PROSPECTUS SUPPLEMENT
(To Prospectus dated May 17, 1999)
[LOGO]
NEW CENTURY HOME EQUITY LOAN TRUST, SERIES 1999-NCA
$325,000,000
ASSET BACKED PASS-THROUGH CERTIFICATES
$96,000,000 Class A-1 Variable Pass-Through Rate
$50,000,000 Class A-2 6.68% Pass-Through Rate
$45,000,000 Class A-3 6.76% Pass-Through Rate
$50,000,000 Class A-4 7.22% Pass-Through Rate
$22,266,000 Class A-5 7.55% Pass-Through Rate
$23,000,000 Class A-6 7.11% Pass-Through Rate
$38,734,000 Class A-7 7.32% Pass-Through Rate
Notional Balance Class A-8IO Weighted Average Pass-Through Rate
NEW CENTURY MORTGAGE CORPORATION
Originator and Servicer
----------------------
NC CAPITAL CORPORATION
Seller
----------------------
FINANCIAL ASSET SECURITIES CORP.
Depositor
----------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-8 IN THIS PROSPECTUS
SUPPLEMENT AND ON 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., New Century
Mortgage Corporation, Firstar Bank Milwaukee, N.A., U.S. Bank National
Association or any of their affiliates.
This prospectus supplement may be used to offer and sell the certificates only
if accompanied by the prospectus.
Only the eight classes of certificates identified above are being offered by
this prospectus supplement and the accompanying prospectus.
THE CERTIFICATES
o The certificates represent ownership interests in a trust consisting
primarily of a pool of first and second lien, fixed-rate residential
mortgage loans and funds on deposit in the related pre-funding
accounts. The mortgage loans will be segregated into two groups as
described in this prospectus supplement.
o The Class A-1 Certificates will accrue interest at a rate equal to
one-month LIBOR plus a fixed margin, subject to certain limitations
described in this prospectus supplement.
o The Class A-2, Class A-3, Class A-4, Class A-5, Class A-6 and Class
A-7 Certificates will accrue interest at the fixed rates specified
above, subject to certain limitations described in this prospectus
supplement.
o The Class A-8IO Certificates will have no principal balance and will
bear interest for thirty-six months at the rate described in this
prospectus supplement calculated on a notional balance. No
distributions will be made on the Class A-8IO Certificates after the
June 2002 distribution date.
CREDIT ENHANCEMENT
o Policy - Financial Security Assurance Inc. will issue a certificate
insurance policy guaranteeing certain payments on the offered
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.
[FSA LOGO]
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 A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6 and Class
A-7 Certificates are being offered by Greenwich Capital Markets, Inc. and
PaineWebber Incorporated from time to time in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. The Class
A-8IO Certificates are being offered by Greenwich Capital Markets, Inc. from
time to time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the depositor with respect to the
sale of the offered certificates are expected to be approximately
$326,489,109.43, before deducting issuance expenses payable by the depositor,
estimated to be $440,000. 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 June 24, 1999.
GREENWICH CAPITAL MARKETS, INC. PAINEWEBBER INCORPORATED
June 21, 1999
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
----
Summary of Terms..............................S-3
Risk Factors..................................S-8
The Mortgage Pool............................S-13
The Originator and Servicer..................S-32
The Pooling and Servicing Agreement..........S-42
Description of the Certificates..............S-47
The Certificate Insurer......................S-84
Use of Proceeds..............................S-87
Certain Material Federal Income
Tax Consequences...........................S-87
State Taxes..................................S-91
ERISA Considerations.........................S-91
Legal Investment Considerations..............S-94
Method of Distribution.......................S-95
Legal Matters................................S-95
Ratings......................................S-95
Experts......................................S-96
Index of Defined Terms.......................S-97
Annex I ....................................S-101
PROSPECTUS
Page
----
Important Notice About
Information in this Prospectus
and Each Accompanying
Prospectus Supplement....................3
Risk Factors................................4
The Trust...................................10
Use of Proceeds.............................15
The Depositor...............................16
Loan Program................................18
Description of The
Securities ..............................18
Credit Enhancement..........................27
Yield and Prepayment
Considerations...........................32
The Agreements..............................35
Certain Legal Aspects
of the Loans.............................47
Certain Material Federal Income
Tax Considerations.......................58
State Tax Considerations....................79
ERISA Considerations........................80
Legal Investment............................83
Method of Distribution......................84
Legal Matters...............................85
Financial Information.......................85
Rating......................................86
Index of Defined Terms......................88
<PAGE>
SUMMARY OF TERMS
o This summary highlights selected information from this document and
does not contain all of the information that you need to consider in
making your investment decision. To understand all of the terms of
the offering of the certificates, read carefully this entire
document and the accompanying prospectus.
