. Except as otherwise specified, the Agreement
described herein contemplates a Trust Fund comprised of Loans. The provisions
of an Agreement with respect to a Trust Fund which consists of or includes
Private Asset Backed Securities may contain provisions similar to those
described herein but will be more fully described in the related Prospectus
Supplement.
Assignment of the Trust Fund Assets
Assignment of the Loans. At the time of issuance of the Securities of
a Series, the Depositor will cause the Loans comprising the related Trust Fund
to be assigned to the Trustee, together with all principal and interest
received by or on behalf of the Depositor on or with respect to such Loans
after the Cut-off Date, other than principal and interest due on or before the
Cut-off Date and other than any Retained Interest specified in the related
Prospectus Supplement. The Trustee will, concurrently with such assignment,
deliver the Securities to the Depositor in exchange for the Loans. Each Loan
will be identified in a schedule appearing as an exhibit to the related
Agreement. Such schedule will include information as to the outstanding
principal balance of each Loan after application of payments due on or before
the Cut-off Date, as well as information regarding the Loan Rate or APR, the
current scheduled monthly payment of principal and interest, the maturity of
the Loan, the Combined Loan-to-Value Ratios at origination and certain other
information.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will as to each Home Improvement Contract, deliver or cause to be
delivered to the Trustee the original Home Improvement Contract and copies of
documents and instruments related to each Home Improvement Contract and, other
than in the case of unsecured Home Improvement Contracts, the security interest
in the Property securing such Home Improvement Contract. In order to give
notice of the right, title and interest of Securityholders to the Home
Improvement Contracts, the Depositor will cause a UCC-1 financing statement to
be executed by the Depositor or the Seller identifying the Trustee as the
secured party and identifying all Home Improvement Contracts as collateral.
Unless otherwise specified in the related Prospectus Supplement, the Home
Improvement Contracts will not be stamped or otherwise marked to reflect their
assignment to the Trustee. Therefore, if, through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
Home Improvement Contracts without notice of such assignment, the interest of
Securityholders in the Home Improvement Contracts could be defeated. See
"Certain Legal Aspects of the Loans--The Home Improvement Contracts" herein.
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
<PAGE>
was delivered to such recording office), (iii) an assignment of the Mortgage to
the Trustee, which assignment will be in recordable form in the case of a
Mortgage assignment, and (iv) such other security documents, including those
relating to any senior interests in the Property, as may be specified in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, the Depositor will promptly cause the assignments of the
related Loans to be recorded in the appropriate public office for real property
records, except in states in which, in the opinion of counsel acceptable to the
Trustee, such recording is not required to protect the Trustee's interest in
such Loans against the claim of any subsequent transferee or any successor to
or creditor of the Depositor or the originator of such Loans.
The Trustee (or the custodian hereinafter referred to) will review
such Loan documents within the time period specified in the related Prospectus
Supplement after receipt thereof, and the Trustee will hold such documents in
trust for the benefit of the Securityholders. Unless otherwise specified in the
related Prospectus Supplement, if any such document is found to be missing or
defective in any material respect, the Trustee (or such custodian) will notify
the Master Servicer and the Depositor, and the Master Servicer will notify the
related Seller. If the Seller cannot cure the omission or defect within a
specified number of days after receipt of such notice (or such other period as
may be specified in the related Prospectus Supplement), the Seller will be
obligated either (i) to purchase the related Loan from the Trust at the
Purchase Price or (ii) to remove such Loan from the Trust Fund and substitute
in its place one or more other Loans. There can be no assurance that a Seller
will fulfill this purchase or substitution obligation. Although the Master
Servicer may be obligated to enforce such obligation to the extent described
above under "Loan Program--Representations by Sellers; Repurchases", neither
the Master Servicer nor the Depositor will be obligated to purchase or replace
such Loan if the Seller defaults on its obligation, unless such breach also
constitutes a breach of the representations or warranties of the Master
Servicer or the Depositor, as the case may be. Unless otherwise specified in
the related Prospectus Supplement, this purchase obligation constitutes the
sole remedy available to the Securityholders or the Trustee for omission of, or
a material defect in, a constituent document.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Loans as agent of the Trustee.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Agreement. Upon a breach of any such representation of
the Master Servicer which materially and adversely affects the interests of the
Securityholders in a Loan, the Master Servicer will be obligated either to cure
the breach in all material respects or to purchase or replace the Loan at the
Purchase Price. Unless otherwise specified in the related Prospectus
Supplement, this obligation to cure, purchase or substitute constitutes the
sole remedy available to the Securityholders or the Trustee for such a breach
of representation by the Master Servicer.
Assignment of Private Asset Backed Securities. The Depositor will
cause Private Asset Backed Securities to be registered in the name of the
Trustee. The Trustee (or the custodian) will have possession of any
certificated Private Asset Backed Securities. Unless otherwise specified in the
related Prospectus Supplement, the Trustee will not be in possession of or be
assignee of record of any underlying assets for a Private Asset Backed
Security. See "The Trust Fund--
<PAGE>
Private Asset Backed Securities" herein. Each Private Asset Backed Security
will be identified in a schedule appearing as an exhibit to the related
Agreement which will specify the original principal amount, outstanding
principal balance as of the Cut-off Date, annual pass-through rate or interest
rate and maturity date and certain other pertinent information for each Private
Asset Backed Security conveyed to the Trustee.
Notwithstanding the foregoing provisions, with respect to a Trust Fund
for which a REMIC election is to be made, no purchase or substitution of a Loan
will be made if such purchase or substitution would result in a prohibited
transaction tax under the Code.
Payments on Loans; Deposits to Security Account
Each Sub-Servicer servicing a Loan pursuant to a Sub-Servicing
Agreement (as defined below under "--Sub-Servicing of Loans") will establish
and maintain an account (the "Sub-Servicing Account") which meets the following
requirements and is otherwise acceptable to the Master Servicer. A
Sub-Servicing Account must be established with a Federal Home Loan Bank or with
a depository institution (including the Sub-Servicer itself) whose accounts are
insured by either the Bank Insurance Fund (the "BIF") of the FDIC or the
Savings Association Insurance Fund (as successor to the Federal Savings and
Loan Insurance Corporation ("SAIF")) of the Federal Deposit Insurance
Corporation (the "FDIC"). If a Sub-Servicing Account is maintained at an
institution that is a Federal Home Loan Bank or an FDIC-insured institution
and, in either case, the amount on deposit in the Sub-Servicing Account exceeds
the FDIC insurance coverage amount, then such excess amount must be remitted to
the Master Servicer within one business day of receipt. In addition, the
Sub-Servicer must maintain a separate account for escrow and impound funds
relating to the Loans. Each Sub-Servicer is required to deposit into its
Sub-Servicing Account on a daily basis all amounts described below under
"--Sub-Servicing of Loans" that are received by it in respect of the Loans,
less its servicing or other compensation. On or before the date specified in
the Sub-Servicing Agreement, the Sub-Servicer will remit or cause to be
remitted to the Master Servicer or the Trustee all funds held in the
Sub-Servicing Account with respect to Loans that are required to be so
remitted. The Sub-Servicer may also be required to advance on the scheduled
date of remittance an amount corresponding to any monthly installment of
interest and/or principal, less its servicing or other compensation, on any
Loan for which payment was not received from the mortgagor. Unless otherwise
specified in the related Prospectus Supplement, any such obligation of the
Sub-Servicer to advance will continue up to and including the first of the
month following the date on which the related Property is sold at a foreclosure
sale or is acquired on behalf of the Securityholders by deed in lieu of
foreclosure, or until the related Loan is liquidated.
The Master Servicer will establish and maintain or cause to be
established and maintained with respect to the related Trust Fund a separate
account or accounts for the collection of payments on the related Trust Fund
Assets in the Trust Fund (the "Security Account") must be either (i) maintained
with a depository institution the debt obligations of which (or in the case of
a depository institution that is the principal subsidiary of a holding company,
the obligations of which) are rated in one of the two highest rating categories
by the Rating Agency or Rating Agencies that rated one or more classes of the
related Series of Securities, (ii) an account or accounts the deposits in which
are fully insured by either the BIF or SAIF, (iii) an account or accounts the
deposits in which are insured by the BIF or SAIF (to the limits established by
the FDIC), and the uninsured deposits in which are otherwise secured such
<PAGE>
that, as evidenced by an opinion of counsel, the Securityholders have a claim
with respect to the funds in the Security Account or a perfected first priority
security interest against any collateral securing such funds that is superior
to the claims of any other depositors or general creditors of the depository
institution with which the Security Account is maintained, or (iv) an account
or accounts otherwise acceptable to each Rating Agency. The collateral eligible
to secure amounts in the Security Account is limited to United States
government securities and other high-quality investments ("Permitted
Investments"). A Security Account may be maintained as an interest bearing
account or the funds held therein may be invested pending each succeeding
Distribution Date in Permitted Investments. Unless otherwise specified in the
related Prospectus Supplement, the Master Servicer or its designee will be
entitled to receive any such interest or other income earned on funds in the
Security Account as additional compensation and will be obligated to deposit in
the Security Account the amount of any loss immediately as realized. The
Security Account may be maintained with the Master Servicer or with a
depository institution that is an affiliate of the Master Servicer, provided it
meets the standards set forth above.
The Master Servicer will deposit or cause to be deposited in the
Security Account for each Trust Fund on a daily basis, to the extent applicable
and provided in the Agreement, the following payments and collections received
or advances made by or on behalf of it subsequent to the Cut-off Date (other
than payments due on or before the Cut-off Date and exclusive of any amounts
representing Retained Interest):
(i) all payments on account of principal, including Principal
Prepayments and any applicable prepayment penalties, on the
Loans;
(ii) all payments on account of interest on the Loans, net of
applicable servicing compensation;
(iii) all proceeds (net of unreimbursed payments of property
taxes, insurance premiums and similar items ("Insured
Expenses") incurred, and unreimbursed advances made, by the
related Sub-Servicer, if any) of the hazard insurance
policies and any Primary Mortgage Insurance Policies, to the
extent such proceeds are not applied to the restoration of
the property or released to the Mortgagor in accordance with
the Master Servicer's normal servicing procedures
(collectively, "Insurance Proceeds") and all other cash
amounts (net of unreimbursed expenses incurred in connection
with liquidation or foreclosure ("Liquidation Expenses") and
unreimbursed advances made, by the related Sub-Servicer, if
any) received and retained in connection with the liquidation
of defaulted Loans, by foreclosure or otherwise ("Liquidation
Proceeds"), together with any net proceeds received on a
monthly basis with respect to any properties acquired on
behalf of the Securityholders by foreclosure or deed in lieu
of foreclosure;
(iv) all proceeds of any Loan or property in respect thereof
purchased by the Master Servicer, the Depositor, any
Sub-Servicer or any Seller as described under "Loan
Program--Representations by Sellers; Repurchases or
Substitutions" herein or "--Assignment of Trust Fund Assets"
above and all proceeds of any Loan repurchased as described
under "--Termination; Optional Termination" below;
<PAGE>
(v) all payments required to be deposited in the Security
Account with respect to any deductible clause in any blanket
insurance policy described under "--Hazard Insurance" below;
(vi) any amount required to be deposited by the Master
Servicer in connection with losses realized on investments
for the benefit of the Master Servicer of funds held in the
Security Account; and
(vii) all other amounts required to be deposited in the
Security Account pursuant to the Agreement.
Pre-Funding Account
If so provided in the related Prospectus Supplement, the Master
Servicer will establish and maintain a pre-funding account (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
(the "Pre-Funded Amount") on the related Closing Date. The Pre-Funded Amount
will not exceed 25% of the initial aggregate principal amount of the
Certificates and Notes of the related Series. The Pre-Funded Amount will be
used by the related Trustee to purchase Subsequent Loans from the Depositor
from time to time during the Funding Period. The Funding Period, if any, for a
Trust Fund will begin on the related Closing Date and will end on the date
specified in the related Prospectus Supplement, which in no event will be later
than the date that is three months after the Closing Date. Any amounts
remaining in the Pre-Funding Account at the end of the Funding Period will be
distributed to the related Securityholders in the manner and priority specified
in the related Prospectus Supplement, as a prepayment of principal of the
related Securities.
Sub-Servicing of Loans
Each Seller of a Loan or any other servicing entity may act as the
Sub-Servicer for such Loan pursuant to an agreement (each, a "Sub-Servicing
Agreement"), which will not contain any terms inconsistent with the related
Agreement. While each Sub-Servicing Agreement will be a contract solely between
the Master Servicer and the Sub-Servicer, the Agreement pursuant to which a
Series of Securities is issued will provide that, if for any reason the Master
Servicer for such Series of Securities is no longer the Master Servicer of the
related Loans, the Trustee or any successor Master Servicer must recognize the
Sub-Servicer's rights and obligations under such Sub-Servicing Agreement.
With the approval of the Master Servicer, a Sub-Servicer may delegate
its servicing obligations to third-party servicers, but such Sub-Servicer will
remain obligated under the related Sub-Servicing Agreement. Each Sub-Servicer
will be required to perform the customary functions of a servicer of mortgage
loans. Such functions generally include collecting payments from mortgagors or
obligors and remitting such collections to the Master Servicer; maintaining
hazard insurance policies as described herein and in any related Prospectus
Supplement, and filing and settling claims thereunder, subject in certain cases
to the right of the Master Servicer to approve in advance any such settlement;
maintaining escrow or impoundment accounts of mortgagors or obligors for
payment of taxes, insurance and other items required to be paid by the
mortgagor or obligor pursuant to the related Loan; processing assumptions or
substitutions, although, the Master Servicer is generally required to exercise
due-on-sale clauses to the extent
<PAGE>
such exercise is permitted by law and would not adversely affect insurance
coverage; attempting to cure delinquencies; supervising foreclosures;
inspecting and managing Properties under certain circumstances; maintaining
accounting records relating to the Loans; and, to the extent specified in the
related Prospectus Supplement, maintaining additional insurance policies or
credit support instruments and filing and settling claims thereunder. A
Sub-Servicer will also be obligated to make advances in respect of delinquent
installments of interest and/or principal on Loans, as described more fully
above under "--Payments on Loans; Deposits to Security Account", and in respect
of certain taxes and insurance premiums not paid on a timely basis by
mortgagors or obligors.
As compensation for its servicing duties, each Sub-Servicer will be
entitled to a monthly servicing fee (to the extent the scheduled payment on the
related Loan has been collected) in the amount set forth in the related
Prospectus Supplement. Each Sub-Servicer is also entitled to collect and
retain, as part of its servicing compensation, any prepayment or late charges
provided in the Mortgage Note or related instruments. Each Sub-Servicer will be
reimbursed by the Master Servicer for certain expenditures which it makes,
generally to the same extent the Master Servicer would be reimbursed under the
Agreement. The Master Servicer may purchase the servicing of Loans if the
Sub-Servicer elects to release the servicing of such Loans to the Master
Servicer. See "--Servicing and Other Compensation and Payment of Expenses"
below.
Each Sub-Servicer may be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Sub-Servicer in its servicing
capacity. Each Sub-Servicer will be required to maintain a fidelity bond and an
errors and omissions policy with respect to its officers, employees and other
persons acting on its behalf or on behalf of the Master Servicer.
Each Sub-Servicer will be required to service each Loan pursuant to
the terms of the Sub-Servicing Agreement for the entire term of such Loan,
unless the Sub-Servicing Agreement is earlier terminated by the Master Servicer
or unless servicing is released to the Master Servicer. The Master Servicer may
terminate a Sub-Servicing Agreement without cause, upon written notice to the
Sub-Servicer in the manner specified in such Sub-Servicing Agreement.
The Master Servicer may agree with a Sub-Servicer to amend a
Sub-Servicing Agreement or, upon termination of the Sub-Servicing Agreement,
the Master Servicer may act as servicer of the related Loans or enter into new
Sub-Servicing Agreements with other Sub-Servicers. If the Master Servicer acts
as servicer, it will not assume liability for the representations and
warranties of the Sub-Servicer which it replaces. Each Sub-Servicer must be a
Seller or meet the standards for becoming a Seller or have such servicing
experience as to be otherwise satisfactory to the Master Servicer and the
Depositor. The Master Servicer will make reasonable efforts to have the new
Sub-Servicer assume liability for the representations and warranties of the
terminated Sub-Servicer, but no assurance can be given that such an assumption
will occur. In the event of such an assumption, the Master Servicer may in the
exercise of its business judgment release the terminated Sub-Servicer from
liability in respect of such representations and warranties. Any amendments to
a Sub-Servicing Agreement or new Sub-Servicing Agreements may contain
provisions different from those which are in effect in the original
Sub-Servicing Agreement. However, each Agreement will provide that any such
amendment or new agreement may not be inconsistent with or violate such
Agreement.
<PAGE>
Collection Procedures
The Master Servicer, directly or through one or more Sub-Servicers,
will make reasonable efforts to collect all payments called for under the Loans
and will, consistent with each Agreement and any Pool Insurance Policy, Primary
Mortgage Insurance Policy, FHA Insurance, VA Guaranty Policy and Bankruptcy
Bond or alternative arrangements, follow such collection procedures as are
customary with respect to loans that are comparable to the Loans. Consistent
with the above, the Master Servicer may, in its discretion, (i) waive any
assumption fee, late payment or other charge in connection with a Loan and (ii)
to the extent not inconsistent with the coverage of such Loan by a Pool
Insurance Policy, Primary Mortgage Insurance Policy, FHA Insurance, VA Guaranty
or Bankruptcy Bond or alternative arrangements, if applicable, arrange with a
borrower a schedule for the liquidation of delinquencies running for no more
than 125 days after the applicable due date for each payment. Both the
Sub-Servicer and the Master Servicer may be obligated to make Advances during
any period of such an arrangement.