o This summary provides an overview of certain calculations, cash flow
priorities and other information to aid your understanding and is
qualified by the full description of these calculations, cash flow
priorities and other information in this prospectus supplement and
the accompanying prospectus. Some of the information consists of
forward-looking statements relating to future economic performance
or projections and other financial items. Forward-looking statements
are subject to a variety of risks and uncertainties that could cause
actual results to differ from the projected results. Those risks and
uncertainties include, among others, general economic and business
conditions, regulatory initiatives and compliance with governmental
regulations, and various other matters, all of which are beyond our
control. Accordingly, what actually happens may be very different
from what we predict in our forward-looking statements.
<PAGE>
Offered Certificates
The New Century Home Equity Loan Trust, Series 1999-NCA Asset Backed
Pass-Through Certificates will consist of ten classes of certificates, eight
of which are being offered by this prospectus supplement and the accompanying
prospectus. The assets of the trust that will support the certificates will
consist primarily of a pool of fixed-rate, first and second lien, residential
mortgage loans and funds on deposit in the related pre-funding accounts.
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 two classes of certificates that are not being offered to
the public by this prospectus supplement. These certificates will be
designated the Class P and the Class R Certificates. The Class P Certificates
will have an original principal balance of $100. The Class R Certificates will
not have an original principal balance.
We refer you to "Description of the Certificates--General," "--Book-Entry
Certificates" and "The Mortgage Pool" in this prospectus supplement and "The
Trust--The Loans--General" in the accompanying prospectus for additional
information.
Cut-off Date
For any initial mortgage loan, June 1, 1999. For any additional mortgage loan,
the date of its origination.
Closing Date
On or about June 24, 1999.
Servicer and Originator
New Century Mortgage Corporation, a California corporation.
We refer you to "The Mortgage Pool--Underwriting Standards" and "The
Originator and Servicer" in this prospectus supplement for additional
information.
Seller
NC Capital Corporation, a California corporation.
We refer you to "The Pooling and Servicing Agreement--The Seller" in this
prospectus supplement for additional information.
The Depositor
Financial Asset Securities Corp.
600 Steamboat Road
Greenwich, Connecticut 06830
(203) 625-2700
Trustee
Firstar Bank Milwaukee, N.A., a national banking association.
We refer you to "The Pooling and Servicing Agreement--The Trustee" in this
prospectus supplement for additional information.
Trustee Administrator
U.S. Bank National Association, a national banking association.
We refer you to "Pooling and Servicing Agreement--Trust Administrator" in this
prospectus supplement for additional information.
Certificate Insurer
Financial Security Assurance Inc., a New York stock insurance company.
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 Offered Certificates
Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class
A-6, Class A-7 and Class A-8IO Certificates.
o Group I Certificates
Class A-1, Class A-2, Class A-3, Class A-4, Class A-5 and Class
A-6 Certificates. Except under the circumstances described
under "Description of the Certificates--Allocation of
Available Funds," the Group I Certificates receive their
distributions from Loan Group I.
o Group II Certificates
Class A-7 Certificates. Except under the circumstances
described herein under "Description of the Certificates -
Allocation of Available Funds," the Class A-7 Certificates
receive their distributions from Loan Group II.
o Floating Rate Certificates
Class A-1 Certificates
o Fixed Rate Certificates
Class A-2, Class A-3, Class A-4, Class A-5, Class A-6, Class
A-7 and Class A-8IO Certificates
o Interest Only Certificates
Class A-8IO Certificates. The Class A-8IO Certificates consist
of two payment components, the Class A-8IO-I Component and
Class A-8IO-II Component, as further described in this
prospectus supplement.
o Book-Entry Certificates
Offered Certificates
o Physical Certificates
Class P and Class R Certificates
o Residual Certificates
Class R Certificates
Mortgage Loans
On the closing date the trust will acquire an initial pool of fixed-rate,
first and second lien residential mortgage loans that will be segregated into
two groups, Loan Group I and Loan Group II. During the pre-funding period, the
trust is expected to acquire additional mortgage loans using amounts on
deposit in the pre-funding accounts. The pre-funding period will begin on the
closing date and end not later than July 25, 1999. As of the initial cut-off
date, the initial mortgage loans in Loan Group I are expected to have an
aggregate outstanding principal balance of approximately $219,008,212.32, and
the initial mortgage loans in Loan Group II are expected to have an aggregate
outstanding principal balance of approximately $29,633,223.38.