Except as otherwise specified in the related Prospectus Supplement, in
any case in which property securing a Loan has been, or is about to be,
conveyed by the mortgagor or obligor, the Master Servicer will, to the extent
it has knowledge of such conveyance or proposed conveyance, exercise or cause
to be exercised its rights to accelerate the maturity of such Loan under any
due-on-sale clause applicable thereto, but only if the exercise of such rights
is permitted by applicable law. If these conditions are not met or if the
Master Servicer reasonably believes it is unable under applicable law to
enforce such due-on-sale clause, or the Master Servicer will enter into or
cause to be entered into an assumption and modification agreement with the
person to whom such property has been or is about to be conveyed, pursuant to
which such person becomes liable for repayment of the Loan and, to the extent
permitted by applicable law, the mortgagor remains liable thereon. Any fee
collected by or on behalf of the Master Servicer for entering into an
assumption agreement will be retained by or on behalf of the Master Servicer as
additional servicing compensation. See "Certain Legal Aspects of the
Loans--Due-on-Sale Clauses". In connection with any such assumption, the terms
of the related Loan may not be changed.
Hazard Insurance
Except as otherwise specified in the related Prospectus Supplement,
the Master Servicer will require the mortgagor or obligor on each Loan to
maintain a hazard insurance policy providing for no less than the coverage of
the standard form of fire insurance policy with extended coverage customary for
the type of Property in the state in which such Property is located. All
amounts collected by the Master Servicer under any hazard policy (except for
amounts to be applied to the restoration or repair of the Property or released
to the mortgagor or obligor in accordance with the Master Servicer's normal
servicing procedures) will be deposited in the related Security Account. In the
event that the Master Servicer maintains a blanket policy insuring against
hazard losses on all the Loans comprising part of a Trust Fund, it will
conclusively be deemed to have satisfied its obligation relating to the
maintenance of hazard insurance. Such blanket policy may contain a deductible
clause, in which case the Master Servicer will be required to deposit from its
own funds into the related Security Account the amounts which would have been
deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements securing a Loan by
fire, lightning, explosion,
<PAGE>
smoke, windstorm and hail, riot, strike and civil commotion, subject to the
conditions and exclusions particularized in each policy. Although the policies
relating to the Loans may have been underwritten by different insurers under
different state laws in accordance with different applicable forms and
therefore may not contain identical terms and conditions, the basic terms
thereof are dictated by respective state laws, and most such policies typically
do not cover any physical damage resulting from the following: war, revolution,
governmental actions, floods and other water-related causes, earth movement
(including earthquakes, landslides and mud flows), nuclear reactions, wet or
dry rot, vermin, rodents, insects or domestic animals, theft and, in certain
cases, vandalism. The foregoing list is merely indicative of certain kinds of
uninsured risks and is not intended to be all inclusive. If the Property
securing a Loan is located in a federally designated special flood area at the
time of origination, the Master Servicer will require the mortgagor or obligor
to obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Loans
typically contain a clause which in effect requires the insured at all time to
carry insurance of a specified percentage of the full replacement value of the
insured property in order to recover the full amount of any partial loss. If
the insured's coverage falls below this specified percentage, then the
insurer's liability in the event of partial loss will not exceed the larger of
(i) the actual cash value (generally defined as replacement cost at the time
and place of loss, less physical depreciation) of the improvements damaged or
destroyed or (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements. Since the amount of hazard insurance the Master Servicer may
cause to be maintained on the improvements securing the Loans declines as the
principal balances owing thereon decrease, and since improved real estate
generally has appreciated in value over time in the past, the effect of this
requirement in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damaged property. If specified in the
related Prospectus Supplement, a special hazard insurance policy will be
obtained to insure against certain of the uninsured risks described above. See
"Credit Enhancement--Special Hazard Insurance Policies" herein.
If the Property securing a defaulted Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged Property, the Master Servicer is not required to expend its own funds
to restore the damaged Property unless it determines (i) that such restoration
will increase the proceeds to Securityholders on liquidation of the Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
If recovery on a defaulted Loan under any related Insurance Policy is
not available for the reasons set forth in the preceding paragraph, or if the
defaulted Loan is not covered by an Insurance Policy, the Master Servicer will
be obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Loan. If the proceeds of any liquidation of the Property securing the defaulted
Loan are less than the principal balance of such Loan plus interest accrued
thereon that is payable to Securityholders, the Trust Fund will realize a loss
in the amount of such difference plus the aggregate of expenses incurred by the
Master Servicer in connection with such proceedings and which are reimbursable
under the Agreement. In the unlikely event that any such proceedings result in
a total recovery which is, after reimbursement to the Master Servicer of its
expenses, in excess of the principal balance of such Loan plus interest accrued
thereon that is payable to
<PAGE>
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" herein.
Realization upon Defaulted Loans
Primary Mortgage Insurance Policies. The Master Servicer will maintain
or cause each Sub-Servicer to maintain, as the case may be, in full force and
effect, to the extent specified in the related Prospectus Supplement, a Primary
Mortgage Insurance Policy with regard to each Loan for which such coverage is
required. The Master Servicer will not cancel or refuse to renew any such
Primary Mortgage Insurance Policy in effect at the time of the initial issuance
of a Series of Securities that is required to be kept in force under the
applicable Agreement unless the replacement Primary Mortgage Insurance Policy
for such cancelled or nonrenewed policy is maintained with an insurer whose
claims-paying ability is sufficient to maintain the current rating of the
classes of Securities of such Series that have been rated.
Although the terms and conditions of primary mortgage insurance vary,
the amount of a claim for benefits under a Primary Mortgage Insurance Policy
covering a Loan will consist of the insured percentage of the unpaid principal
amount of the covered Loan and accrued and unpaid interest thereon and
reimbursement of certain expenses, less (i) all rents or other payments
collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to the Property, (ii)
hazard insurance proceeds in excess of the amount required to restore the
Property and which have not been applied to the payment of the Loan, (iii)
amounts expended but not approved by the issuer of the related Primary Mortgage
Insurance Policy (the "Primary Insurer"), (iv) claim payments previously made
by the Primary Insurer and (v) unpaid premiums.
Primary Mortgage Insurance Policies reimburse certain losses sustained
by reason of defaults in payments by borrowers. Primary Mortgage Insurance
Policies will not insure against, and exclude from coverage, a loss sustained
by reason of a default arising from or involving certain matters, including (i)
fraud or negligence in origination or servicing of the Loans,
<PAGE>
including misrepresentation by the originator, borrower or other persons
involved in the origination of the Loans; (ii) failure to construct the
Property subject to the Loan in accordance with specified plans; (iii) physical
damage to the Property; and (iv) the related Master Servicer or Sub-servicer
not being approved as a servicer by the Primary Insurer.
Recoveries Under a Primary Mortgage Insurance Policy. As conditions
precedent to the filing of or payment of a claim under a Primary Mortgage
Insurance Policy covering a Loan, the insured will be required to (i) advance
or discharge (a) all hazard insurance policy premiums and (b) as necessary and
approved in advance by the Primary Insurer, (1) real estate property taxes, (2)
all expenses required to maintain the related Property in at least as good a
condition as existed at the effective date of such Primary Mortgage Insurance
Policy, ordinary wear and tear excepted, (3) Property sales expenses, (4) any
outstanding liens (as defined in such Primary Mortgage Insurance Policy) on the
Property and (5) foreclosure costs, including court costs and reasonable
attorneys' fees; (ii) in the event of any physical loss or damage to the
Property, to have the Property restored and repaired to at least as good a
condition as existed at the effective date of such Primary Mortgage Insurance
Policy, ordinary wear and tear excepted; and (iii) tender to the Primary
Insurer good and merchantable title to and possession of the Property.
In those cases in which a Loan is serviced by a Sub-Servicer, the
Sub-Servicer, on behalf of itself, the Trustee and Securityholders, will
present claims to the Primary Insurer, and all collection thereunder will be
deposited in the Sub-Servicing Account. In all other cases, the Master
Servicer, on behalf of itself, the Trustee and the Securityholders, will
present claims to the insurer under each Primary Mortgage Insurance Policy, and
will take such reasonable steps as are necessary to receive payment or to
permit recovery thereunder with respect to defaulted Loans. As set forth above,
all collections by or on behalf of the Master Servicer under any Primary
Mortgage Insurance Policy and, when the Property has not been restored, the
hazard insurance policy, are to be deposited in the Security Account, subject
to withdrawal as heretofore described.
If the Property securing a defaulted Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged Property to a condition sufficient to permit recovery under the related
Primary Mortgage Insurance Policy, if any, the Master Servicer is not required
to expend its own funds to restore the damaged Property unless it determines
(i) that such restoration will increase the proceeds to Securityholders on
liquidation of the Loan after reimbursement of the Master Servicer for its
expenses and (ii) that such expenses will be recoverable by it from related
Insurance Proceeds or Liquidation Proceeds.
If recovery on a defaulted Loan under any related Primary Mortgage
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Loan is not covered by a Primary Mortgage
Insurance Policy, the Master Servicer will be obligated to follow or cause to
be followed such normal practices and procedures as it deems necessary or
advisable to realize upon the defaulted Loan. If the proceeds of any
liquidation of the Property securing the defaulted Loan are less than the
principal balance of such Loan plus interest accrued thereon that is payable to
Securityholders, the Trust Fund will realize a loss in the amount of such
difference plus the aggregate of expenses incurred by the Master Servicer in
connection with such proceedings and which are reimbursable under the
Agreement. In the unlikely event that any such proceedings result in a total
recovery which is, after reimbursement to the Master Servicer of its expenses,
in excess of the principal balance of such Loan plus interest accrued
<PAGE>
thereon that is payable to Securityholders, the Master Servicer will be
entitled to withdraw or retain from the Security Account amounts representing
its normal servicing compensation with respect to such Loan and, except as
otherwise specified in the Prospectus Supplement, amounts representing the
balance of such excess, exclusive of any amount required by law to be forwarded
to the related borrower, as additional servicing compensation.
Servicing and Other Compensation and Payment of Expenses
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer's primary servicing compensation with respect to a Series of
Securities will come from the monthly payment to it, out of each interest
payment on a Loan, of an amount equal to the percentage per annum specified in
the related Prospectus Supplement of the outstanding principal balance thereof.
Since the Master Servicer's primary compensation is a percentage of the
outstanding principal balance of each Loan, such amounts will decrease as the
Loans amortize. In addition to primary compensation, the Master Servicer or the
Sub-Servicers may be entitled to retain all assumption fees and late payment
charges, to the extent collected from borrowers, and, if so provided in the
related Prospectus Supplement, any prepayment penalties and any interest or
other income which may be earned on funds held in the Security Account or any
Sub-Servicing Account. Unless otherwise specified in the related Prospectus
Supplement, any Sub-Servicer will receive a portion of the Master Servicer's
primary compensation as its sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, the Master
Servicer will, unless otherwise specified in the related Prospectus Supplement,
pay from its servicing compensation certain expenses incurred in connection
with its servicing of the Loans, including, without limitation, payment of any
premium for any insurance policy, guaranty, surety or other form of credit
enhancement as specified in the related Prospectus Supplement, payment of the
fees and disbursements of the Trustee and independent accountants, payment of
expenses incurred in connection with distributions and reports to
Securityholders, and payment of any other expenses described in the related
Prospectus Supplement.
Evidence as to Compliance
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to the
Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with the Uniform Single Audit Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC, the
servicing by or on behalf of the Master Servicer of mortgage loans or private
asset backed securities, or under pooling and servicing agreements
substantially similar to each other (including the related Agreement) was
conducted in compliance with such agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, the Audit
Program for Mortgages serviced for FHLMC, or the Uniform Single Audit Program
for Mortgage Bankers, it is required to report. In rendering its statement such
firm may rely, as to matters relating to the direct servicing of Loans or
Private Asset Backed Securities by Sub-Servicers, upon comparable statements
for examinations conducted substantially in compliance with the Uniform Single
Audit Program for Mortgage Bankers or the Audit Program for Mortgages serviced
for FHLMC (rendered within one year of such statement) of firms of independent
public accountants with respect to the related Sub-Servicer.
<PAGE>
Each Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of
officers of the Master Servicer may be obtained by Securityholders of the
related Series without charge upon written request to the Master Servicer at
the address set forth in the related Prospectus Supplement.
Certain Matters Regarding the Master Servicer and the Depositor
The Master Servicer under each Agreement will be named in the related
Prospectus Supplement. The entity serving as Master Servicer may have normal
business relationships with the Depositor or the Depositor's affiliates.
Each Agreement will provide that the Master Servicer may not resign
from its obligations and duties under the Agreement except upon a determination
that its duties thereunder are no longer permissible under applicable law. The
Master Servicer may, however, be removed from its obligations and duties as set
forth in the Agreement. No such resignation will become effective until the
Trustee or a successor servicer has assumed the Master Servicer's obligations
and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer,
the Depositor nor any director, officer, employee, or agent of the Master
Servicer or the Depositor will be under any liability to the related Trust Fund
or Securityholders for any action taken or for refraining from the taking of
any action in good faith pursuant to the Agreement, or for errors in judgment;
provided, however, that neither the Master Servicer, the Depositor nor any such
person will be protected against any liability which would otherwise be imposed
by reason of wilful misfeasance or gross negligence in the performance of
duties thereunder or by reasons of reckless disregard of obligations and duties
thereunder. To the extent provided in the related Agreement, the Master
Servicer, the Depositor and any director, officer, employee or agent of the
Master Servicer or the Depositor may be entitled to indemnification by the
related Trust Fund and may be held harmless against any loss, liability or
expense incurred in connection with any legal action relating to the Agreement
or the Securities, other than any loss, liability or expense related to any
specific Loan or Loans (except any such loss, liability or expense otherwise
reimbursable pursuant to the Agreement) and any loss, liability or expense
incurred by reason of willful misfeasance or gross negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. In addition, each Agreement will provide
that neither the Master Servicer nor the Depositor will be under any obligation
to appear in, prosecute or defend any legal action which is not incidental to
its respective responsibilities under the Agreement and which in its opinion
may involve it in any expense or liability. The Master Servicer or the
Depositor may, however, in its discretion undertake any such action which it
may deem necessary or desirable with respect to the Agreement and the rights
and duties of the parties thereto and the interests of the Securityholders
thereunder. In such event, the legal expenses and costs of such action and any
liability resulting therefrom will be expenses, costs and liabilities of the
Trust Fund and the Master Servicer or the Depositor, as the case may be, will
be entitled to be reimbursed therefor out of funds otherwise distributable to
Securityholders.
<PAGE>
Except as otherwise specified in the related Prospectus Supplement,
any person into which the Master Servicer may be merged or consolidated, or any
person resulting from any merger or consolidation to which the Master Servicer
is a party, or any person succeeding to the business of the Master Servicer,
will be the successor of the Master Servicer under each Agreement.
Events of Default; Rights upon Event of Default
Pooling and Servicing Agreement; Servicing Agreement. Except as
otherwise specified in the related Prospectus Supplement, Events of Default
under each Agreement will consist of (i) any failure by the Master Servicer to
distribute or cause to be distributed to Securityholders of any class any
required payment (other than an Advance) which continues unremedied for five
business days after the giving of written notice of such failure to the Master
Servicer by the Trustee or the Depositor, or to the Master Servicer, the
Depositor and the Trustee by the holders of Securities of such class evidencing
not less than 25% of the aggregate Percentage Interests evidenced by such
class; (ii) any failure by the Master Servicer to make an Advance as required
under the Agreement, unless cured as specified therein; (iii) any failure by
the Master Servicer duly to observe or perform in any material respect any of
its other covenants or agreements in the Agreement which continues unremedied
for thirty days after the giving of written notice of such failure to the
Master Servicer by the Trustee or the Depositor, or to the Master Servicer, the
Depositor and the Trustee by the holders of Securities of any class evidencing
not less than 25% of the aggregate Percentage Interests constituting such
class; and (iv) certain events of insolvency, readjustment of debt, marshalling
of assets and liabilities or similar proceeding and certain actions by or on
behalf of the Master Servicer indicating its insolvency, reorganization or
inability to pay its obligations.
If specified in the related Prospectus Supplement, the Agreement will
permit the Trustee to sell the Trust Fund Assets and the other assets of the
Trust Fund in the event that payments in respect thereto are insufficient to
make payments required in the Agreement. The assets of the Trust Fund will be
sold only under the circumstances and in the manner specified in the related
Prospectus Supplement.
So long as an Event of Default under an Agreement remains unremedied,
the Depositor or the Trustee may, and at the direction of holders of Securities
of any class evidencing not less than 51% of the aggregate Percentage Interests
constituting such class and under such other circumstances as may be specified
in such Agreement, the Trustee shall, terminate all of its rights and
obligations of the Master Servicer under the Agreement relating to such Trust
Fund and in and to the Trust Fund Assets, whereupon the Trustee will succeed to
all of the responsibilities, duties and liabilities of the Master Servicer
under the Agreement, including, if specified in the related Prospectus
Supplement, the obligation to make advances, and will be entitled to similar
compensation arrangements. In the event that the Trustee is unwilling or unable
so to act, it may appoint, or petition a court of competent jurisdiction for
the appointment of, a mortgage loan servicing institution with a net worth of a
least $10,000,000 to act as successor to the Master Servicer under the
Agreement. Pending such appointment, the Trustee is obligated to act in such
capacity. The Trustee and any such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
payable to the Master Servicer under the Agreement.
<PAGE>
No Securityholder, solely by virtue of such holder's status as a
Securityholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Securities of any class of such Series evidencing not less than 25% of the
aggregate Percentage Interests constituting such class have made written
request upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity, and
the Trustee for 60 days has neglected or refused to institute any such
proceeding.
Indenture. Except as otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for five (5) days or more in the payment of any
principal of or interest on any Note of such Series; (ii) failure to perform
any other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of thirty (30) days after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iii) any representation or warranty made by the Depositor or the Trust Fund in
the Indenture or in any certificate or other writing delivered pursuant thereto
or in connection therewith with respect to or affecting such Series having been
incorrect in a material respect as of the time made, and such breach is not
cured within thirty (30) days after notice thereof is given in accordance with
the procedures described in the related Prospectus Supplement; (iv) certain
events of bankruptcy, insolvency, receivership or liquidation of the Depositor
or the Trust Fund; or (v) any other Event of Default provided with respect to
Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, either the Trustee or the holders of
a majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount (or, if the Notes of that Series have a
Pass-Through Rate of 0%, such portion of the principal amount as may be
specified in the terms of that Series, as provided in the related Prospectus
Supplement) of all the Notes of such Series to be due and payable immediately.