The statistical information in this prospectus supplement reflects the
characteristics of the initial mortgage loans in Loan Group I and Loan Group
II as of the initial cut-off date. The statistical information does not
reflect the characteristics of any additional mortgage loans that are acquired
by the trust during the pre-funding period. As a result, the statistical
profile of the final pool of mortgage loans following the pre-funding period
will vary somewhat from the statistical profile of the initial mortgage loans
presented in this prospectus supplement.
Distribution Dates
Beginning in July 1999, the trustee will make distributions on the
certificates on the 25th day of each calendar month to the holders 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 A-1 One-Month LIBOR+0.15%
Class A-2 6.68%
Class A-3 6.76%
Class A-4 7.22%
Class A-5 7.55%
Class A-6 7.11%
Class A-7 7.32%
Class A-8IO Weighted Average*
______________
* The Class A-8IO Certificates will consist of two payment components, the
Class A-8IO-I and Class A-8IO-II Components. The components will bear
interest on their notional balances for thirty-six months at the rate
described in this prospectus supplement. No distributions will be made on
the Class A-8IO Certificates after the June 2002 distribution date.
In addition, if the servicer fails to exercise its option to terminate the
trust on the earliest permitted date as described below under "Optional
Termination", the pass-through rates on the following classes of offered
certificates will increase to the rates specified below:
Class A-5 8.05%
Class A-6 7.61%
Class A-7 7.82%
Interest payable on each class of certificates accrues during an accrual
period. Except for the first accrual period, the accrual period for the Class
A-1 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
for the Class A-1 Certificates will begin on the closing date and end on July
25, 1999. Interest will be calculated for the Class A-1 Certificates on the
basis of the actual number of days in the accrual period, based on an assumed
360-day year. The accrual period for the Class A-2, Class A-3, Class A-4,
Class A-5, Class A-6, Class A-7 and Class A-8IO Certificates for any
distribution date is the prior calendar month. Interest will be calculated for
the Class A-2, Class A-3, Class A-4, Class A-5, Class A-6, Class A-7 and Class
A-8IO Certificates on the basis of a 360-day year consisting of twelve 30-day
months.
We refer you to "Description of the Certificates" in this prospectus
supplement for additional information.
Principal Payments
Principal will be distributed to holders of the offered certificates (other
than the Class A-8IO Certificates) on each distribution date in the amounts
described herein under "Description of the Certificates--Allocation of
Available Funds."
Payment Priorities
In general, funds available for distribution on any distribution date from
payments and other amounts received on the mortgage loans in a loan group will
be distributed, first, to cover certain trust expenses, second, to pay
interest on the related offered certificates and, third, to pay principal on
the related offered certificates.
General
Funds on deposit in either pre-funding account that have not been used to
purchase additional mortgage loans during the pre-funding period will be
distributed as principal of the Group I or Group II Certificates, as
applicable, on the first distribution date following the pre-funding period.
In certain limited circumstances, payments on the mortgage loans in one loan
group may be used to make certain distributions to the holders of the offered
certificates relating to the other loan group.
We refer you to "Description of the Certificates" in this prospectus
supplement for additional information.
Pre-Funding Accounts and Capitalized Interest Accounts
At closing, the seller will deposit up to $76,358,564.30 into two separate
pre-funding accounts, to be used to acquire additional mortgage loans from the
seller during the pre-funding period.
Of this amount, the trust will apply up to $67,257,787.68 to purchase
additional mortgage loans for inclusion in Group I and up to $9,100,776.62 to
purchase additional mortgage loans for inclusion in Group II.
The purchase of additional mortgage loans will occur only during the
pre-funding period, which will begin on the closing date and end not later
than July 25, 1999.
At closing, the seller also will deposit funds into two separate capitalized
interest accounts for use as necessary during the pre-funding period to ensure
that all required interest distributions are made on the offered certificates.
We refer you to "The Pooling and Servicing Agreement--Pre-Funding Accounts and
Capitalized Interest Accounts" in this prospectus supplement for additional
information.
Advances
The servicer is required to make cash advances to cover delinquent payments of
principal and interest unless it reasonably believes that the cash advances
are not 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 servicer may purchase all of the mortgage loans and retire the
certificates when the current aggregate principal balance of the mortgage
loans is equal to or less than 10% of the aggregate cut-off date principal
balances of the mortgage loans. However, in no event will the optional
termination occur before June 2002.
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
The Financial Guaranty Policy
The certificate insurance policy will guaranty the payment of principal and
interest on the offered certificates to the extent described in this
prospectus supplement. If the certificate insurer were unable to pay under the
policy, the offered certificates could be subject to losses.
We refer you to "Description of the Certificates--Credit Enhancement--The
Certificate Insurance Policy" in this prospectus supplement for additional
information.
Overcollateralization
The mortgage loans owned by the trust bear interest each month in an amount
that in the aggregate is expected to exceed the amount needed to pay monthly
interest on the offered certificates and certain trust expenses. A portion of
this excess interest will be applied initially to pay principal on the offered
certificates until the required level of overcollateralization is reached.
This will reduce 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.
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 Ratings Services, a
division of The McGraw Hill Companies, Inc. and Moody's Investors Service,
Inc.
Standard &
Poor's Moody's
Class Rating Rating
----- ------ --------
A-1 AAA Aaa
A-2 AAA Aaa
A-3 AAA Aaa
A-4 AAA Aaa
A-5 AAA Aaa
A-6 AAA Aaa
A-7 AAA Aaa
A-8IO AAAr Aaa
A rating is not a recommendation to buy, sell or hold securities. These
ratings may be lowered or withdrawn at any time by any 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 trust accounts) will be characterized as two "real estate
mortgage investment conduits" or "REMICs". The Class A-1, Class A-2, Class
A-3, Class A-4, Class A-5, Class A-6, Class A-7, Class A-8IO and Class P
Certificates will constitute "regular interests" in the issuing REMIC. The
Class R Certificates will represent the sole class of "residual interests" in
both REMICs.
The offered certificates generally will be treated as newly originated debt
instruments for federal income tax purposes. Beneficial owners of the offered
certificates will be required to report income on the offered certificates in
accordance with the accrual method of accounting.
We refer you to "Certain Material Federal Income Tax Consequences" in this
prospectus supplement and in the prospectus for additional information.
ERISA Considerations
It is expected that the offered certificates may be purchased by a pension or
other employee benefit plan subject to the Employee Retirement Income Security
Act of 1974, as amended, or Section 4975 of the Internal Revenue Code of 1986,
as amended, 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.
We refer you to "ERISA Considerations" in this prospectus supplement and in
the prospectus.
Legal Investment
The certificates will not be "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984. You should consult with
your lawyer to see if you are permitted to buy the certificates since the
legal investment rules vary depending on what kind of entity you are and who
regulates you.
We refer you to "Legal Investment Considerations" in this prospectus
supplement and "Legal Investment" in the prospectus.
<PAGE>
RISK FACTORS
The following information, which you should carefully consider,
identifies certain significant sources of risk associated with an investment
in the certificates. You should also carefully consider the information set
forth under "Risk Factors" in the prospectus.
Unpredictability of Prepayments and Effect on Yields
Borrowers may prepay their mortgage loans in whole or in part at any
time. We cannot predict the rate at which borrowers will repay their mortgage
loans. A prepayment of a mortgage loan generally will result in a prepayment
on the certificates.
o If you purchase your certificates at a discount and principal is
repaid slower than you expect, then your yield may be lower than you
expect.
o If you purchase your certificates at a premium and principal is
repaid faster than you expect, then your yield may be lower than you
expect.
o If you purchase the Class A-8IO Certificates and principal of the
mortgage loans is repaid at an extremely rapid rate, you may not
recover your initial investment.
o The rate of prepayments on the mortgage loans will be sensitive to
prevailing interest rates. Generally, if prevailing interest rates
decline significantly, the mortgage loans are more likely to prepay
than if prevailing rates remain at or above current levels.
Conversely, if prevailing interest rates rise significantly, the
prepayments on the mortgage loans are likely to decrease.
o Approximately 74.10% of the initial mortgage loans in Loan Group I
and approximately 76.99% of the initial mortgage loans in Loan Group
II (in each case by aggregate cut-off date principal balance)
require the mortgagor to pay a premium if the mortgagor prepays the
mortgage loan during a specified period. This period may range from
three months to five years after the mortgage loan was originated. A
prepayment premium may discourage a mortgagor from prepaying the
mortgage loan during the applicable period. No prepayment premiums
will be distributed to holders of the offered certificates.
o The seller may be required to purchase mortgage loans from the trust
in the event certain breaches of representations and warranties
occur and are not cured. In addition, the originator has the option
to purchase mortgage loans that become ninety days or more
delinquent, subject to certain limitations and conditions described
in the prospectus supplement. These purchases will have the same
effect on the holders of the related class or classes of 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
offered certificates.
o On the first distribution date, amounts remaining on deposit in the
pre-funding accounts will be distributed as principal of the related
classes of offered certificates on a pro rata basis. Accordingly,
these distributions, if they occur, will reduce the notional balance
of the Class A-8IO Certificates.
See "Yield, Prepayment and Maturity Considerations" for a description
of factors that may influence the rate and timing of prepayments on the
mortgage loans.