Such declaration may, under certain circumstances, be rescinded and annulled by
the holders of more than 50% of the Percentage Interests of the Notes of such
Series.
If, following an Event of Default with respect to any Series of Notes,
the Notes of such Series have been declared to be due and payable, the Trustee
may, in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration
of acceleration if such collateral continues to provide sufficient funds for
the payment of principal of and interest on the Notes of such Series as they
would have become due if there had not been such a declaration. In addition,
the Trustee may not sell or otherwise liquidate the collateral securing the
Notes of a Series following an Event of Default, unless (a) the holders of 100%
of the Percentage Interests of the Notes of such Series consent to such sale,
(b) the proceeds of such sale or liquidation are sufficient to pay in full the
principal of and accrued interest, due and unpaid, on the outstanding Notes of
such Series at the date of such sale or (c) the Trustee determines that such
collateral would not be sufficient on an ongoing basis to make all payments on
such Notes as such payments would have become due if such Notes had not been
declared due and payable, and the Trustee obtains the consent of the holders of
66 2/3% of the Percentage Interests of each Class of Notes of such Series.
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Except as otherwise specified in the related Prospectus Supplement, in
the event the principal of the Notes of a Series is declared due and payable,
as described above, the holders of any such Notes issued at a discount from par
may be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default shall occur and be continuing with
respect to a Series of Notes, the Trustee shall be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of Notes of such Series, unless such holders
offered to the Trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying with
such request or direction. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, the holders of a majority of
the then aggregate outstanding amount of the Notes of such Series shall have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee or exercising any trust or power conferred
on the Trustee with respect to the Notes of such Series, and the holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may, in certain cases, waive any default with respect thereto, except a default
in the payment of principal or interest or a default in respect of a covenant
or provision of the Indenture that cannot be modified without the waiver or
consent of all the holders of the outstanding Notes of such Series affected
thereby.
Amendment
Except as otherwise specified in the related Prospectus Supplement,
each Agreement may be amended by the Depositor, the Master Servicer and the
Trustee, without the consent of any of the Securityholders, (i) to cure any
ambiguity; (ii) to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein; or (iii) to make
any other revisions with respect to matters or questions arising under the
Agreement which are not inconsistent with the provisions thereof, provided that
such action will not adversely affect in any material respect the interests of
any Securityholder. In addition, to the extent provided in the related
Agreement, an Agreement may be amended without the consent of any of the
Securityholders, to change the manner in which the Security Account is
maintained, provided that any such change does not adversely affect the then
current rating on the class or classes of Securities of such Series that have
been rated. In addition, if a REMIC election is made with respect to a Trust
Fund, the related Agreement may be amended to modify, eliminate or add to any
of its provisions to such extent as may be necessary to maintain the
qualification of the related Trust Fund as a REMIC, provided that the Trustee
has received an opinion of counsel to the effect that such action is necessary
or helpful to maintain such qualification. Except as otherwise specified in the
related Prospectus Supplement, each Agreement may also be amended by the
Depositor, the Master Servicer and the Trustee with consent of holders of
Securities of such Series evidencing not less than 66% of the aggregate
Percentage Interests of each class affected thereby for the purpose of adding
any provisions to or changing in an manner or eliminating any of the provisions
of the Agreement or of modifying in any manner the rights of the holders of the
related Securities; provided, however, that no such amendment may (i) reduce in
any manner the amount of or delay the timing of, payments received on Loans
which are required to be distributed on any Security without the consent of the
holder of such Security, or (ii) reduce the aforesaid percentage of Securities
of any class of holders which are required to
<PAGE>
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.
Termination; 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" herein), from
the related Trust Fund of all of the remaining Trust Fund Assets and all
property acquired in respect of such Trust Fund Assets.
Unless otherwise specified by the related Prospectus Supplement, any
such purchase of Trust Fund Assets and property acquired in respect of Trust
Fund Assets evidenced by a Series of Securities will be made at the option of
the Master Servicer or, if applicable, such holder of the REMIC residual
interest, at a price, and in accordance with the procedures, specified in the
related Prospectus Supplement. The exercise of such right will effect early
retirement of the Securities of that Series, but the right of the Master
Servicer or, if applicable, such holder of the REMIC residual interest, to so
purchase is subject to the principal balance of the related Trust Fund Assets
being less than the percentage specified in the related Prospectus Supplement
of the aggregate principal balance of the Trust Fund Assets at the Cut-off Date
for the Series. The foregoing is subject to the provision that if a REMIC
election is made with respect to a Trust Fund, any repurchase pursuant to
clause (ii) above will be made only in connection with a "qualified
liquidation" of the REMIC within the meaning of Section 860F(g)(4) of the Code.
Indenture. The Indenture will be discharged with respect to a Series
of Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes
of such Series or, with certain limitations, upon deposit with the Trustee of
funds sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture
will provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect
of the Notes of such Series (except for certain obligations relating to
temporary Notes and exchange of Notes, to register the transfer of or exchange
Notes of such Series, to replace stolen, lost or mutilated Notes of such
Series, to maintain paying agencies and to hold monies for payment in trust)
upon the deposit with the Trustee, in trust, of money and/or direct obligations
of or obligations guaranteed by the United States of America which through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of and
each installment of
<PAGE>
interest on the Notes of such Series on the last scheduled Distribution Date
for such Notes and any installment of interest on such Notes in accordance with
the terms of the Indenture and the Notes of such Series. In the event of any
such defeasance and discharge of Notes of such Series, holders of Notes of such
Series would be able to look only to such money and/or direct obligations for
payment of principal and interest, if any, on their Notes until maturity.
The Trustee
The Trustee under each Agreement will be named in the applicable
Prospectus Supplement. The commercial bank or trust company serving as Trustee
may have normal banking relationships with the Depositor, the Master Servicer
and any of their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the Loans. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Loans is situated. The summaries are qualified in their
entirety by reference to the applicable federal laws and the appropriate laws
of the states in which Loans may be originated.
General
The Loans for a Series may be secured by deeds of trust, mortgages,
security deeds or deeds to secure debt, depending upon the prevailing practice
in the state in which the property subject to the loan is located. A mortgage
creates a lien upon the real property encumbered by the mortgage, which lien is
generally not prior to the lien for real estate taxes and assessments. Priority
between mortgages depends on their terms and generally on the order of
recording with a state or county office. There are two parties to a mortgage,
the mortgagor, who is the borrower and owner of the mortgaged property, and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. Although a deed of
trust is similar to a mortgage, a deed of trust formally has three parties, the
borrower-property owner called the trustor (similar to a mortgagor), a lender
(similar to a mortgagee) called the beneficiary, and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale,
to the trustee to secure payment of the obligation. A security deed and a deed
to secure debt are special types of deeds which indicate on their face that
they are granted to secure an underlying debt. By executing a security deed or
deed to secure debt, the grantor conveys title to, as opposed to merely
creating a lien upon, the subject property to the grantee until such time as
the underlying debt is repaid. The trustee's authority under a deed of trust,
the mortgagee's authority under a mortgage and the grantee's authority under a
security deed or deed to secure debt are governed by law and, with respect to
some deeds of trust, the directions of the beneficiary.
<PAGE>
Foreclosure/Repossession
Foreclosure of a deed of trust is generally accomplished by a
non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In addition to
any notice requirements contained in a deed of trust, in some states, the
trustee must record a notice of default and send a copy to the
borrower-trustor, to any person who has recorded a request for a copy of any
notice of default and notice of sale, to any successor in interest to the
borrower-trustor, to the beneficiary of any junior deed of trust and to certain
other persons. In general, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender. After
the reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. If the
deed of trust is not reinstated, a notice of sale must be posted in a public
place and, in most states, published for a specific period of time in one or
more newspapers. In addition, some state laws require that a copy of the notice
of sale be posted on the property and sent to all parties having an interest in
the real property.
Foreclosure of a mortgage is generally accomplished by judicial
action. The action is initiated by the service of legal pleadings upon all
parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings are often not contested by any of the
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to
conduct the sale of the property. In some states, mortgages may also be
foreclosed by advertisement, pursuant to a power of sale provided in the
mortgage.
Although foreclosure sales are typically public sales, frequently no
third party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding
under the loan, accrued and unpaid interest and the expenses of foreclosure in
which event the mortgagor's debt will be extinguished or the lender may
purchase for a lesser amount in order to preserve its right against a borrower
to seek a deficiency judgment in states where such judgment is available.
Thereafter, subject to the right of the borrower in some states to remain in
possession during the redemption period, the lender will assume the burden of
ownership, including obtaining hazard insurance and making such repairs at its
own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of any mortgage guaranty insurance proceeds.
Courts have imposed general equitable principles upon foreclosure,
which are generally designed to mitigate the legal consequences to the borrower
of the borrower's defaults under the
<PAGE>
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" below.
Environmental Risks
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and safety.
These include laws and regulations governing air pollutant emissions, hazardous
and toxic substances, impacts to wetlands, leaks from underground storage
tanks, and the management, removal and disposal of lead- and
asbestos-containing materials. In certain circumstances, these laws and
regulations impose obligations on the owners or operators of residential
properties such as those subject to the Loans. The failure to comply with such
laws and regulations may result in fines and penalties.
Moreover, under various federal, state and local laws and regulations,
an owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs. Such
liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of such substances, and could exceed
the value of the property and the aggregate assets of the owner or operator. In
addition, persons who transport or dispose of hazardous substances, or arrange
for the transportation, disposal or treatment of hazardous substances, at
off-site locations may also be held liable if there are releases or threatened
releases of hazardous substances at such off-site locations.
In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), contamination of property may give rise to a lien on the property
to assure the payment of the costs of clean-up. In several states, such a lien
has priority over the lien of an existing mortgage against such property. Under
CERCLA, such a lien is subordinate to pre-existing, perfected security
interests.
Under the laws of some states, and under CERCLA, there is a
possibility that a lender may be held liable as an "owner" or "operator" for
costs of addressing releases or threatened releases of hazardous substances at
a property, regardless of whether or not the environmental damage or threat was
caused by a current or prior owner or operator. CERCLA imposes liability for
such costs on any and all "responsible parties," including owners or operators.
However, CERCLA excludes from the definition of "owner or operator" a secured
creditor who holds indicia of ownership primarily to protect its security
interest but does not "participate in the management" of the property (the
"secured creditor exclusion"). Thus, if a lender's activities begin to encroach
on the actual management of a contaminated facility or property, the lender may
incur liability as an "owner or operator" under CERCLA. Similarly, if a lender
forecloses
<PAGE>
and takes title to a contaminated facility or property, the lender may incur
CERCLA liability in various circumstances, including, but not limited to, when
it holds the facility or property as an investment (including leasing the
facility or property to a third party), or fails to market the property in a
timely fashion.
Whether actions taken by a lender would constitute such participation
in the management of a property, so that the lender would lose the protection
of the secured creditor exclusion, has been a matter of judicial interpretation
of the statutory language, and court decisions have historically been
inconsistent. In 1990, the United States Court of Appeals for the Eleventh
Circuit suggested, in United States v. Fleet Factors Corp., that the mere
capacity of the lender to influence a borrower's decisions regarding disposal
of hazardous substances was sufficient participation in the management of the
borrower's business to deny the protection of the secured creditor exclusion to
the lender, regardless of whether the lender actually exercised such influence.
Other judicial decisions did not interpret the secured creditor exclusion as
narrowly as did the Eleventh Circuit.
This ambiguity appears to have been resolved by the enactment of the
Asset Conservation, Lender Liabiltiy and Deposit Insurance Protection Act of
1996 (the "Asset Conservation Act"), which took effect on September 30, 1996.
The Asset Conservation Act provides that in order to be deemed to have
participated in the management of a secured property, a lender must actually
participate in the operational affairs of the property or of the borrower. The
Asset Conservation Act also provides that participation in the management of
the property does not include "merely having the capacity to influence, or
unexercised right to control" operations. Rather, a lender will lose the
protection of the secured creditor exclusion only if it exercises
decision-making control over the borrower's environmental compliance and
hazardous substance handling and disposal practices, or assumes day-to-day
management of all operational functions of the secured property.
If a lender is or becomes liable, it can bring an action for
contribution against any other "responsible parties," including a previous
owner or operator, who crated the environmental hazard, but those persons or
entities may be bankrupt or otherwise judgment proof. The costs associated with
environmental cleanup may be substantial. It is conceivable that such costs
arising from the circumstances set forth above would result in a loss to
Certificateholders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks
(except heating oil tanks). The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under such rule, a holder
of a security interest in an underground storage tank or real property
containing an underground storage tank is not considered an operator of the
underground storage tank as long as petroleum is not added to, stored in or
dispensed from the tank. Moreover, under the Asset Conservation Act, the
protections accorded to lenders under CERCLA are also accorded to holders of
security interests in underground petroleum storage tanks. It should be noted,
however, that liability for cleanup of petroleum contamination may be governed
by state law, which may not provide for any specific protection for secured
creditors.
<PAGE>
The Asset Conservation Act specifically addresses 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 Asset Conservation
Act, however, does not clearly address the potential liability of lenders who
retain legal title to a property and enter into an agreement with the purchaser
for the payment of the purchase price and interest over the term of the
contract, such as the Trust Fund does in connection with the Installment
Contracts.
If a lender (including a lender under an Installment Contract) is or
becomes liable under CERCLA, it may be authorized to bring a statutory action
for contribution against any other "responsible parties", including a previous
owner or operator. However, such persons or entities may be bankrupt or
otherwise judgment proof, and the costs associated with environmental cleanup
and related actions may be substantial. Moreover, some state laws imposing
liability for addressing hazardous substances do not contain exemptions from
liability for lenders. Whether the costs of addressing a release or threatened
release at a property pledged as collateral for one of the Loans (or at a
property subject to an Installment Contract), would be imposed on the Trust
Fund, and thus occasion a loss to the Securityholders, therefore depends on the
specific factual and legal circumstances at issue.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption would defeat the title
of any purchaser from the lender subsequent to foreclosure or sale under a deed
of trust. Consequently, the practical effect of the redemption right is to
force the lender to retain the property and pay the expenses of ownership until
the redemption period has run. In some states, there is no right to redeem
property after a trustee's sale under a deed of trust.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have adopted statutory prohibitions restricting the
right of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or certain other foreclosure proceedings. A deficiency judgment
is a personal judgment against the borrower equal in most cases to the
difference between the amount due to the lender and the fair market value of
the real property sold at the foreclosure sale. Other statutes require the
beneficiary or mortgagee to exhaust the security afforded under a deed of trust
or mortgage by foreclosure in an attempt to satisfy the full debt before
bringing a personal action against the borrower. In certain other states, the
lender has the option of bringing a personal action against the borrower on the
debt without first exhausting such security; however, in some of these states,
the lender, following judgment on such personal action, may be deemed to have
elected a remedy and may be precluded from exercising remedies with respect to
the security. Consequently, the practical effect of the election requirement,
when applicable, is that lenders will usually proceed first against the
security rather than bringing a personal action against the borrower. Finally,
other statutory
<PAGE>
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 Relief Act (as defined below) and state laws affording relief to debtors,
may interfere with or affect the ability of the secured mortgage lender to
realize upon its security. For example, in a proceeding under the federal
Bankruptcy Code, a lender may not foreclose on the Property without the
permission of the bankruptcy court. The rehabilitation plan proposed by the
debtor may provide, if the Property is not the debtor's principal residence and
the court determines that the value of the Property is less than the principal
balance of the mortgage loan, for the reduction of the secured indebtedness to
the value of the Property as of the date of the commencement of the bankruptcy,
rendering the lender a general unsecured creditor for the difference, and also
may reduce the monthly payments due under such mortgage loan, change the rate
of interest and alter the mortgage loan repayment schedule. The effect of any
such proceedings under the federal Bankruptcy Code, including but not limited
to any automatic stay, could result in delays in receiving payments on the
Loans underlying a Series of Securities and possible reductions in the
aggregate amount of such payments.
The federal tax laws provide priority to certain tax liens over the
lien of a mortgage or secured party. Numerous federal and state consumer
protection laws impose substantive requirements upon mortgage lenders in
connection with the origination, servicing and enforcement of loans secured by
Single Family Properties. These laws include the federal Truth-in-Lending Act,
Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes and
regulations. These federal and state laws impose specific statutory liabilities
upon lenders who fail to comply with the provisions of the law. In some cases,
this liability may affect assignees of the loans or contracts.
Due-on-Sale Clauses
Unless otherwise specified in the related Prospectus Supplement, each
conventional Loan will contain a due-on-sale clause which will provide that if
the mortgagor or obligor sells, transfers or conveys the Property, the loan or
contract may be accelerated by the mortgagee or secured party. The Garn-St.
Germain Depository Institutions Act of 1982 (the "Garn-St. Germain Act"),
subject to certain exceptions, preempts state constitutional, statutory and
case law prohibiting the enforcement of due-on-sale clauses. As a result,
due-on-sale clauses have become generally enforceable except in those states
whose legislatures exercised their authority to regulate the enforceability of
such clauses with respect to mortgage loans that were (i) originated or assumed
during the "window period" under the Garn-St. Germain Act which ended in all
cases not later than October 15, 1982, and (ii) originated by lenders other
than national banks, federal savings institutions and federal credit unions.
FHLMC has taken the position in its published mortgage servicing standards
that, out of a total of eleven "window period states," five states (Arizona,
Michigan, Minnesota, New Mexico and Utah) have enacted statutes extending, on
various terms and for varying periods, the prohibition on enforcement of
due-on-sale clauses with respect to certain categories of window period loans.
Also, the Garn-St.
<PAGE>
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.
<PAGE>
Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his
defaults under the loan documents. Examples of judicial remedies that have been
fashioned include judicial requirements that the lender undertake affirmative
and expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under security agreements receive notices in addition to
the statutorily-prescribed minimums. For the most part, these cases have upheld
the notice provisions as being reasonable or have found that, in some cases
involving the sale by a trustee under a deed of trust or by a mortgagee under a
mortgage having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V") provides that state
usury limitations shall not apply to certain types of residential first
mortgage loans originated by certain lenders after March 31, 1980. The Office
of Thrift Supervision, as successor to the Federal Home Loan Bank Board, is
authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V. The statute authorized the states to
reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision which expressly rejects an application of the federal
law. Fifteen states adopted such a law prior to the April 1, 1993 deadline. In
addition, even where Title V is not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
The Home Improvement Contracts
General. The Home Improvement Contracts, other than those Home
Improvement Contracts that are unsecured or secured by mortgages on real estate
(such Home Improvement Contracts are hereinafter referred to in this section as
"contracts") generally are "chattel paper" or constitute "purchase money
security interests" each as defined in the Uniform Commercial Code (the "UCC").