Potential Inadequacy of Credit Enhancement for the Offered Certificates
The credit enhancement features described in the summary are intended
to enhance the likelihood that holders of the offered certificates will
receive regular payments of interest and, if applicable, principal. However,
we cannot assure you that the credit enhancement will adequately cover any
shortfalls in cash available to pay your certificates as a result of
delinquencies or defaults on the mortgage loans. 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.
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 financial guaranty policy, you may suffer losses.
Rating of the Offered Certificates Based Primarily on Rating of
the Certificate Insurer
The ratings on the offered certificates will depend primarily on the
rating of the certificate insurer. Therefore, a reduction of the rating
assigned to the rating of the certificate insurer may result in a
corresponding reduction on the ratings assigned to the offered certificates.
In general, the ratings address credit risk and do not address the likelihood
of prepayments.
Effect of the Rate Caps on Certain Classes of Certificates
The Class A-1, Class A-4, Class A-5, Class A-6 and Class A-7
Certificates will accrue interest at the respective pass-through rates
specified on the cover of this prospectus supplement, but in each case will be
subject to a rate cap. The rate cap in each case will be based on the weighted
average of the interest rates of the mortgage loans in the related loan group
net of certain trust expenses and, for the first thirty-six distribution
dates, net of the amount distributed on the related component of the Class
A-8IO certificates. The mortgage loans accrue interest at various fixed rates.
As a result, the Class A-1, Class A-4, Class A-5, Class A-6 and Class A-7
Certificates may accrue less interest than they would accrue if their rates
were calculated solely on the basis set forth on the cover. The related
classes of certificates do not provide for any "carry-forward" or "catch-up"
if the amount of interest paid to the holders of such certificates is reduced.
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 the amount of the servicer's fee for the
related accrual period. The certificate insurer will not be required to cover
this shortfall. If the other credit enhancement is insufficient to cover this
shortfall in excess of the servicing fee, it may adversely affect the yield on
your investment.
Furthermore, 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 may
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 34.52% of the initial mortgage loans in Loan Group I and
approximately 42.11% of the initial mortgage loans in Loan Group II based on
aggregate cut-off date principal balances had loan-to-value ratios in excess
of 80.00%, but no more than 95.13%, at origination.
Additional Mortgage Loans May Differ from Initial Mortgage Loans
Amounts on deposit in the pre-funding accounts will be applied to
purchase additional mortgage loans from the seller during the pre-funding
period. While the seller will not select additional mortgage loans in a manner
believed to be adverse to the interests of certificateholders, the additional
mortgage loans may have been originated using credit criteria different from
that applied to the initial mortgage loans. Following the transfer of the
additional mortgage loans to the trust, the aggregate characteristics of the
mortgage loans held in the trust may vary from those of the initial mortgage
loans.
Any funds remaining on deposit in the pre-funding accounts at the end
of the pre-funding period will be distributed as principal to holders of the
related classes of offered certificates on the first distribution date.
The ability of the trust to invest in additional mortgage loans
largely depends on the ability of the originator to originate or purchase
additional mortgage loans. The ability of the originator to originate or
purchase additional mortgage loans may be affected by a variety of economic
and social factors, which include interest rates, unemployment levels, the
rate of inflation and consumer perception of economic conditions generally.
The seller is unable to predict the extent to which such economic or social
factors will affect the originator's ability to originate or purchase
additional loans.
Geographic Concentration of the Initial Mortgage Loans
The chart below lists the states with the highest concentrations of
mortgage loans for each loan group based on aggregate cut-off principal
balance of the initial mortgage loans in each loan group.
Initial Loan Group I Initial Loan Group II
-------------------- ---------------------
California 29.89% California 50.19%
Texas 11.66% Illinois 8.11%
Florida 9.13% Texas 6.29%
Illinois 4.54% Washington 5.08%
Washington 3.42% Florida 4.04%
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 described below will have a
disproportionate impact on the mortgage loans in general.
o Economic conditions in states listed above that 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. Lower loan-to-value ratios could 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 Due to Prior Liens
Approximately 9.47% of the initial mortgage loans in Loan Group I and
10.69% of the initial mortgage loans in Loan Group II by aggregate cut-off
date principal balance are secured by second liens, in each case junior to a
senior lien on the related mortgaged property. In general, a junior lienholder
may not foreclose on the related mortgaged property unless it forecloses
subject to the senior lien, in which case it must either pay the entire amount
due under the senior mortgage or agree to make payments under the senior
mortgage if the borrower is in default thereunder. As a result, in general,
the servicer does not expect to foreclose on mortgage loans secured by second
liens.
Lack of Liquidity
Greenwich Capital Markets, Inc. and Paine Webber Incorporated intend
to make a secondary market in the classes of offered certificates, but have 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 asset-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.
Servicer Alternatives to Foreclosure
The servicer may foreclose on any delinquent mortgage loan or,
subject to certain limitations, work out an agreement with the mortgagor,
which may involve waiving or modifying any term of the mortgage loan. Upon the
consent of the certificate insurer, the servicer may also sell any mortgage
loan that is at least 90 days delinquent. If the servicer sells any such
mortgage loan for less than its outstanding balance plus all prior advances
thereon, or 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.
Year 2000 Systems Risk Could Affect the Ability of the Servicer or the
Trust Administrator to Perform Its Duties
As is the case with most companies using computers in their
operations, the servicer and the trust administrator are faced with the task
of completing their compliance goals in connection with the year 2000 issue.
The year 2000 issue is the result of prior computer programs being written
using two digits, rather than four digits, to define the applicable year. Any
of the servicer's or the trust administrator's computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. Any such occurrence could result in major computer
system failure or miscalculations. Each of the servicer and the trust
administrator is presently engaged in various procedures to ensure that its
computer systems and software will be year 2000 compliant. However, in the
event that the servicer or the trust administrator, or any of its related
suppliers, customers, brokers or agents do not successfully and timely achieve
year 2000 compliance, the performance of obligations of the servicer or the
trust administrator, as the case may be, under the pooling and servicing
agreement could be materially adversely affected.
<PAGE>
THE MORTGAGE POOL
The information set forth in the following paragraphs has been
provided by NC Capital Corporation in its capacity as seller (the "Seller").
None of the Depositor, the Underwriters, the Trust Administrator, the Trustee,
the Certificate Insurer or any of their respective affiliates have made or
will make any representations as to the accuracy or completeness of such
information.
The statistical information presented in this prospectus supplement
relates only to the mortgage loans originated on or before June 1, 1999, and
conveyed to the Trust on the Closing Date (the "Initial Mortgage Loans").
Unless otherwise noted, all statistical percentages set forth in this
prospectus supplement are measured as a percentage of the aggregate balance of
the Initial Mortgage Loans or the number of Initial Mortgage Loans in the pool
as of June 1, 1999 (the "Initial Cut-off Date"). During the Pre-Funding
Period, additional mortgage loans (the "Additional Mortgage Loans") may be
purchased for inclusion in Loan Group I and Loan Group II (each, a "Loan
Group") from funds on deposit in the related Pre-Funding Account and will be
selected using generally the same criteria used to select the Initial Mortgage
Loans, and generally the same representations and warranties will be made with
respect to the Additional Mortgage Loans. The Initial Mortgage Loans and
Additional Mortgage Loans together are referred to herein as the "Mortgage
Loans" or the "Mortgage Pool." Initial Mortgage Loans included in Loan Group I
and Loan Group II are referred to herein as "Initial Group I Mortgage Loans"
and "Initial Group II Mortgage Loans," respectively. Additional Mortgage Loans
included in Loan Group I and Loan Group II are referred to herein as
"Additional Group I Mortgage Loans" and "Additional Group II Mortgage Loans,"
respectively.
Furthermore, prior to the Closing Date, Initial Mortgage Loans may be
removed from a Loan Group and other Mortgage Loans may be substituted
therefor. In addition, some amortization of the Initial Mortgage Loans may
occur prior to the Closing Date. Moreover, certain of the Initial Mortgage
Loans may prepay in full, or may be determined not to meet the eligibility
requirements for the final pool of Mortgage Loans acquired by the Trust on the
Closing Date. The Seller believes that the information set forth herein with
respect to each Loan Group 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
The assets held by the New Century Home Equity Loan Trust, Series
1999-NCA (the "Trust") will consist principally of the Mortgage Loans and the
Trust Accounts. Substantially all of the Mortgage Loans will consist of
fixed-rate, fully amortizing mortgage loans evidenced by mortgage notes (the
"Mortgage Notes") secured by first or second lien mortgages or deeds of trust
(the "Mortgages") on the related mortgaged properties (the "Mortgaged
Properties"). The Mortgaged Properties consist of owner-occupied properties
and non-owner-occupied investment properties. The Mortgaged Properties do not
include mobile homes which are not permanently affixed to the ground,
commercial properties or unimproved land. With respect to each Mortgage Loan,
the "Cut-off Date Loan Balance" is the unpaid principal balance of such
Mortgage Loan as of the opening of business on the applicable Cut-off Date
taking into account all scheduled payments of principal due on or before such
Cut-off Date, whether or not received.
The Mortgage Loans to be included in the Trust Fund will consist
primarily of loans from the Seller's portfolio that are not delinquent in
excess of the levels permitted in the Pooling and Servicing Agreement.