Pursuant to the UCC, the sale of chattel paper is treated in a manner similar
to perfection of a security interest in chattel paper. Under the related
Agreement, the Depositor will transfer physical possession of the contracts to
the Trustee or a designated custodian or may retain possession of the contracts
as custodian for the Trustee. In addition, the Depositor will make an
appropriate filing of a UCC-1 financing statement in the appropriate states to
give notice of the Trustee's ownership of the contracts. Unless otherwise
specified in the related Prospectus Supplement, the contracts will not be
stamped or otherwise marked to reflect their
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assignment from the Depositor to the Trustee. Therefore, if through negligence,
fraud or otherwise, a subsequent purchaser were able to take physical
possession of the contracts without notice of such assignment, the Trustee's
interest in the contracts could be defeated.
Security Interests in Home Improvements. The contracts that are
secured by the Home Improvements financed thereby grant to the originator of
such contracts a purchase money security interest in such Home Improvements to
secure all or part of the purchase price of such Home Improvements and related
services. A financing statement generally is not required to be filed to
perfect a purchase money security interest in consumer goods. Such purchase
money security interests are assignable. In general, a purchase money security
interest grants to the holder a security interest that has priority over a
conflicting security interest in the same collateral and the proceeds of such
collateral. However, to the extent that the collateral subject to a purchase
money security interest becomes a fixture, in order for the related purchase
money security interest to take priority over a conflicting interest in the
fixture, the holder's interest in such Home Improvement must generally be
perfected by a timely fixture filing. In general, a security interest does not
exist under the UCC in ordinary building material incorporated into an
improvement on land. Home Improvement Contracts that finance lumber, bricks,
other types of ordinary building material or other goods that are deemed to
lose such characterization upon incorporation of such materials into the
related property, will not be secured by a purchase money security interest in
the Home Improvement being financed.
Enforcement of Security Interest in Home Improvements. So long as the
Home Improvement has not become subject to the real estate law, a creditor can
repossess a Home Improvement securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a contract must give
the debtor a number of days' notice, which varies from 10 to 30 days depending
on the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit that the debtor may redeem
at or before such resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments, and in many cases
the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
Consumer Protection Laws. The so-called "Holder-in-Due Course" rule of
the Federal Trade Commission is intended to defeat the ability of the
transferor of a consumer credit contract which is the seller of goods which
gave rise to the transaction (and certain related lenders and assignees) to
transfer such contract free of notice of claims by the debtor thereunder. The
effect of this rule is to subject the assignee of such a contract to all claims
and defenses which the
<PAGE>
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 provides that, subject to the
following conditions, state usury limitations shall not apply to any contract
which is secured by a first lien on certain kinds of consumer goods. The
contracts would be covered if they satisfy certain conditions, among other
things, governing the terms of any prepayments, late charges and deferral fees
and requiring a 30-day notice period prior to instituting any action leading to
repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V was not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on loans covered by
Title V.
Installment Contracts
The Loans may also consist of installment contracts. Under an
installment contract ("Installment Contract") the seller (hereinafter referred
to in this section as the "lender") retains legal title to the property and
enters into an agreement with the purchaser hereinafter referred to in this
section as the "borrower") for the payment of the purchase price, plus
interest, over the term of such contract. Only after full performance by the
borrower of the contract is the lender obligated to convey title to the
property to the purchaser. As with mortgage or deed of trust financing, during
the effective period of the Installment Contract, the borrower is generally
responsible for maintaining the property in good condition and for paying real
estate taxes, assessments and hazard insurance premiums associated with the
property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his
or her right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The lender in
such a situation does not have to foreclose in order to obtain title to the
property, although in some cases a quiet title action is in order if the
borrower has filed the Installment Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Contracts from the harsh consequences of
forfeiture. Under such statutes, a judicial or
<PAGE>
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during
which the Installment Contract may be reinstated upon full payment of the
default amount and the borrower may have a post-foreclosure statutory
redemption right. In other states, courts in equity may permit a borrower with
significant investment in the property under an Installment Contract for the
sale of real estate to share in the proceeds of sale of the property after the
indebtedness is repaid or may otherwise refuse to enforce the forfeiture
clause. Nevertheless, generally speaking, the lender's procedures for obtaining
possession and clear title under an Installment Contract in a given state are
simpler and less time-consuming and costly than are the procedures for
foreclosing and obtaining clear title to a property subject to one or more
liens.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act"), a borrower who enters military
service after the origination of such borrower's Loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the Loan and is later called to active duty) may not be charged
interest above an annual rate of 6% during the period of such borrower's active
duty status, unless a court orders otherwise upon application of the lender. It
is possible that such interest rate limitation could have an effect, for an
indeterminate period of time, on the ability of the Master Servicer to collect
full amounts of interest on certain of the Loans. Any shortfall in interest
collections resulting from the application of the Relief Act could result in
losses to the Securityholders. The Relief Act also imposes limitations which
would impair the ability of the Master Servicer to foreclose on an affected
Loan during the borrower's period of active duty status. Moreover, the Relief
Act permits the extension of a Loan's maturity and the re-adjustment of its
payment schedule beyond the completion of military service. Thus, in the event
that such a Loan goes into default, there may be delays and losses occasioned
by the inability to realize upon the Property in a timely fashion.
Junior Mortgages; Rights of Senior Mortgagees
To the extent that the Loans comprising the Trust Fund for a Series
are secured by mortgages which are junior to other mortgages held by other
lenders or institutional investors, the rights of the Trust Fund (and therefore
the Securityholders), as mortgagee under any such junior mortgage, are
subordinate to those of any mortgagee under any senior mortgage. The senior
mortgagee has the right to receive hazard insurance and condemnation proceeds
and to cause the property securing the Loan to be sold upon default of the
mortgagor, thereby extinguishing the junior mortgagee's lien unless the junior
mortgagee asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior mortgage. A junior
mortgagee may satisfy a defaulted senior loan in full and, in some states, may
cure such default and bring the senior loan current, in either event adding the
amounts expended to the balance due on the junior loan. In most states, absent
a provision in the mortgage or deed of trust, no notice of default is required
to be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may
<PAGE>
determine. Thus, in the event improvements on the property are damaged or
destroyed by fire or other casualty, or in the event the property is taken by
condemnation, the mortgagee or beneficiary under underlying senior mortgages
will have the prior right to collect any insurance proceeds payable under a
hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the senior
mortgages. Proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, may be applied to the indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon
a failure of the mortgagor to perform any of these obligations, the mortgagee
is given the right under certain mortgages to perform the obligation itself, at
its election, with the mortgagor agreeing to reimburse the mortgagee for any
sums expended by the mortgagee on behalf of the mortgagor. All sums so expended
by the mortgagee become part of the indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make Revolving Credit Line Loans typically contains
a "future advance" clause, which provides, in essence, that additional amounts
advanced to or on behalf of the borrower by the beneficiary or lender are to be
secured by the deed of trust or mortgage. Any amounts so advanced after the
Cut-off Date with respect to any mortgage will not be included in the Trust
Fund. The priority of the lien securing any advance made under the clause may
depend in most states on whether the deed of trust or mortgage is called and
recorded as a credit line deed of trust or mortgage. If the beneficiary or
lender advances additional amounts, the advance is entitled to receive the same
priority as amounts initially advanced under the trust deed or mortgage,
notwithstanding the fact that there may be junior trust deeds or mortgages and
other liens which intervene between the date of recording of the trust deed or
mortgage and the date of the future advance, and notwithstanding that the
beneficiary or lender had actual knowledge of such intervening junior trust
deeds or mortgages and other liens at the time of the advance. In most states,
the trust deed or mortgage lien securing mortgage loans of the type which
includes home equity credit lines applies retroactively to the date of the
original recording of the trust deed or mortgage, provided that the total
amount of advances under the home equity credit line does not exceed the
maximum specified principal amount of the recorded trust deed or mortgage,
except as to advances made after receipt by the lender of a written notice of
lien from a judgment lien creditor of the trustor.
The Title I Program
General. Certain of the Loans contained in a Trust Fund may be loans
insured under the FHA Title I Credit Insurance program created pursuant to
Sections 1 and 2(a) of the National Housing Act of 1934 (the "Title I
Program"). Under the Title I Program, the FHA is authorized and empowered to
insure qualified lending institutions against losses on eligible loans. The
Title I Program operates as a coinsurance program in which the FHA insures up
to 90% of certain losses incurred on an individual insured loan, including the
unpaid principal balance of the loan, but only to the extent of the insurance
coverage available in the lender's FHA insurance coverage reserve account. The
owner of the loan bears the uninsured loss on each loan.
The types of loans which are eligible for insurance by the FHA under
the Title I Program include property improvement loans ("Property Improvement
Loans" or "Title I Loans"). A Property Improvement Loan or Title I Loan means a
loan made to finance actions or items that substantially protect or improve the
basic livability or utility of a property and includes single family
improvement loans.
There are two basic methods of lending or originating such loans which
include a "direct loan" or a "dealer loan". With respect to a direct loan, the
borrower makes application directly to a lender without any assistance from a
dealer, which application may be filled out by the borrower or by a person
acting at the direction of the borrower who does not have a financial interest
in the loan transaction, and the lender may disburse the loan proceeds solely
to the borrower or jointly to the borrower and other parties to the
transaction. With respect to a dealer loan, the dealer, who has a direct or
indirect financial interest in the loan transaction, assists the borrower in
preparing the loan application or otherwise assists the borrower in obtaining
the loan from the lender. The lender may disburse proceeds solely to the dealer
or the borrower or jointly to the borrower and the dealer or other parties to
the transaction. With respect to a dealer Title I Loan, a dealer may include a
seller, a contractor or supplier of goods or services.
Loans insured under the Title I Program are required to have fixed
interest rates and generally provide for equal installment payments due weekly,
biweekly, semi-monthly or monthly, except that a loan may be payable quarterly
or semi-annually where a borrower has an irregular flow of income. The first or
last payments (or both) may vary in amount but may not exceed 150% of the
regular installment payment, and the first payment may be due no later than two
months from the date of the loan. The note must contain a provision permitting
full or partial prepayment of the loan. The interest rate must be negotiated
and agreed to by the borrower and the lender and must be fixed for the term of
the loan and recited in the note. Interest on an insured loan must accrue from
the date of the loan and be calculated according to the actuarial method. The
lender must assure that the note and all other documents evidencing the loan
are in compliance with applicable federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence and
diligence to determine whether the borrower and any co-maker is solvent and an
acceptable credit risk, with a reasonable ability to make payments on the loan
obligation. The lender's credit application and review must determine whether
the borrower's income will be adequate to meet the periodic payments required
by the loan, as well as the borrower's other housing and recurring expenses,
which determination must be made in accordance with the expense-to-income
ratios published by the Secretary of HUD unless the lender determines and
documents in the loan file the existence of compensating factors concerning the
borrower's creditworthiness which support approval of the loan.
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the time
of approval by the lending institution (as is typically the case with other
federal loan programs). If, after a loan has been
<PAGE>
made and reported for insurance under the Title I Program, the lender discovers
any material misstatement of fact or that the loan proceeds have been misused
by the borrower, dealer or any other party, it shall promptly report this to
the FHA. In such case, provided that the validity of any lien on the property
has not been impaired, the insurance of the loan under the Title I Program will
not be affected unless such material misstatements of fact or misuse of loan
proceeds was caused by (or was knowingly sanctioned by) the lender or its
employees.
Requirements for Title I Loans. The maximum principal amount for Title
I Loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that such maximum
amount does not exceed $25,000 (or the current applicable amount) for a single
family property improvement loan. Generally, the term of a Title I Loan may not
be less than six months nor greater than 20 years and 32 days. A borrower may
obtain multiple Title I Loans with respect to multiple properties, and a
borrower may obtain more than one Title I Loan with respect to a single
property, in each case as long as the total outstanding balance of all Title I
Loans in the same property does not exceed the maximum loan amount for the type
of Title I Loan thereon having the highest permissible loan amount.
Borrower eligibility for a Title I Loan requires that the borrower
have at least a one-half interest in either fee simple title to the real
property, a lease thereof for a term expiring at least six months after the
final maturity of the Title I Loan or a recorded land installment contract for
the purchase of the real property. In the case of a Title I Loan with a total
principal balance in excess of $15,000, if the property is not occupied by the
owner, the borrower must have equity in the property being improved at least
equal to the principal amount of the loan, as demonstrated by a current
appraisal. Any Title I Loan in excess of $7,500 must be secured by a recorded
lien on the improved property which is evidenced by a mortgage or deed of trust
executed by the borrower and all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend such list of items and activities. With respect to any dealer Title I
Loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan, the lender is
required to obtain, promptly upon completion of the improvements but not later
than 6 months after disbursement of the loan proceeds with one 6 month
extension if necessary, a completion certificate, signed by the borrower. The
lender is required to conduct an on-site inspection on any Title I Loan where
the principal obligation is $7,500 or more, and on any direct Title I Loan
where the borrower fails to submit a completion certificate.
FHA Insurance Coverage. Under the Title I Program, the FHA establishes
an insurance coverage reserve account for each lender which has been granted a
Title I contract of insurance. The amount of insurance coverage in this account
is a maximum of 10% of the amount disbursed, advanced or expended by the lender
in originating or purchasing eligible loans registered with the FHA for Title I
insurance, with certain adjustments. The balance in the insurance coverage
reserve account is the maximum amount of insurance claims the FHA is required
to pay to the Title I lender. Loans to be insured under the Title I Program
will be registered for insurance by the FHA and the insurance coverage
attributable to such loans will be
<PAGE>
included in the insurance coverage reserve account for the originating or
purchasing lender following the receipt and acknowledgment by the FHA of a loan
report on the prescribed form pursuant to the Title I regulations. For each
eligible loan reported and acknowledged for insurance, the FHA charges a fee
(the "Premium"). For loans having a maturity of 25 months or less, the FHA
bills the lender for the entire Premium in an amount equal to the product of
0.50% of the original loan amount and the loan term. For home improvement loans
with a maturity greater than 25 months, each year that a loan is outstanding
the FHA bills the lender for a Premium in an amount equal to 0.50% of the
original loan amount. If a loan is prepaid during the year, the FHA will not
refund or abate the Premium paid for such year.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect
to loans insured under the lender's contract of insurance by (i) the amount of
the FHA insurance claims approved for payment relating to such insured loans
and (ii) the amount of insurance coverage attributable to insured loans sold by
the lender, and such insurance coverage may be reduced for any FHA insurance
claims rejected by the FHA. The balance of the lender's FHA insurance coverage
reserve account will be further adjusted as required under Title I or by the
FHA, and the insurance coverage therein may be earmarked with respect to each
or any eligible loans insured thereunder, if a determination is made by the
Secretary of HUD that it is in its interest to do so. Originations and
acquisitions of new eligible loans will continue to increase a lender's
insurance coverage reserve account balance by 10% of the amount disbursed,
advanced or expended in originating or acquiring such eligible loans registered
with the FHA for insurance under the Title I Program. The Secretary of HUD may
transfer insurance coverage between insurance coverage reserve accounts with
earmarking with respect to a particular insured loan or group of insured loans
when a determination is made that it is in the Secretary's interest to do so.
The lender may transfer (except as collateral in a bona fide
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an insured
loan is transferred with recourse or with a guaranty or repurchase agreement,
the FHA, upon receipt of written notification of the transfer of such loan in
accordance with the Title I regulations, will transfer from the transferor's
insurance coverage reserve account to the transferee's insurance coverage
reserve account an amount, if available, equal to 10% of the actual purchase
price or the net unpaid principal balance of such loan (whichever is less).
However, under the Title I Program not more than $5,000 in insurance coverage
shall be transferred to or from a lender's insurance coverage reserve account
during any October 1 to September 30 period without the prior approval of the
Secretary of HUD. Amounts which may be recovered by the Secretary of HUD after
payment of an insurance claim are not added to the amount of insurance coverage
in the related lender's insurance coverage reserve account.
Claims Procedures Under Title I. Under the Title I Program the lender
may accelerate an insured loan following a default on such loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full
<PAGE>
payment is due and reinstate the loan only if the borrower brings the loan
current, executes a modification agreement or agrees to an acceptable repayment
plan.
Following acceleration of maturity upon a secured Title I Loan, the
lender may either (a) proceed against the property under any security
instrument, or (b) make a claim under the lender's contract of insurance. If
the lender chooses to proceed against the property under a security instrument
(or if it accepts a voluntary conveyance or surrender of the property), the
lender may file an insurance claim only with the prior approval of the
Secretary of HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation of
the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims, where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any Title I Loan must be filed
with the FHA no later than 9 months after the date of default of such loan.
Concurrently with filing the insurance claim, the lender shall assign to the
United States of America the lender's entire interest in the loan note (or a
judgment in lien of the note), in any security held and in any claim filed in
any legal proceedings. If, at the time the note is assigned to the United
States, the Secretary has reason to believe that the note is not valid or
enforceable against the borrower, the FHA may deny the claim and reassign the
note to the lender. If either such defect is discovered after the FHA has paid
a claim, the FHA may require the lender to repurchase the paid claim and to
accept a reassignment of the loan note. If the lender subsequently obtains a
valid and enforceable judgment against the borrower, the lender may resubmit a
new insurance claim with an assignment of the judgment. Although the FHA may
contest any insurance claim and make a demand for repurchase of the loan at any
time up to two years from the date the claim was certified for payment and may
do so thereafter in the event of fraud or misrepresentation on the part of the
lender, the FHA has expressed an intention to limit the period of time within
which it will take such action to one year from the date the claim was
certified for payment.