Pursuant to the Pooling and Servicing Agreement, the Originator will make
various representations and warranties regarding the Mortgage Loans. See "The
Pooling and Servicing Agreement--Assignment of the Mortgage Loans."
References herein to percentages of the Initial Mortgage Loans mean
percentages based on the aggregate of the Cut-off Date Loan Balances of the
Mortgage Loans in the related Loan Group, unless otherwise specified.
Initial Group I Mortgage Loan Statistics
The Initial Group I Mortgage Loans are expected to consist of 3,063
Mortgage Loans, 3,062 of which have fixed-rates, 3,062 of which are fully
amortizing, and all of which are evidenced by Mortgage Notes secured by
Mortgages on Mortgaged Properties located in 47 states. Approximately 90.53%
of the Initial Group I Mortgage Loans are secured by first liens on the
related Mortgaged Properties, and the remainder are secured by second liens on
the related Mortgaged Properties. The aggregate Initial Cut-off Date Loan
Balances of the Initial Group I Mortgage Loans totaled approximately
$219,008,212.32. The Initial Group I Mortgage Loans bear interest at fixed
Mortgage Rates ranging from approximately 6.7500% to 17.6000% per annum. The
weighted average Mortgage Rate for the Initial Group I Mortgage Loans was
approximately 10.2245% per annum. The lowest Cut-off Date Loan Balance of any
Initial Group I Mortgage Loan was approximately $4,678.01 and the highest was
approximately $327,269.78. The average Cut-off Date Loan Balance of the
Initial Group I Mortgage Loans was approximately $71,501.21. The weighted
average original term to stated maturity of the Initial Group I Mortgage Loans
was approximately 318.42 months. The weighted average remaining term to stated
maturity of the Initial Group I Mortgage Loans was approximately 317.65
months. As of the Initial Cut-off Date, the weighted average number of months
that have elapsed since origination of the Initial Group I Mortgage Loans was
approximately 0.76 months. The lowest and highest Combined Loan-to-Value
Ratios of the Initial Group I Mortgage Loans at origination were approximately
13.95% and 95.13%, respectively. The weighted average Combined Loan-to-Value
Ratio of the Initial Group I Mortgage Loans was approximately 75.81%. The
weighted average Combined Loan-to-Value Ratio of the Initial Group I Mortgage
Loans that represent second liens on the related Mortgaged Properties was
approximately 80.11%.
Approximately 10.55% of the Initial Group I Mortgage Loans are
secured by non-owner-occupied (including second homes) Mortgaged Properties
(based solely upon statements made by the related Mortgagors at the time of
origination of the related Mortgage Loans).
Approximately 1.50%, 17.61%, 4.72%, 1.06% and 75.12% of the Initial
Group I Mortgage Loans have original stated maturities of approximately 10
years, 15 years, 20 years, 25 years and 30 years, respectively. No Initial
Group I Mortgage Loan is scheduled to mature later than June 1, 2029.
As of June 1, 1999, approximately 0.64% of the Initial Group I
Mortgage Loans were 30 days Delinquent, and no Initial Group I Mortgage Loan
was 60 or more days Delinquent.
<PAGE>
The Initial Group I Mortgage Loans are expected to have the following
characteristics as of the Initial Cut-off Date (it being understood that the
sum in any column may not equal the indicated total due to rounding):
<TABLE>
<CAPTION>
Combined Loan-to-Value Ratios of the Initial Group I Mortgage Loans(1)
Percent of
Aggregate Cut-off
Date Loan Balance
Number Aggregate of all Initial
Range of Combined of Cut-off Date Group I
Loan-to-Value Ratios (%) Mortgage Loans Loan Balance Mortgage Loans
- ------------------------- -------------- -------------- ------------------
<S> <C> <C> <C>
13.95 - 15.00 1 $ 30,000.00 0.01%
15.01 - 20.00 10 296,782.85 0.14
20.01 - 25.00 16 536,065.96 0.24
25.01 - 30.00 18 747,884.50 0.34
30.01 - 35.00 34 1,610,915.23 0.74
35.01 - 40.00 31 1,609,096.62 0.73
40.01 - 45.00 44 2,091,195.84 0.95
45.01 - 50.00 64 3,564,779.50 1.63
50.01 - 55.00 83 5,751,721.78 2.63
55.01 - 60.00 115 7,535,047.50 3.44
60.01 - 65.00 210 13,397,192.29 6.12
65.01 - 70.00 312 21,951,175.61 10.02
70.01 - 75.00 455 32,113,158.77 14.66
75.01 - 80.00 715 52,181,019.03 23.83
80.01 - 85.00 542 43,642,025.07 19.93
85.01 - 90.00 381 29,406,230.45 13.43
90.01 - 95.00 31 2,476,471.32 1.13
95.01 - 95.13 1 67,450.00 0.03
-------------------- ------------- --------------- --------
Total.......... 3,063 $219,008,212.32 100.00%
============= =============== ========
</TABLE>
(1) As of the Initial Cut-off Date, the weighted average Combined
Loan-to-Value Ratio of the Initial Group I Mortgage Loans was approximately
75.81%.