Under the Title I Program the amount of an FHA insurance claim
payment, when made, is equal to the Claimable Amount, up to the amount of
insurance coverage in the lender's insurance coverage reserve account. For the
purposes hereof, the "Claimable Amount" means an amount equal to 90% of the sum
of: (a) the unpaid loan obligation (net unpaid principal and the uncollected
interest earned to the date of default) with adjustments thereto if the lender
has proceeded against property securing such loan; (b) the interest on the
unpaid amount of the loan obligation from the date of default to the date of
the claim's initial submission for payment plus 15 calendar days (but not to
exceed 9 months from the date of default), calculated at the rate of 7% per
annum; (c) the uncollected court costs; (d) the attorney's fees not to exceed
$500; and (e) the expenses for recording the assignment of the security to the
United States.
The Secretary of HUD may deny a claim for insurance in whole or in
part for any violations of the regulations governing the Title I Program;
however, the Secretary of HUD may waive such violations if it determines that
enforcement of the regulations would impose an injustice upon a lender which
has substantially complied with the regulations in good faith.
<PAGE>
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 REMIC under the Internal Revenue Code of 1986, as amended (the
"Code"); (iii) the Securities represent an ownership interest in some or all of
the assets included in the Trust Fund for a Series; or (iv) an election is made
to treat the Trust Fund relating to a particular Series of Certificates as a
partnership. The Prospectus Supplement for each Series of Securities will
specify how the Securities will be treated for federal income tax purposes and
will discuss whether a REMIC election, if any, will be made with respect to
such Series.
As used herein, the term "U.S. Person" means a citizen or resident of
the United States, a corporation, partnership or other entity created or
organized in or under the laws of the United States, any state thereof or the
District of Columbia (other than a partnership that is not treated as a United
States person under any applicable Treasury regulations), an estate whose
income is subject to U.S. federal income tax regardless of its source of
income, or a trust if a court within
<PAGE>
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 section 7701(a)(19)(C)(v) of the Code;
and (ii) Securities held by a real estate investment trust will constitute
"real estate assets" within the meaning of section 856(c)(4)(A) of the Code 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 section 856(c)(3)(B) of the Code.
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 through 1275 of the Code and the Treasury regulations issued
thereunder on February 2, 1994, as amended on June 11, 1996 (the "OID
Regulations"). A holder should be aware, however, that the OID Regulations do
not adequately address certain issues relevant to prepayable securities, such
as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. In the
opinion of Tax Counsel, a holder of a Debt Security must include such OID in
gross income as ordinary interest income as it accrues under a method taking
into account an economic accrual of the discount. In general, OID must be
included in income in advance of the receipt of the cash representing that
income. The amount of OID on a Debt Security will be considered to be zero if
it is less than a de minimis amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such class will be treated as
the fair
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market value of such class on the Closing Date. The issue price of a Debt
Security also includes the amount paid by an initial Debt Security holder for
accrued interest that relates to a period prior to the issue date of the Debt
Security. The stated redemption price at maturity of a Debt Security includes
the original principal amount of the Debt Security, but generally will not
include distributions of interest if such distributions constitute "qualified
stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as
described below) provided that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Debt
Security. The OID Regulations state that interest payments are unconditionally
payable only if a late payment or nonpayment is expected to be penalized or
reasonable remedies exist to compel payment. Certain Debt Securities may
provide for default remedies in the event of late payment or nonpayment of
interest. In the opinion of Tax Counsel, the interest on such Debt Securities
will be unconditionally payable and constitute qualified stated interest, not
OID. However, absent clarification of the OID Regulations, where Debt
Securities do not provide for default remedies, the interest payments will be
included in the Debt Security's stated redemption price at maturity and taxed
as OID. Interest is payable at a single fixed rate only if the rate
appropriately takes into account the length of the interval between payments.
Distributions of interest on Debt Securities with respect to which deferred
interest will accrue, will not constitute qualified stated interest payments,
in which case the stated redemption price at maturity of such Debt Securities
includes all distributions of interest as well as principal thereon. Where the
interval between the issue date and the first Distribution Date on a Debt
Security is either longer or shorter than the interval between subsequent
Distribution Dates, all or part of the interest foregone, in the case of the
longer interval, and all of the additional interest, in the case of the shorter
interval, will be included in the stated redemption price at maturity and
tested under the de minimis rule described below. In the case of a Debt
Security with a long first period which has non-de minimis OID, all stated
interest in excess of interest payable at the effective interest rate for the
long first period will be included in the stated redemption price at maturity
and the Debt Security will generally have OID. Holders of Debt Securities
should consult their own tax advisors to determine the issue price and stated
redemption price at maturity of a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered
to be zero if such OID is less than 0.25% of the stated redemption price at
maturity of the Debt Security multiplied by the weighted average maturity of
the Debt Security. For this purpose, the weighted average maturity of the Debt
Security is computed as the sum of the amounts determined by multiplying the
number of full years (i.e., rounding down partial years) from the issue date
until each distribution in reduction of stated redemption price at maturity is
scheduled to be made by a fraction, the numerator of which is the amount of
each distribution included in the stated redemption price at maturity of the
Debt Security and the denominator of which is the stated redemption price at
maturity of the Debt Security. Holders generally must report de minimis OID pro
rata as principal payments are received, and such income will be capital gain
if the Debt Security is held as a capital asset. However, accrual method
holders may elect to accrue all de minimis OID as well as market discount under
a constant interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest
is unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
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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 section 1272(a)(6) of the Code, such as the
Debt Security. Additionally, the OID Regulations do not contain provisions
specifically interpreting section 1272(a)(6) of the Code. 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
section 1272(a)(6) of the Code, there can be no assurance that such methodology
represents the correct manner of calculating OID.
The holder of a Debt Security issued with OID must include in gross
income, for all days during its taxable year on which it holds such Debt
Security, the sum of the "daily portions" of such original issue discount. The
amount of OID includible in income by a holder will be computed by allocating
to each day during a taxable year a pro rata portion of the original issue
discount that accrued during the relevant accrual period. In the case of a Debt
Security that is not a Regular Interest Security and the principal payments on
which are not subject to acceleration resulting from prepayments on the Loans,
the amount of OID includible in income of a holder for an accrual period
(generally the period over which interest accrues on the debt instrument) will
equal the product of the yield to maturity of the Debt Security and the
adjusted issue price of the Debt Security, reduced by any payments of qualified
stated interest. The adjusted issue price is the sum of its issue price plus
prior accruals or OID, reduced by the total payments made with respect to such
Debt Security in all prior periods, other than qualified stated interest
payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding at
the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events which have occurred before the end of the accrual
period and (iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method
is to increase
<PAGE>
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" below) the payments on
which consist solely or primarily of a specified portion of the interest
payments on qualified mortgages held by the REMIC or on Loans underlying
Pass-Through Securities ("Interest Weighted Securities"). The Issuer intends to
take the position that all of the income derived from an Interest Weighted
Security should be treated as OID and that the amount and rate of accrual of
such OID should be calculated by treating the Interest Weighted Security as a
Compound Interest Security. However, in the case of Interest Weighted
Securities that are entitled to some payments of principal and that are Regular
Interest Securities the IRS could assert that income derived from an Interest
<PAGE>
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 IRS
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" below.
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 through
1278 of the Code. A Holder that acquires a Debt Security with more than a
prescribed de minimis amount of "market discount" (generally, the excess of the
principal amount of the Debt Security over the purchaser's purchase price) will
be required to include accrued market discount in income as ordinary income in
each month, but limited to an amount not exceeding the principal payments on
the Debt Security received in that month and, if the Securities are sold, the
gain realized. Such market discount would accrue in a manner to be provided in
Treasury regulations but, until such regulations are issued, such market
discount would in general accrue either (i) on the basis of a constant yield
(in the case of a Pay-Through Security, taking into account a prepayment
assumption) or (ii) in the ratio of (a) in the case of Securities (or in the
case of a Pass-Through Security, as set forth below, the Loans underlying such
Security) not originally issued with original issue discount, stated interest
payable in the relevant period to total stated interest remaining to be paid at
the beginning of the period or (b) in the case of Securities (or, in the case
of a Pass-Through Security, as described below, the Loans underlying such
Security) originally issued at a discount, OID in the relevant period to total
OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination
date of the Debt Security (or, in the case of a Pass-Through Security, the
Loans), the excess of interest paid or accrued to purchase or carry a Security
(or, in the case of a Pass-Through Security, as described below, the underlying
Loans) with market discount over interest received on such Security is allowed
as a current deduction only to the extent such excess is greater than the
market discount that accrued during the taxable year in which such interest
expense was incurred. In general, the deferred portion of any interest expense
will be deductible when such market discount is included in income, including
upon the sale, disposition, or repayment of the Security (or in the case of a
Pass-Through Security, an underlying Loan). A holder may elect to include
market discount in income currently as it accrues, on all market discount
obligations acquired by such
<PAGE>
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 of the Code issued December
30, 1997.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium
in income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Debt Security with market discount, the holder of the Debt
Security would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such holder of the Debt Security acquires during the year
of the election or thereafter. Similarly, a holder of a Debt Security that
makes this election for a Debt Security that is acquired at a premium will be
deemed to have made an election to amortize bond premium with respect to all
debt instruments having amortizable bond premium that such holder owns or
acquires. The election to accrue interest, discount and premium on a constant
yield method with respect to a Debt Security is irrevocable.
Taxation of the REMIC and its Holders
General. In the opinion of Tax Counsel, if a REMIC election is made
with respect to a Series of Securities, then the arrangement by which the
Securities of that Series are issued will be treated as a REMIC as long as all
of the provisions of the applicable Agreement are complied with and the
statutory and regulatory requirements are satisfied. Securities will be
designated as "Regular Interests" or "Residual Interests" in a REMIC, as
specified in the related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement,
if a REMIC election is made with respect to a Series of Securities, in the
opinion of Tax Counsel (i) Securities held by a domestic building and loan
association will constitute "a regular or a residual interest in a REMIC"
within the meaning of section 7701(a)(19)(C)(xi) of the Code (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 section 7701(a)(19)(C) of the Code); and (ii)
<PAGE>
Securities held by a real estate investment trust will constitute "real estate
assets" within the meaning of section 856(c)(4)(A) of the Code, 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 section 856(c)(3)(B) of the Code (assuming, for both purposes, that
at least 95% of the REMIC's assets are qualifying assets). If less than 95% of
the REMIC's assets consist of assets described in clause (i) or (ii) above,
then a Security will qualify for the tax treatment described in clause (i) or
(ii) in the proportion that such REMIC assets are qualifying assets.
REMIC Expenses; Single Class REMICs
As a general rule, in the opinion of Tax Counsel, all of the expenses
of a REMIC will be taken into account by holders of the Residual Interest
Securities. In the case of a "single class REMIC," however, the expenses will
be allocated, under Treasury regulations, among the holders of the Regular
Interest Securities and the holders of the Residual Interest Securities on a
daily basis in proportion to the relative amounts of income accruing to each
holder on that day. In the case of a holder of a Regular Interest Security who
is an individual or a "pass-through interest holder" (including certain
pass-through entities but not including real estate investment trusts), such
expenses will be deductible only to the extent that such expenses, plus other
"miscellaneous itemized deductions" of the holder, exceed 2% of such Holder's
adjusted gross income. In addition, for taxable years beginning after December
31, 1990, the amount of itemized deductions otherwise allowable for the taxable
year for an individual whose adjusted gross income exceeds the applicable
amount (which amount will be adjusted for inflation for taxable years beginning
after 1990) will be reduced by the lesser of (i) 3% of the excess of adjusted
gross income over the applicable amount, or (ii) 80% of the amount of itemized
deductions otherwise allowable for such taxable year. The reduction or
disallowance of this deduction may have a significant impact on the yield of
the Regular Interest Security to such a holder. In general terms, a single
class REMIC is one that either (i) would qualify, under existing Treasury
regulations, as a grantor trust if it were not a REMIC (treating all interests
as ownership interests, even if they would be classified as debt for federal
income tax purposes) or (ii) is similar to such a trust and which is structured
with the principal purpose of avoiding the single class REMIC rules. Unless
otherwise specified in the related Prospectus Supplement, the expenses of the
REMIC will be allocated to holders of the related residual interest securities.
Taxation of the REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, in the opinion of Tax Counsel, a REMIC is not generally subject to
entity-level tax. Rather, the taxable income or net loss of a REMIC is taken
into account by the holders of residual interests. As described above, the
regular interests are generally taxable as debt of the REMIC.
Calculation of REMIC Income. In the opinion of Tax Counsel, the
taxable income or net loss of a REMIC is determined under an accrual method of
accounting and in the same manner as in the case of an individual, with certain
adjustments. In general, the taxable income or net loss will be the difference
between (i) the gross income produced by the REMIC's assets, including stated
interest and any original issue discount or market discount on loans and other
assets, and (ii) deductions, including stated interest and original issue
discount accrued on Regular Interest Securities, amortization of any premium
with respect to Loans, and servicing
<PAGE>
fees and other expenses of the REMIC. A holder of a Residual Interest Security
that is an individual or a "pass-through interest holder" (including certain
pass-through entities, but not including real estate investment trusts) will be
unable to deduct servicing fees payable on the loans or other administrative
expenses of the REMIC for a given taxable year, to the extent that such
expenses, when aggregated with such holder's other miscellaneous itemized
deductions for that year, do not exceed two percent of such holder's adjusted
gross income.
For purposes of computing its taxable income or net loss, the REMIC
should have an initial aggregate tax basis in its assets equal to the aggregate
fair market value of the regular interests and the residual interests on the
Startup Day (generally, the day that the interests are issued). That aggregate
basis will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals
originated on or after March 2, 1984, and the market discount provisions apply
to loans originated after July 18, 1984. Subject to possible application of the
de minimis rules, the method of accrual by the REMIC of OID income on such
loans will be equivalent to the method under which holders of Pay-Through
Securities accrue original issue discount (i.e., under the constant yield
method taking into account the Prepayment Assumption). The REMIC will deduct
OID on the Regular Interest Securities in the same manner that the holders of
the Regular Interest Securities include such discount in income, but without
regard to the de minimis rules. See "--Taxation of Debt Securities" above.
However, a REMIC that acquires loans at a market discount must include such
market discount in income currently, as it accrues, on a constant interest
basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant
yield method. Although the law is somewhat unclear regarding recovery of
premium attributable to loans originated on or before such date, it is possible
that such premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be
subject to a 100% tax on any net income derived from a "prohibited
transaction." For this purpose, net income will be calculated without taking
into account any losses from prohibited transactions or any deductions
attributable to any prohibited transaction that resulted in a loss. In general,
prohibited transactions include: (i) subject to limited exceptions, the sale or
other disposition of any qualified mortgage transferred to the REMIC; (ii)
subject to a limited exception, the sale or other disposition of a cash flow
investment; (iii) the receipt of any income from assets not permitted to be
held by the REMIC pursuant to the Code; or (iv) the receipt of any fees or
other compensation for services rendered by the REMIC. It is anticipated that a
REMIC will not engage in any prohibited transactions in which it would
recognize a material amount of net income. In addition, subject to a number of
exceptions, a tax is imposed at the rate of 100% on amounts contributed to a
REMIC after the close of the three-month period beginning on the Startup Day.
The holders of Residual Interest Securities will generally be responsible for
the payment of any such taxes imposed on the REMIC. To the extent not paid by
such holders or otherwise, however, such taxes will be paid out of the Trust
Fund and will be allocated pro rata to all outstanding classes of Securities of
such REMIC.
<PAGE>
Residual Interest Securities
In the opinion of Tax Counsel, the holder of a Certificate
representing a residual interest (a "Residual Interest Security") will take
into account the "daily portion" of the taxable income or net loss of the REMIC
for each day during the taxable year on which such holder held the Residual
Interest Security. The daily portion is determined by allocating to each day in
any calendar quarter its ratable portion of the taxable income or net loss of
the REMIC for such quarter, and by allocating that amount among the holders (on
such day) of the Residual Interest Securities in proportion to their respective
holdings on such day.
In the opinion of Tax Counsel, the holder of a Residual Interest
Security must report its proportionate share of the taxable income of the REMIC
whether or not it receives cash distributions from the REMIC attributable to
such income or loss. The reporting of taxable income without corresponding
distributions could occur, for example, in certain REMIC issues in which the
loans held by the REMIC were issued or acquired at a discount, since mortgage
prepayments cause recognition of discount income, while the corresponding
portion of the prepayment could be used in whole or in part to make principal
payments on REMIC Regular Interests issued without any discount or at an
insubstantial discount (if this occurs, it is likely that cash distributions
will exceed taxable income in later years). Taxable income may also be greater
in earlier years of certain REMIC issues as a result of the fact that interest
expense deductions, as a percentage of outstanding principal on REMIC Regular
Interest Securities, will typically increase over time as lower yielding
Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the holder of a residual interest is taxed on
the net income of the REMIC, the taxable income derived from a Residual
Interest Security in a given taxable year will not be equal to the taxable
income associated with investment in a corporate bond or stripped instrument
having similar cash flow characteristics and pretax yield. Therefore, the
after-tax yield on the Residual Interest Security may be less than that of such
a bond or instrument.
Limitation on Losses. In the opinion of Tax Counsel, the amount of the
REMIC's net loss that a holder may take into account currently is limited to
the holder's adjusted basis at the end of the calendar quarter in which such
loss arises. A holder's basis in a Residual Interest Security will initially
equal such holder's purchase price, and will subsequently be increased by the
amount of the REMIC's taxable income allocated to the holder, and decreased
(but not below zero) by the amount of distributions made and the amount of the
REMIC's net loss allocated to the holder. Any disallowed loss may be carried
forward indefinitely, but may be used only to offset income of the REMIC
generated by the same REMIC. The ability of holders of Residual Interest
Securities to deduct net losses may be subject to additional limitations under
the Code, as to which such holders should consult their tax advisers.
Distributions. In the opinion of Tax Counsel, distributions on a
Residual Interest Security (whether at their scheduled times or as a result of
prepayments) will generally not result in any additional taxable income or loss
to a holder of a Residual Interest Security. If the amount of such payment
exceeds a holder's adjusted basis in the Residual Interest Security, however,
the holder will recognize gain (treated as gain from the sale of the Residual
Interest Security) to the extent of such excess.
<PAGE>
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 section 511 of the
Code, 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"
below. The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess
inclusion income from REMIC residual certificates that have "significant value"
within the meaning of the REMIC Regulations, effective for taxable years
beginning after December 31, 1995, except with respect to residual certificates
continuously held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect on excess inclusions on the alternative
minimum taxable income of a residual holder. First, alternative minimum taxable
income for such residual holder is determined without regard to the special
rule that taxable income cannot be less than excess inclusions. Second, a
residual holder's alternative minimum taxable income for a tax year cannot be
less than excess inclusions for the year. Third, the amount of any alternative
minimum tax net operating loss deductions must be computed without regard to
any excess inclusions. These rules are effective for tax years beginning after
December 31, 1986, unless a residual holder elects to have such rules apply
only to tax years beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to
the excess, if any, of REMIC taxable income for the quarterly period allocable
to a Residual Interest Security, over the daily accruals for such quarterly
period of (i) 120% of the long term applicable federal rate on the Startup Day
multiplied by (ii) the adjusted issue price of such Residual Interest Security
at the beginning of such quarterly period. The adjusted issue price of a
Residual Interest at the beginning of each calendar quarter will equal its
issue price (calculated in a manner analogous to the determination of the issue
price of a Regular Interest), increased by the aggregate of the daily accruals
for prior calendar quarters, and decreased (but not below zero) by the amount
of loss allocated to a holder and the amount of distributions made on the
Residual Interest Security before the beginning of the quarter. The long-term
federal rate, which is
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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 through 1399 of the Code, if such entity is not subject to tax on
its unrelated business income. Accordingly, the applicable Pooling and
Servicing Agreement will prohibit Disqualified Organizations from owning a
Residual Interest Security. In addition, no transfer of a Residual Interest
Security will be permitted unless the proposed transferee shall have furnished
to the Trustee an affidavit representing and warranting that it is neither a
Disqualified Organization nor an agent or nominee acting on behalf of a
Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a "noneconomic
residual interest" unless, at the time of the transfer (i) the present value of
the expected future distributions on the Residual Interest Security at least
equals the product of the present value of the anticipated excess inclusions
and the highest rate of tax for the year in which the transfer occurs, and (ii)
the transferor reasonably expects that the transferee will receive
distributions from the REMIC at or after the time at which the taxes accrue on
the anticipated excess inclusions in an amount sufficient to satisfy the
accrued taxes. If a transfer of a Residual Interest is disregarded, the
transferor would be liable for any Federal income tax imposed upon taxable
income derived by the transferee from the REMIC. The REMIC Regulations provide
no guidance as to how to determine if a significant purpose of a transfer is to
impede the assessment or collection of tax. A similar type of limitation exists
with respect to certain transfers of residual interests by foreign persons to
United States persons. See "--Tax Treatment of Foreign Investors" below.
<PAGE>
Mark to Market Rules. Prospective purchasers of a REMIC Residual
Interest Security should be aware that the IRS recently finalized regulations
(the "Mark-to-Market Regulations") which provide that a REMIC Residual Interest
Security acquired after January 3, 1995 cannot be marked-to-market. Prospective
purchasers of a REMIC Residual Interest Security should consult their tax
advisors regarding the possible application of the Mark-to-Market Regulations.
Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS in
a unified administrative proceeding.
Tax Status as a Grantor Trust
General. As further specified in the related Prospectus Supplement, if
a REMIC election is not made and the Trust Fund is not structured as a
partnership, then, in the opinion of Tax Counsel, the Trust Fund relating to a
Series of Securities will be classified for federal income tax purposes as a
grantor trust under Subpart E, Part 1 of Subchapter J of the Code and not as an
association taxable as a corporation (the Securities of such Series,
"Pass-Through Securities"). In some Series there will be no separation of the
principal and interest payments on the Loans. In such circumstances, a holder
will be considered to have purchased a pro rata undivided interest in each of
the Loans. In other cases ("Stripped Securities"), sale of the Securities will
produce a separation in the ownership of all or a portion of the principal
payments from all or a portion of the interest payments on the Loans.
In the opinion of Tax Counsel, each holder must report on its federal
income tax return its share of the gross income derived from the Loans (not
reduced by the amount payable as fees to the Trustee and the Servicer and
similar fees (collectively, the "Servicing Fee")), at the same time and in the
same manner as such items would have been reported under the Holder's tax
accounting method had it held its interest in the Loans directly, received
directly its share of the amounts received with respect to the Loans, and paid
directly its share of the Servicing Fees. In the case of Pass-Through
Securities other than Stripped Securities, such income will consist of a pro
rata share of all of the income derived from all of the Loans and, in the case
of Stripped Securities, such income will consist of a pro rata share of the
income derived from each stripped bond or stripped coupon in which the holder
owns an interest. The holder of a Security will generally be entitled to deduct
such Servicing Fees under Section 162 or Section 212 of the Code to the extent
that such Servicing Fees represent "reasonable" compensation for the services
rendered by the Trustee and the Servicer (or third parties that are compensated
for the performance of services). In the case of a noncorporate holder,
however, Servicing Fees (to the extent not otherwise disallowed, e.g., because
they exceed reasonable compensation) will be deductible in computing such
holder's regular tax liability only to the extent that such fees, when added to
other miscellaneous itemized deductions, exceed 2% of adjusted gross income and
may not be deductible to any extent in computing such holder's alternative
minimum tax liability. In addition, for taxable years beginning after December
31, 1990, the amount of itemized deductions otherwise allowable for the taxable
year for an individual whose adjusted gross income exceeds the applicable
amount (which amount will be adjusted for inflation in taxable
<PAGE>
years beginning after 1990) will be reduced by the lesser of (i) 3% of the
excess of adjusted gross income over the applicable amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for such taxable year.
Discount or Premium on Pass-Through Securities. In the opinion of Tax
Counsel, the holder's purchase price of a Pass-Through Security is to be
allocated among the Loans in proportion to their fair market values, determined
as of the time of purchase of the Securities. In the typical case, the Trustee
(to the extent necessary to fulfill its reporting obligations) will treat each
Loan as having a fair market value proportional to the share of the aggregate
principal balances of all of the Loans that it represents, since the
Securities, unless otherwise specified in the related Prospectus Supplement,
will have a relatively uniform interest rate and other common characteristics.
To the extent that the portion of the purchase price of a Pass-Through Security
allocated to a Loan (other than to a right to receive any accrued interest
thereon and any undistributed principal payments) is less than or greater than
the portion of the principal balance of the Loan allocable to the Security, the
interest in the Loan allocable to the Pass-Through Security will be deemed to
have been acquired at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess of
a prescribed de minimis amount or a Stripped Security, a holder of a Security
will be required to report as interest income in each taxable year its share of
the amount of OID that accrues during that year in the manner described above.
OID with respect to a Loan could arise, for example, by virtue of the financing
of points by the originator of the Loan, or by virtue of the charging of points
by the originator of the Loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a
Loan will be includible in income, generally in the manner described above,
except that in the case of Pass-Through Securities, market discount is
calculated with respect to the Loans underlying the Certificate, rather than
with respect to the Security. A holder that acquires an interest in a Loan
originated after July 18, 1984 with more than a de minimis amount of market
discount (generally, the excess of the principal amount of the Loan over the
purchaser's allocable purchase price) will be required to include accrued
market discount in income in the manner set forth above. See "--Taxation of
Debt Securities; Market Discount" and "--Premium" above.
In the case of market discount on a Pass-Through Security attributable
to Loans originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of such discount that is allocable to a loan
among the principal payments on the Loan and to include the discount allocable
to each principal payment in ordinary income at the time such principal payment
is made. Such treatment would generally result in discount being included in
income at a slower rate than discount would be required to be included in
income using the method described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to
receive only a portion of the interest payments on the Loans, a right to
receive only principal payments on the Loans, or a right to receive certain
payments of both interest and principal. Certain Stripped Securities ("Ratio
Strip Securities") may represent a right to receive differing percentages of
both the interest and principal on each Loan. Pursuant to section 1286 of the
Code, the separation of ownership of the right to receive some or all of the
interest payments on an obligation from
<PAGE>
ownership of the right to receive some or all of the principal payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect to interest payments. Section 1286 of the Code
applies the OID rules to stripped bonds and stripped coupons. For purposes of
computing original issue discount, a stripped bond or a stripped coupon is
treated as a debt instrument issued on the date that such stripped interest is
purchased with an issue price equal to its purchase price or, if more than one
stripped interest is purchased, the ratable share of the purchase price
allocable to such stripped interest.
Servicing fees in excess of reasonable servicing fees ("excess
servicing") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (i.e., 1% interest on the Loan
principal balance) or the Securities are initially sold with a de minimis
discount (assuming no prepayment assumption is required), any non-de minimis
discount arising from a subsequent transfer of the Securities should be treated
as market discount. The IRS appears to require that reasonable servicing fees
be calculated on a Loan by Loan basis, which could result in some Loans being
treated as having more than 100 basis points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and original issue discount rules are to apply
to Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the "Cash Flow Bond Method"), a
prepayment assumption is used and periodic recalculations are made which take
into account with respect to each accrual period the effect of prepayments
during such period. However, the 1986 Act does not, absent Treasury
regulations, appear specifically to cover instruments such as the Stripped
Securities which technically represent ownership interests in the underlying
Loans, rather than being debt instruments "secured by" those loans.
Nevertheless, it is believed that the Cash Flow Bond Method is a reasonable
method of reporting income for such Securities, and it is expected that OID
will be reported on that basis unless otherwise specified in the related
Prospectus Supplement. In applying the calculation to Pass-Through Securities,
the Trustee will treat all payments to be received by a holder with respect to
the underlying Loans as payments on a single installment obligation. The IRS
could, however, assert that original issue discount must be calculated
separately for each Loan underlying a Security.
Under certain circumstances, if the Loans prepay at a rate faster than
the Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate
a holder's recognition of income. If, however, the Loans prepay at a rate
slower than the Prepayment Assumption, in some circumstances the use of this
method may decelerate a holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted
Security, the Trustee intends, absent contrary authority, to report income to
Security holders as OID, in the manner described above for Interest Weighted
Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations
of the applicable Code provisions. Among other possibilities, the Internal
Revenue Service could contend that (i) in certain Series, each non-Interest
Weighted Security is composed of an unstripped undivided ownership interest in
Loans and an installment obligation consisting of stripped principal payments;
(ii) the non-Interest Weighted Securities are subject to the contingent payment
provisions of the
<PAGE>
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 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.
<PAGE>
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) 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
<PAGE>
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 "--Residual
Interest Securities--Excess Inclusions" above.
Tax Characterization of the Trust as a Partnership
Tax Counsel is of the opinion that a Trust Fund structured as a
partnership will not be an association (or publicly traded partnership) taxable
as a corporation for federal income tax purposes. This opinion is based on the
assumption that the terms of the Trust Agreement and related documents will be
complied with, and on counsel's conclusions that the nature of the income of
the Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Certificates
has been structured as a private placement under an IRS safe harbor, so that
the Trust Fund will not be characterized as a publicly traded partnership
taxable as a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, in the opinion of Tax Counsel, the Trust Fund would be subject to
corporate income tax on its taxable income. The Trust Fund's taxable income
would include all its income, possibly reduced by its interest expense on the
Notes. Any such corporate income tax could materially reduce cash
<PAGE>
available to make payments on the Notes and distributions on the Certificates,
and Certificateholders could be liable for any such tax that is unpaid by the
Trust Fund.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and
the Noteholders will agree by their purchase of Notes, to treat the Notes as
debt for federal income tax purposes. In such a circumstance, Tax Counsel is,
except as otherwise provided in the related Prospectus Supplement, of the
opinion that the Notes will be classified as debt for federal income tax
purposes. The discussion below assumes this characterization of the Notes is
correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that
the interest formula for the Notes meets the requirements for "qualified stated
interest" under the OID regulations, and that any OID on the Notes (i.e., any
excess of the principal amount of the Notes over their issue price) does not
exceed a de minimis amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID regulations. If these conditions are not satisfied with respect to any
given series of Notes, additional tax considerations with respect to such Notes
will be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except
as discussed in the following paragraph, in the opinion of Tax Counsel, the
Notes will not be considered issued with OID. The stated interest thereon will
be taxable to a Noteholder as ordinary interest income when received or accrued
in accordance with such Noteholder's method of tax accounting. Under the OID
regulations, a holder of a Note issued with a de minimis amount of OID must
include such OID in income, on a pro rata basis, as principal payments are made
on the Note. It is believed that any prepayment premium paid as a result of a
mandatory redemption will be taxable as contingent interest when it becomes
fixed and unconditionally payable. A purchaser who buys a Note for more or less
than its principal amount will generally be subject, respectively, to the
premium amortization or market discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (a "Short-Term Note") may be subject to
special rules. An accrual basis holder of a Short-Term Note (and certain cash
method holders, including regulated investment companies, as set forth in
Section 1281 of the Code) generally would be required to report interest income
as interest accrues on a straight-line basis over the term of each interest
period. Other cash basis holders of a Short-Term Note would, in general, be
required to report interest income as interest is paid (or, if earlier, upon
the taxable disposition of the Short-Term Note). However, a cash basis holder
of a Short-Term Note reporting interest income as it is paid may be required to
defer a portion of any interest expense otherwise deductible on indebtedness
incurred to purchase or carry the Short-Term Note until the taxable disposition
of the Short-Term Note. A cash basis taxpayer may elect under Section 1281 of
the Code to accrue interest income on all nongovernment debt obligations with a
term of one year or less, in which case the taxpayer would include interest on
the Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
<PAGE>
Sale or Other Disposition. In the opinion of Tax Counsel, if a
Noteholder sells a Note, the holder will recognize gain or loss in an amount
equal to the difference between the amount realized on the sale and the
holder's adjusted tax basis in the Note. The adjusted tax basis of a Note to a
particular Noteholder will equal the holder's cost for the Note, increased by
any market discount, acquisition discount, OID and gain previously included by
such Noteholder in income with respect to the Note and decreased by the amount
of bond premium (if any) previously amortized and by the amount of principal
payments previously received by such Noteholder with respect to such Note. Any
such gain or loss will be capital gain or loss if the Note was held as a
capital asset, except for gain representing accrued interest and accrued market
discount not previously included in income. Capital losses generally may be
used only to offset capital gains.
Foreign Holders. In the opinion of Tax Counsel, interest payments made
(or accrued) to a Noteholder who is a nonresident alien, foreign corporation or
other non-United States person (a "foreign person") generally will be
considered "portfolio interest", and generally will not be subject to United
States federal income tax and withholding tax, if the interest is not
effectively connected with the conduct of a trade or business within the United
States by the foreign person and the foreign person (i) is not actually or
constructively a "10 percent shareholder" of the Trust or the Seller (including
a holder of 10% of the outstanding Certificates) or a "controlled foreign
corporation" with respect to which the Trust or the Seller is a "related
person" within the meaning of the Code and (ii) provides the Owner Trustee or
other person who is otherwise required to withhold U.S. tax with respect to the
Notes with an appropriate statement (on Form W-8 or a similar form), signed
under penalties of perjury, certifying that the beneficial owner of the Note is
a foreign person and providing the foreign person's name and address. If a Note
is held through a securities clearing organization or certain other financial
institutions, the organization or institution may provide the relevant signed
statement to the withholding agent; in that case, however, the signed statement
must be accompanied by a Form W-8 or substitute form provided by the foreign
person that owns the Note. If such interest is not portfolio interest, then it
will be subject to United States federal income and withholding tax at a rate
of 30 percent, unless reduced or eliminated pursuant to an applicable tax
treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's
name, address, correct federal taxpayer identification number and a statement
that the holder is not subject to backup withholding. Should a nonexempt
Noteholder fail to provide the required certification, the Trust Fund will be
required to withhold 31 percent of the amount otherwise payable to the holder,
and remit the withheld amount to the IRS as a credit against the holder's
federal income tax liability.
<PAGE>
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of Tax Counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for federal income tax purposes, the Notes might
be treated as equity interests in the Trust Fund. If so treated, the Trust Fund
might be treated as a publicly traded partnership that would not be taxable as
a corporation because it would meet certain qualifying income tests.
Nonetheless, treatment of the Notes as equity interests in such a publicly
traded partnership could have adverse tax consequences to certain holders. For
example, income to certain tax-exempt entities (including pension funds) would
be "unrelated business taxable income", income to foreign holders generally
would be subject to U.S. tax and U.S. tax return filing and withholding
requirements, and individual holders might be subject to certain limitations on
their ability to deduct their share of the Trust Fund's expenses.
Tax Consequences to Holders of the Certificates
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust Fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
Trust Fund, the partners of the partnership being the Certificateholders, and
the Notes being debt of the partnership. However, the proper characterization
of the arrangement involving the Trust Fund, the Certificates, the Notes, the
Trust Fund and the Servicer is not clear because there is no authority on
transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series of
Securities includes a single class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. If the Trust Fund is a partnership, in the
opinion of Tax Counsel, the Trust Fund will not be subject to federal income
tax. Rather, in the opinion of Tax Counsel, each Certificateholder will be
required to separately take into account such holder's allocated share of
income, gains, losses, deductions and credits of the Trust Fund. The Trust
Fund's income will consist primarily of interest and finance charges earned on
the Loans (including appropriate adjustments for market discount, OID and bond
premium) and any gain upon collection or disposition of Loans. The Trust Fund's
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees, and losses or deductions upon collection or
disposition of Loans.
<PAGE>
In the opinion of Tax Counsel, the tax items of a partnership are
allocable to the partners in accordance with the Code, Treasury regulations and
the partnership agreement (here, the Trust Agreement and related documents).
The Trust Agreement will provide, in general, that the Certificateholders will
be allocated taxable income of the Trust Fund for each month equal to the sum
of (i) the interest that accrues on the Certificates in accordance with their
terms for such month, including interest accruing at the Pass-Through Rate for
such month and interest on amounts previously due on the Certificates but not
yet distributed; (ii) any Trust Fund income attributable to discount on the
Loans that corresponds to any excess of the principal amount of the
Certificates over their initial issue price (iii) prepayment premium payable to
the Certificateholders for such month; and (iv) any other amounts of income
payable to the Certificateholders for such month. Such allocation will be
reduced by any amortization by the Trust Fund of premium on Loans that
corresponds to any excess of the issue price of Certificates over their
principal amount. All remaining taxable income of the Trust Fund will be
allocated to the Depositor. Based on the economic arrangement of the parties,
in the opinion of Tax Counsel, this approach for allocating Trust Fund income
should be permissible under applicable Treasury regulations, although no
assurance can be given that the IRS would not require a greater amount of
income to be allocated to Certificateholders. Moreover, in the opinion of Tax
Counsel, even under the foregoing method of allocation, Certificateholders may
be allocated income equal to the entire Pass-Through Rate plus the other items
described above even though the Trust Fund might not have sufficient cash to
make current cash distributions of such amount. Thus, cash basis holders will
in effect be required to report income from the Certificates on the accrual
basis and Certificateholders may become liable for taxes on Trust Fund income
even if they have not received cash from the Trust Fund to pay such taxes. In
addition, because tax allocations and tax reporting will be done on a uniform
basis for all Certificateholders but Certificateholders may be purchasing
Certificates at different times and at different prices, Certificateholders may
be required to report on their tax returns taxable income that is greater or
less than the amount reported to them by the Trust Fund.
In the opinion of Tax Counsel, all of the taxable income allocated to
a Certificateholder that is a pension, profit sharing or employee benefit plan
or other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
In the opinion of Tax Counsel, an individual taxpayer's share of
expenses of the Trust Fund (including fees to the Servicer but not interest
expense) would be miscellaneous itemized deductions. Such deductions might be
disallowed to the individual in whole or in part and might result in such
holder being taxed on an amount of income that exceeds the amount of cash
actually distributed to such holder over the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income
and allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Loan, the Trust Fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued
with OID, and, therefore, the Trust should not have OID income. However, the
purchase price paid by the Trust Fund for the Loans may be greater or less than
the remaining principal balance of the Loans at the time of purchase. If so, in
the opinion of Tax Counsel, the Loan will have been acquired at a
<PAGE>
premium or discount, as the case may be. (As indicated above, the Trust Fund
will make this calculation on an aggregate basis, but might be required to
recompute it on a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium,
the Trust Fund will elect to include any such discount in income currently as
it accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. Pursuant to final Treasury regulations issued
May 9, 1997 under section 708 of the Code a sale or exchange of 50 percent or
more of the capital and profits in the issuer entity within a 12-month tax
period would cause a deemed contribution of assets of the issuer entity (the
"old partnership") to a new partnership (the "new partnership") in exchange for
interest in the new partnership. Such interests would be deemed distributed to
the partners of the old partnership in liquidation thereof, which would not
constitute a sale or exchange.
Disposition of Certificates. Generally, in the opinion of Tax Counsel,
capital gain or loss will be recognized on a sale of Certificates in an amount
equal to the difference between the amount realized and the seller's tax basis
in the Certificates sold. A Certificateholder's tax basis in a Certificate will
generally equal the holder's cost increased by the holder's share of Trust Fund
income (includible in income) and decreased by any distributions received with
respect to such Certificate. In addition, both the tax basis in the
Certificates and the amount realized on a sale of a Certificate would include
the holder's share of the Notes and other liabilities of the Trust Fund. A
holder acquiring Certificates at different prices may be required to maintain a
single aggregate adjusted tax basis in such Certificates, and, upon sale or
other disposition of some of the Certificates, allocate a portion of such
aggregate tax basis to the Certificates sold (rather than maintaining a
separate tax basis in each Certificate for purposes of computing gain or loss
on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's
share of unrecognized accrued market discount on the Receivables would
generally be treated as ordinary income to the holder and would give rise to
special tax reporting requirements. The Trust Fund does not expect to have any
other assets that would give rise to such special reporting requirements. Thus,
to avoid those special reporting requirements, the Trust Fund will elect to
include market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise
to a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the
Certificateholders in proportion to the principal amount of Certificates owned
by them as of the close of the last day of such month. As a result, a holder
purchasing Certificates may be allocated tax items (which will affect its tax
liability and tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder
had. The tax basis of the Trust Fund's assets will not be adjusted to reflect
that higher (or lower) basis unless the Trust Fund were to file an election
under section 754 of the Code. In order to avoid the administrative
complexities that would be involved in keeping accurate accounting records, as
well as potentially onerous information reporting requirements, the Trust Fund
will not make such election. As a result, Certificateholders might be allocated
a greater or lesser amount of Trust Fund income than would be appropriate based
on their own purchase price for Certificates.
Administrative Matters. The Owner Trustee is required to keep or have
kept complete and accurate books of the Trust Fund. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and the
fiscal year of the Trust will be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Trust Fund and will report each Certificateholder's allocable share
of items of Trust Fund income and expense to holders and the IRS on Schedule
K-1. The Trust Fund will provide the Schedule K-l information to nominees that
fail to provide the Trust Fund with the information statement described below
and such nominees will be required to forward such information to the
beneficial owners of the Certificates. Generally, holders must file tax returns
that are consistent with the information return filed by the Trust Fund or be
subject to penalties unless the holder notifies the IRS of all such
inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as
a nominee at any time during a calendar year is required to furnish the Trust
Fund with a statement containing certain information on the nominee, the
beneficial owners and the Certificates so held. Such information includes (i)
the name, address and taxpayer identification number of the nominee and (ii) as
to each beneficial owner (x) the name, address and identification number of
such person, (y) whether such person is a United States person, a tax-exempt
entity or a foreign government, an international organization, or any wholly
owned agency or instrumentality of either of the foregoing, and (z) certain
information on Certificates that were held, bought or sold on behalf of such
person throughout the year. In addition, brokers and financial institutions
that hold Certificates through a nominee are required to furnish directly to
the Trust Fund information as to themselves and their ownership of
Certificates. A clearing agency registered under section 17A of the Securities
Exchange Act of 1934, as amended, is not required to furnish any such
information statement to the Trust Fund. The information referred to above for
any calendar year must be furnished to the Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that fail to
provide the Trust Fund with the information described above may be subject to
penalties.
The Depositor will be designated as the tax matters partner in the
related Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
<PAGE>
partnership items does not expire before three years after the date on which
the partnership information return is filed. Any adverse determination
following an audit of the return of the Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may
be precluded from separately litigating a proposed adjustment to the items of
the Trust Fund. An adjustment could also result in an audit of a
Certificateholder's returns and adjustments of items not related to the income
and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear
whether the Trust Fund would be considered to be engaged in a trade or business
in the United States for purposes of federal withholding taxes with respect to
non-U.S. persons because there is no clear authority dealing with that issue
under facts substantially similar to those described herein. Although it is not
expected that the Trust Fund would be engaged in a trade or business in the
United States for such purposes, the Trust Fund will withhold as if it were so
engaged in order to protect the Trust Fund from possible adverse consequences
of a failure to withhold. The Trust Fund expects to withhold on the portion of
its taxable income that is allocable to foreign Certificateholders pursuant to
section 1446 of the Code, as if such income were effectively connected to a
U.S. trade or business, at a rate of 35% for foreign holders that are taxable
as corporations and 39.6% for all other foreign holders. Subsequent adoption of
Treasury regulations or the issuance of other administrative pronouncements may
require the Trust to change its withholding procedures. In determining a
holder's withholding status, the Trust Fund may rely on IRS Form W-8, IRS Form
W-9 or the holder's certification of nonforeign status signed under penalties
of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the
branch profits tax) on its share of the Trust Fund's income. Each foreign
holder must obtain a taxpayer identification number from the IRS and submit
that number to the Trust on Form W-8 in order to assure appropriate crediting
of the taxes withheld. A foreign holder generally would be entitled to file
with the IRS a claim for refund with respect to taxes withheld by the Trust
Fund taking the position that no taxes were due because the Trust Fund was not
engaged in a U.S. trade or business. However, interest payments made (or
accrued) to a Certificateholder who is a foreign person generally will be
considered guaranteed payments to the extent such payments are determined
without regard to the income of the Trust Fund. If these interest payments are
properly characterized as guaranteed payments, then the interest will not be
considered "portfolio interest." As a result, Certificateholders will be
subject to United States federal income tax and withholding tax at a rate of 30
percent, unless reduced or eliminated pursuant to an applicable treaty. In such
case, a foreign holder would only be entitled to claim a refund for that
portion of the taxes in excess of the taxes that should be withheld with
respect to the guaranteed payments.
Backup Withholding. Distributions made on the Certificates and
proceeds from the sale of the Certificates will be subject to a "backup"
withholding tax of 31% if, in general, the Certificateholder fails to comply
with certain identification procedures, unless the holder is an exempt
recipient under applicable provisions of the Code. The New Regulations
described herein make certain modifications to the backup withholding and
information reporting rules. The New Regulations will generally be effective
for payments made after December 31, 1999, subject to certain transition rules.
Prospective investors are urged to consult their own tax advisors regarding the
New Regulations.
<PAGE>
FASIT SECURITIES
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory vehicle
for the issuance of mortgage-backed and asset-backed securities. Although the
FASIT provisions of the Code became effective on September 1, 1997, no Treasury
regulations or other administrative guidance has been issued with respect to
those provisions. Accordingly, definitive guidance cannot be provided with
respect to many aspects of the tax treatment of FASIT Securityholders.
Investors also should note that the FASIT discussions contained herein
constitutes only a summary of the federal income tax consequences to holders of
FASIT Securities. With respect to each Series of FASIT Securities, the related
Prospectus Supplement will provide a detailed discussion regarding the federal
income tax consequences associated with the particular transaction.
FASIT Securities will be classified as either FASIT Regular
Securities, which generally will be treated as debt for federal income tax
purposes, or FASIT Ownership Securities, which generally are not treated as
debt for such purposes, but rather as representing rights and responsibilities
with respect to the taxable income or loss of the related Series. The
Prospectus Supplement for each Series of Securities will indicate whether one
or more FASIT elections will be made for that Series and which Securities of
such Series will be designated as Regular Securities, and which, if any, will
be designated as Ownership Securities.
Qualification as a FASIT. The Trust Fund underlying a Series (or one
or more designated pools of assets held in the Trust Fund) will qualify under
the Code as a FASIT in which the FASIT Regular Securities and the FASIT
Ownership Securities will constitute the "regular interests" and the "ownership
interests," respectively, if (i) a FASIT election is in effect, (ii) certain
tests concerning (A) the composition of the FASIT's assets and (B) the nature
of the Securityholders' interest in the FASIT are met on a continuing basis,
and (iii) the Trust Fund is not a regulated company as defined in section
851(a) of the Code.
Asset Composition. In order for a Trust Fund (on one or more
designated pools of assets held by a Trust Fund) to be eligible for FASIT
status, substantially all of the assets of the Trust Fund (or the designated
pool) must consist of "permitted assets" as of the close of the third month
beginning after the closing date and at all times thereafter (the "FASIT
Qualification Test"). Permitted assets include (i) cash or cash equivalents,
(ii) debt instruments with fixed terms that would qualify as REMIC regular
interests if issued by a REMIC (generally, instruments that provide for
interest at a fixed rate, a qualifying variable rate, or a qualifying
interest-only ("IO") type rate, (iii) foreclosure property, (iv) certain
hedging instruments (generally, interest and currency rate swaps and credit
enhancement contracts) that are reasonably required to guarantee or hedge
against the FASIT's risks associated with being the obligor on FASIT interests,
(v) contract rights to acquire qualifying debt instruments or qualifying
hedging instruments, (vi) FASIT regular interests, and (vii) REMIC regular
interests. Permitted assets do not include any debt instruments issued by the
holder of the FASIT's ownership interest or by any person related to such
holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements. All
of the interests in a FASIT must belong to either of the following: (i) one or
more classes of regular interests or (ii) a single class of ownership interest
that is held by a fully taxable domestic corporation. In the case of Series
that include FASIT Ownership Securities, the ownership interest will be
represented by the FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it
is designated as a regular interest, (ii) it has a stated maturity no greater
than thirty years, (iii) it entitles its holder to a specified principal
amount, (iv) the issue price of the interest does not exceed 125% of its stated
principal amount, (v) the yield to maturity of the interest is less than the
applicable Treasury rate published by the IRS plus 5%, and (vi) if it pays
interest, such interest is payable at either (a) a fixed rate with respect to
the principal amount of the regular interest or (b) a permissible variable rate
with respect to such principal amount. Permissible variable rates for FASIT
regular interests are the same as those for REMIC regular interest (i.e.,
certain qualified floating rates and weighted average rates). See "Certain
Material Federal Income Tax Considerations--Taxation of Debt
Securities--Variable Rate Debt Securities" herein.
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 "--TAX TREATMENT OF FASIT REGULAR SECURITIES
AND--TREATMENT OF HIGH-YIELD INTERESTS" below.
Consequences of Disqualification. If a Series of FASIT Securities
fails to comply with one or more of the Code's ongoing requirements for FASIT
status during any taxable year, the Code provides that its FASIT status may be
lost for that year and thereafter. If FASIT status is lost, the treatment of
the former FASIT and the interests therein for federal income tax purposes is
uncertain. The former FASIT might be treated as a grantor trust, as a separate
association taxed as a corporation, or as a partnership. The FASIT Regular
Securities could be treated as debt instruments for federal income tax purposes
or as equity interests. Although the Code authorizes the Treasury to issue
regulations that address situations where a failure to meet the requirements
for FASIT status occurs inadvertently and in good faith, such regulations have
not yet been issued. It is possible that disqualification relief might be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the FASIT's income for a period of time in which the requirements
for FASIT status are not satisfied.
Tax Treatment of FASIT Regular Securities. Payments received by
holders of FASIT Regular Securities generally should be accorded the same tax
treatment under the Code as payments received on other taxable corporate debt
instruments and on REMIC Regular Securities. As in the case of holders of REMIC
Regular Securities, holders of FASIT Regular Securities must report income from
such Securities under an accrual method of accounting, even if they otherwise
would have used the case receipts and disbursements method. Except in the case
of FASIT Regular Securities issued with OID or acquired with market discount or
premium, interest paid or accrued on a FASIT Regular Security generally will be
<PAGE>
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" herein. 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" herein.
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 section 7701(a)(19) of the Code 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"
herein. In addition, FASIT Regular Securities held by a financial institution
to which section 585 of the Code applies will be treated as evidences of
indebtedness for purposes of section 582(c)(1) of the Code. FASIT Securities
will not qualify as "Government Securities" for either REIT or RIC
qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject to
special rules regarding the eligibility of holders of such interests, and the
ability of such holders to offset income derived from their FASIT Security with
losses. High-Yield Interests may be held only by Eligible Corporations other
FASITs, and dealers in securities who acquire such interests as inventory. If a
securities dealer (other than an Eligible Corporation) initially acquires a
High-Yield Interest as inventory, but later begins to hold it for investment,
the dealer will be subject to an excise tax equal to the income from the
High-Yield Interest multiplied by the highest corporate income tax rate. In
addition, transfers of High-Yield Interests to disqualified holders will be
disregarded for federal income tax purposes, and the transferor still will be
treated as the holder of the High-Yield Interest.
The holder of a High-Yield Interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from the High-Yield Interest, for either regular Federal income tax
purposes or for alternative minimum tax purposes. In addition, the FASIT
provisions contain an anti-abuse rule that imposes corporate income tax on
income derived from a FASIT Regular Security that is held by a pass-through
entity (other
<PAGE>
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" herein.
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly, losses
on dispositions of a FASIT Ownership Security generally will be disallowed
where, within six months before or after the disposition, the seller of such
Security acquires any other FASIT Ownership Security or, in the case of a FASIT
holding mortgage assets, any interest in a Taxable Mortgage Pool that is
economically comparable to a FASIT Ownership Security. In addition, if any
security that is sold or contributed to a FASIT by the holder of the related
FASIT Ownership Security was required to be marked-to-market under Code section
475 by such holder, then section 475 will continue to apply to such securities,
except that the amount realized under the mark-to-market rules will be a
greater of the securities' value under present law or the securities' value
after applying special valuation rules contained in the FASIT provisions. Those
special valuation rules generally require that the value of debt instruments
that are not traded on an established securities market be determined by
calculating the present value of the reasonably expected payments under the
instrument using a discount rate of 120% of the applicable Federal rate,
compounded semiannually.
The holder of a FASIT Ownership Security will be subject to a tax
equal to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include (i) the receipt of income
derived from assets that are not permitted assets, (ii) certain dispositions of
permitted assets, (iii) the receipt of any income derived from any loan
originated by a FASIT, and (iv) in certain cases, the receipt of income
representing a servicing fee or other compensation. Any Series for which a
FASIT election is made generally will be structured in order to avoid
application of the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
Securities will be subject to backup withholding to the same extent holders of
REMIC Securities would be subject. See "Certain Material Federal Income Tax
Considerations--Miscellaneous Tax Aspects--Backup Withholding" herein. 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 the Employment
Retirement Income Security Act of 1974, as amended ("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 section 3 of ERISA), 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 sections 401(a) and 501(a) of the Code, however, is
subject to the prohibited transaction rules set forth in Code section 503 of
the Code.
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
<PAGE>
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, or give rise to, a prohibited
transaction under ERISA Sections 406 and 407 and subject to an excise tax under
section 4975 of the Code unless a statutory, regulatory or administrative
exemption applies.
In Prohibited Transaction Exemption 83-1 ("PTE 83-1"), which amended
Prohibited Transaction Exemption 81-7, the DOL exempted from ERISA's prohibited
transaction rules certain transactions relating to the operation of residential
mortgage pool investment trusts and the purchase, sale and holding of "mortgage
pool pass-through certificates" in the initial issuance of such certificates.
PTE 83-1 permits, subject to certain conditions, transactions which might
otherwise be prohibited between Plans and Parties in Interest with respect to
those Plans related to the origination, maintenance and termination of mortgage
pools consisting of mortgage loans secured by first or second mortgages or
deeds of trust on single-family residential property, and the acquisition and
holding of certain mortgage pool pass-through certificates representing an
interest in such mortgage pools by Plans. If the general conditions (discussed
below) of PTE 83-1 are satisfied, investments by a Plan in Securities that
represent interests in a Pool consisting of Loans ("Single Family Securities")
will be exempt from the prohibitions of ERISA Sections 406(a) and 407 (relating
generally to transactions with Parties in Interest who are not fiduciaries) if
the Plan purchases the Single Family Securities at no more than fair market
value and will be exempt from the prohibitions of ERISA Sections 406(b)(1) and
(2) (relating generally to transactions with fiduciaries) if, in addition, the
purchase is approved by an independent fiduciary, no sales commission is paid
to the pool sponsor, the Plan does not purchase more than 25% of all Single
Family Securities, and at least 50% of all Single Family Securities are
purchased by persons independent of the pool sponsor or pool trustee. PTE 83-1
does not provide an exemption for transactions involving Subordinate
Securities. Accordingly, unless otherwise provided in the related Prospectus
Supplement, no transfer of a Subordinate Security or a Security which is not a
Single Family Security may be made to a Plan.
The discussion in this and the next succeeding paragraph applies only
to Single Family Securities. The Depositor believes that, for purposes of PTE
83-1, the term "mortgage pass-through certificate" would include: (i)
Securities issued in a Series consisting of only a single class of Securities;
and (ii) Securities issued in a Series in which there is only one class of
Trust Securities; provided that the Securities in the case of clause (i), or
the Securities in the case of clause (ii), evidence the beneficial ownership of
both a specified percentage of future interest payments (greater than 0%) and a
specified percentage (greater than 0%) of future principal payments on the
Loans. It is not clear whether a class of Securities that evidences the
beneficial ownership in a Trust Fund divided into Loan groups, beneficial
ownership of a specified percentage of interest payments only or principal
payments only, or a notional amount of either principal or interest payments,
or a class of Securities entitled to receive payments of interest and
<PAGE>
principal on the Loans only after payments to other classes or after the
occurrence of certain specified events would be a "mortgage pass-through
certificate" for purposes of PTE 83-1.
PTE 83-1 sets forth three general conditions which must be satisfied
for any transaction to be eligible for exemption: (i) the maintenance of a
system of insurance or other protection for the pooled mortgage loans and
property securing such loans, and for indemnifying Securityholders against
reductions in pass-through payments due to property damage or defaults in loan
payments in an amount not less than the greater of one percent of the aggregate
principal balance of all covered pooled mortgage loans or the principal balance
of the largest covered pooled mortgage loan; (ii) the existence of a pool
trustee who is not an affiliate of the pool sponsor; and (iii) a limitation on
the amount of the payment retained by the pool sponsor, together with other
funds inuring to its benefit, to not more than adequate consideration for
selling the mortgage loans plus reasonable compensation for services provided
by the pool sponsor to the Pool. The Depositor believes that the first general
condition referred to above will be satisfied with respect to the Securities in
a Series issued without a subordination feature, or the Securities only in a
Series issued with a subordination feature, provided that the subordination and
Reserve Account, subordination by shifting of interests, the pool insurance or
other form of credit enhancement described herein (such subordination, pool
insurance or other form of credit enhancement being the system of insurance or
other protection referred to above) with respect to a Series of Securities is
maintained in an amount not less than the greater of one percent of the
aggregate principal balance of the Loans or the principal balance of the
largest Loan. See "Description of the Securities" herein. In the absence of a
ruling that the system of insurance or other protection with respect to a
Series of Securities satisfies the first general condition referred to above,
there can be no assurance that these features will be so viewed by the DOL.
The Trustee will not be affiliated with the Depositor.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Single Family
Securities must make its own determination as to whether the first and third
general conditions, and the specific conditions described briefly in the
preceding paragraph, of PTE 83-1 have been satisfied, or as to the availability
of any other prohibited transaction exemptions. Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Securities is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
On September 6, 1990 the DOL issued to Greenwich Capital Markets,
Inc., an individual exemption (Prohibited Transaction Exemption 90-59;
Exemption Application No. D-8374, 55 Fed. Reg. 36724) (the "Underwriter
Exemption") which applies to certain sales and servicing of "certificates" that
are obligations of a "trust" with respect to which Greenwich Capital Markets,
Inc. is the underwriter, manager or co-manager of an underwriting syndicate.
The Underwriter Exemption provides relief which is generally similar to that
provided by PTE 83-1, but is broader in several respects.
The Underwriter Exemption contains several requirements, some of which
differ from those in PTE 83-l. The Underwriter Exemption contains an expanded
definition of "certificate" which includes an interest which entitles the
holder to pass-through payments of principal, interest and/or other payments.
The Underwriter Exemption contains an expanded definition of "trust" which
permits the trust corpus to consist of secured consumer receivables. The
definition
<PAGE>
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 IBCA, 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.
On July 21, 1997, the DOL published in the Federal Register an
amendment to the Exemption which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. The amendment generally
allows mortgage loans (the "Obligations") supporting payments to
certificateholders, and having a value equal to no more than twenty-five
percent (25%) of the total principal amount of the certificates being offered
by the trust, to be transferred to the trust within a 90-day or three-month
period following the closing date ("Pre-Funding Period"), instead of requiring
that all such Obligations be either identified or transferred on or before the
closing date. The relief is available when the following conditions are met:
(1) The ratio of the amount allocated to the pre-funding
account to the total principal amount of the certificates
being offered (the "Pre-Funding Limit") must not exceed
twenty-five percent (25%).
(2) All Obligations transferred after the closing date (the
"Additional Obligations") must meet the same terms and
conditions for eligibility as the original Obligations used
to create the trust, which terms and conditions have been
approved by an Exemption Rating Agency.
<PAGE>
(3) The transfer of such Additional Obligations to the trust
during the Pre-Funding Period must not result in the
certificates to be covered by the Exemption receiving a lower
credit rating from an Exemption Rating Agency upon
termination of the Pre-Funding Period than the rating that
was obtained at the time of the initial issuance of the
certificates by the trust.
(4) Solely as a result of the use of pre-funding, the
weighted average annual percentage interest rate (the
"Average Interest Rate") for all of the Obligations in the
trust at the end of the Pre-Funding Period must not be more
than 100 basis points lower than the average interest rate
for the Obligations which were transferred to the trust on
the closing date.
(5) In order to insure that the characteristics of the
Additional Obligations are substantially similar to the
original Obligations which were transferred to the Trust:
(i) the characteristics of the Additional
Obligations must be monitored by an insurer or other credit
support provider which is independent of the depositor; or
(ii) an independent accountant retained by
the depositor must provide the depositor with a letter (with
copies provided to each Exemption Rating Agency rating the
certificates, the related underwriter and the related
trustee) stating whether or not the characteristics of the
Additional Obligations conform to the characteristics
described in the related prospectus or prospectus supplement
and/or pooling and servicing agreement. In preparing such
letter, the independent accountant must use the same type of
procedures as were applicable to the Obligations which were
transferred to the trust as of the closing date.
(6) The Pre-Funding Period must end no later than three
months or 90 days after the closing date or earlier in
certain circumstances if the pre-funding account falls below
the minimum level specified in the pooling and servicing
agreement or an event of default occurs.
(7) Amounts transferred to any pre-funding account and/or
capitalized interest account used in connection with the
pre-funding may be invested only in investments which are
permitted by the Exemption Rating Agencies rating the
certificates and must:
(i) be direct obligations of, or obligations fully
guaranteed as to timely payment of principal and interest by,
the United States or any agency or instrumentality thereof
(provided that such obligations are backed by the full faith
and credit of the United States); or
(ii) have been rated (or the obligor has been rated) in
one or the three highest generic rating categories by an
Exemption Rating Agency ("DOC Permitted Investments").
(8) The related prospectus or prospectus supplement must
describe:
<PAGE>
(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.
Any Plan fiduciary which proposes to cause a Plan to purchase
Securities should consult with their counsel concerning the impact of ERISA and
the Code, the applicability of PTE 83-1 and the Underwriter Exemption, and the
potential consequences in their specific circumstances, prior to making such
investment. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment procedure and diversification an
investment in the Securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
LEGAL INVESTMENT
The Prospectus Supplement for each series of Securities will specify
which, if any, of the classes of Securities offered thereby constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Classes of Securities that qualify as
"mortgage related securities" will be legal investments for persons, trusts,
corporations, partnerships, associations, business trusts, and business
entities (including depository institutions, life insurance companies and
pension funds) created pursuant to or existing under the laws of the United
States or of any state (including the District of Columbia and Puerto Rico)
whose authorized investments are subject to state regulations to the same
extent as, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any such entities. Under SMMEA,
if a state enacted legislation prior to October 4, 1991 specifically limiting
the legal investment authority of any such entities with respect to "mortgage
related securities", securities will constitute legal investments for entities
subject to such legislation only to the extent provided therein. Approximately
twenty-one states adopted such legislation prior to the October 4, 1991
deadline. SMMEA provides, however, that in no event will the enactment of any
such legislation affect the validity of any contractual commitment to purchase,
hold or invest in securities, or require the sale or other disposition of
securities, so long as such contractual commitment was made or such securities
were acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and
loan associations and federal savings banks may invest in, sell or otherwise
deal in Securities without limitations as to the percentage of their assets
represented thereby, federal credit unions may invest in mortgage related
securities, and national banks may purchase certificates for their own account
without regard to the limitations generally applicable to investment securities
set forth in 12 U.S.C. 24 (Seventh), subject in each case to such regulations
as the applicable federal authority may prescribe. In this connection, federal
credit unions should review the National Credit Union Administration ("NCUA")
Letter to Credit Unions No. 96, as modified by Letter to Credit Unions No. 108,
which includes guidelines to assist federal credit unions in making investment
decisions for mortgage related
<PAGE>
securities and the NCUA's regulation "Investment and Deposit Activities" (12
C.F.R. Part 703), which sets forth certain restrictions on investment by
federal credit unions in mortgage related securities.
All depository institutions considering an investment in the
Securities (whether or not the class of Securities under consideration for
purchase constitutes a "mortgage related security") should review the Federal
Financial Institutions Examination Council's Supervisory Policy Statement on
the Securities Activities (to the extent adopted by their respective
regulators) (the "Policy Statement") setting forth, in relevant part, certain
securities trading and sales practices deemed unsuitable for an institution's
investment portfolio, and guidelines for (and restrictions on) investing in
mortgage derivative products, including "mortgage related securities", which
are "high-risk mortgage securities" as defined in the Policy Statement.
According to the Policy Statement such "high-risk mortgage securities" include
securities such as Securities not entitled to distributions allocated to
principal or interest, or Subordinated Securities. Under the Policy Statement,
it is the responsibility of each depository institution to determine, prior to
purchase (and at stated intervals thereafter), whether a particular mortgage
derivative product is a "high-risk mortgage security", and whether the purchase
(or retention) of such a product would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions which may restrict or prohibit investment in
securities which are not "interest bearing" or "income paying".
There may be other restrictions on the ability of certain investors,
including depositors institutions, either to purchase Securities or to purchase
Securities representing more than a specified percentage of the investor's
assets. Investors should consult their own legal advisors in determining
whether and to what extent the Securities constitute legal investments for such
investors.
METHOD OF DISTRIBUTION
The Securities offered hereby and by the Prospectus Supplement will be
offered in Series. The distribution of the Securities may be effected from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices to be determined at the time
of sale or at the time of commitment therefor. If so specified in the related
Prospectus Supplement, the Securities will be distributed in a firm commitment
underwriting, subject to the terms and conditions of the underwriting
agreement, by Greenwich Capital Markets, Inc. ("GCM") acting as underwriter
with other underwriters, if any, named therein. In such event, the related
Prospectus Supplement may also specify that the underwriters will not be
obligated to pay for any Securities agreed to be purchased by purchasers
pursuant to purchase agreements acceptable to the Depositor. In connection with
the sale of the Securities, underwriters may receive compensation from the
Depositor or from purchasers of the Securities in the form of discounts,
concessions or commissions. The related Prospectus Supplement will describe any
such compensation paid by the Depositor.
Alternatively, the related Prospectus Supplement may specify that the
Securities will be distributed by GCM acting as agent or in some cases as
principal with respect to Securities that it
<PAGE>
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.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports
filed or caused to be filed by Financial Asset Securities Corp. ("FASCO") with
respect to a Trust Fund pursuant to Section 13(a), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, prior to the termination of the
offering of Certificates 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 Certificates, FASCO 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 Certificates, other than the exhibits to such
<PAGE>
documents (unless such exhibits are specifically incorporated by reference in
such documents). Requests to FASCO should be directed in writing to: Paul D.
Stevelman, Financial Asset Securities Corp., 600 Steamboat Road, Greenwich,
Connecticut 06830, telephone number (203) 625-2700. FASCO has determined that
its financial statements are not material to the offering of any Certificates.
AVAILABLE INFORMATION
The Depositor has filed with the SEC 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 SEC. 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 SEC 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 SEC 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.
RATING
It is a condition to the issuance of the Securities of each Series
offered hereby and by the Prospectus Supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies (each, a "Rating Agency") specified in
the related Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of
the value of the Trust Fund Assets and any credit enhancement with respect to
such class and will reflect such Rating Agency's assessment solely of the
likelihood that holders of a class of Securities of such class will receive
payments to which such Securityholders are entitled under the related
Agreement. Such rating will not constitute an assessment of the likelihood that
principal prepayments on the related Loans will be made, the degree to which
the rate of such prepayments might differ from that originally anticipated or
the likelihood of early optional termination of the Series of Securities. Such
rating should not be deemed a recommendation to purchase, hold or sell
Securities, inasmuch as it does not address market price or suitability for a
particular investor. Such rating will not address the possibility that
prepayment at higher or lower rates than anticipated by an investor may cause
such investor to experience a lower than anticipated yield or that an investor
purchasing a Security at a significant premium might fail to recoup its initial
investment under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect
for any given period of time or that it may not be lowered or
<PAGE>
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.
<PAGE>
INDEX OF DEFINED TERMS
Accrual Securities....................................................28
Additional Obligations...............................................112
Agreement.............................................................14
APR...................................................................17
Asset Conservation Act................................................66
Available Funds.......................................................27
Average Interest Rate................................................112
Bankruptcy Bond.......................................................39
BIF...................................................................49
Book-Entry Securities.................................................32
Cash Flow Bond Method.................................................93
Cede..................................................................33
CEDEL.................................................................33
CEDEL Participants....................................................34
CERCLA................................................................66
Certificates..........................................................13
Code..................................................................79
Collateral Value......................................................18
Combined Loan-to-Value Ratio..........................................18
Contingent Regulations................................................82
Cooperative...........................................................35
Cut-off Date..........................................................13
Debt Securities.......................................................80
Definitive Security...................................................33
Detailed Description..................................................14
Determination Date....................................................27
DOL..................................................................109
DOL Permitted Investments............................................113
DTC...................................................................33
Eligible Corporations................................................105
Euroclear.............................................................33
Euroclear Participants................................................35
European Depositaries.................................................33
FASCO.................................................................20
FASIT Qualification Test.............................................105
FDIC..................................................................49
Financial Intermediary................................................33
Garn-St. Germain Act..................................................69
GCM..................................................................115
High-Yield Interest..................................................105
Home Equity Loans.....................................................14
Home Improvement Contracts............................................14
Home Improvements.....................................................14
HUD...................................................................41
Indenture.............................................................24
Installment Contract..................................................72
Insurance Proceeds....................................................50
Insured Expenses......................................................50
Interest Weighted Securities..........................................84
IO...................................................................105
IRS...................................................................82
Liquidation Expenses..................................................50
Liquidation Proceeds..................................................50
Loan Rate.............................................................15
Mark-to-Market Regulations............................................91
Morgan................................................................33
Mortgage..............................................................48
NCUA.................................................................114
New Regulations.......................................................95
Nonresidents..........................................................96
Notes.................................................................13
Obligations..........................................................112
OID...................................................................80
OID Regulations.......................................................80
PABS Agreement........................................................18
PABS Issuer...........................................................18
PABS Servicer.........................................................18
PABS Trustee..........................................................18
Participants..........................................................33
Parties in Interest..................................................109
Pass-Through Rate.....................................................13
Pass-Through Securities...............................................91
Pay-Through Security..................................................82
Permitted Investments.................................................50
Plans................................................................108
Policy Statement.....................................................114
Pool..................................................................13
Pool Insurance Policy.................................................40
Pool Insurer..........................................................40
Pooling and Servicing Agreement.......................................24
Pre-Funded Amount.....................................................51
Pre-Funding Account...................................................51
Pre-Funding Limit....................................................112
Pre-Funding Period...................................................112
Premium...............................................................77
Prepayment Assumption.................................................82
Primary Insurer.......................................................56
Principal Prepayments.................................................29
Properties............................................................15
Property Improvement Loans............................................75
PTE 83-1.............................................................109
Purchase Price........................................................23
Rating Agency........................................................116
Ratio Strip Securities................................................93
RCRA..................................................................67
Record Date...........................................................25
Refinance Loan........................................................18
Regular Interest Securities...........................................80
Relevant Depositary...................................................33
Relief Act............................................................73
REMIC.................................................................26
Reserve Account.......................................................26
Residual Interest Security............................................88
Retained Interest.....................................................24
Rules.................................................................33
SAIF..................................................................49
SEC...................................................................20
Security Account......................................................49
Security Owners.......................................................33
Security Register.....................................................25
Sellers...............................................................13
Senior Securities.....................................................37
Servicing Agreement...................................................13
Servicing Fee.........................................................91
Short-Term Note.......................................................97
Single Family Properties..............................................15
Single Family Securities.............................................109
Small Mixed-Use Properties............................................17
SMMEA................................................................113
Special Hazard Insurance Policy.......................................38
Special Hazard Insurer................................................38
Stripped Securities...................................................91
Sub-Servicers.........................................................13
Sub-Servicing Account.................................................49
Sub-Servicing Agreement...............................................51
Support Agreement.....................................................30
Support Servicer......................................................30
Tax Counsel...........................................................79
Terms and Conditions..................................................35
TIN...................................................................95
Title I Loans.........................................................75
Title I Program.......................................................75
Title V...............................................................70
Trust Agreement.......................................................14
Trust Fund............................................................13
Trust Fund Assets.....................................................13
Trustee...............................................................24
U.S. Person...........................................................80
UCC...................................................................70
Underwriter Exemption................................................111
VA Guaranty Policy....................................................42