<PAGE>
<TABLE>
<CAPTION>
Loan Rates of the Initial Group I Mortgage Loans(1)
Percent of
Aggregate
Cut-off Date
Number Aggregate Loan Balance of
Range of Loan of Cut-off Date all Initial Group I
Rates (%) Mortgage Loans Loan Balance Mortgage Loans
------------- -------------- ------------ ------------------
<S> <C> <C> <C>
6.7500 - 7.0000 2 $ 140,787.93 0.06%
7.0001 - 7.5000 14 1,614,105.47 0.74
7.5001 - 8.0000 89 9,784,928.38 4.47
8.0001 - 8.5000 123 10,691,339.61 4.88
8.5001 - 9.0000 338 32,868,954.34 15.01
9.0001 - 9.5000 275 25,694,151.05 11.73
9.5001 - 10.0000 520 41,119,136.55 18.78
10.0001 - 10.5000 270 20,220,024.38 9.23
10.5001 - 11.0000 351 23,938,090.13 10.93
11.0001 - 11.5000 218 12,721,549.39 5.81
11.5001 - 12.0000 273 14,056,222.20 6.42
12.0001 - 12.5000 169 8,068,396.02 3.68
12.5001 - 13.0000 181 8,257,125.20 3.77
13.0001 - 13.5000 111 4,269,593.47 1.95
13.5001 - 14.0000 77 3,508,942.08 1.60
14.0001 - 14.5000 22 747,303.49 0.34
14.5001 - 15.0000 12 555,290.82 0.25
15.0001 - 15.5000 7 425,766.23 0.19
15.5001 - 16.0000 7 210,458.85 0.10
16.0001 - 16.5000 2 48,502.41 0.02
17.5001 - 17.6000 2 67,544.32 0.03
- ---------------------- ------- -------------------- ----------
Total............ 3,063 $219,008,212.32 100.00%
======= =================== ==========
</TABLE>
(1) As of the Initial Cut-off Date, the weighted average Mortgage
Rate of the Initial Group I Mortgage Loans was approximately 10.2245% per
annum.
<PAGE>
<TABLE>
<CAPTION>
Original Terms to Maturity of the Initial Group I Mortgage Loans(1)
Percent of Aggregate
Cut-off Date Loan
Number Aggregate Balance of all Initial
Original Terms to of Cut-off Date Group I
Maturity (months) Mortgage Loans Loan Balance Mortgage Loans
- ------------------------------------ ------------------ ------------------------ -------------------------------
<S> <C> <C> <C>
120 82 $ 3,275,815.24 1.50%
180 852 38,563,009.93 17.61
240 157 10,339,319.55 4.72
300 32 2,316,508.07 1.06
360 1,940 164,513,559.53 75.12
------------------ ------------------------ -------------------------------
Total.............................. 3,063 $219,008,212.32 100.00%
================== ======================== ===============================
</TABLE>
(1) As of the Initial Cut-off Date, the weighted average original
term to maturity of the Initial Group I Mortgage Loans was approximately
318.42 months.
<TABLE>
<CAPTION>
Remaining Terms to Maturity of the Initial Group I Mortgage Loans(1)
Percent of Aggregate
Cut-off Date Loan
Number Aggregate Balance of all Initial
Range of Remaining Terms to of Cut-off Date Group I
Maturity (months) Mortgage Loans Loan Balance Mortgage Loans
- ----------------------------------------- ------------------ ----------------------- -------------------------------
<S> <C> <C> <C>
118 - 126 82 $ 3,275,815.24 1.50%
163 - 174 5 120,180.61 0.05
175 - 186 847 38,442,829.32 17.55
235 - 246 157 10,339,319.55 4.72
295 - 306 32 2,316,508.07 1.06
343 - 354 6 482,298.14 0.22
355 - 360 1,934 164,031,261.39 74.90
------------------ ----------------------- -------------------------------
Total................................ 3,063 $219,008,212.32 100.00%
================== ======================= ===============================
</TABLE>
(1) As of the Initial Cut-off Date, the weighted average remaining
term to maturity of the Initial Group I Mortgage Loans was approximately
317.65 months.
<PAGE>
<TABLE>
<CAPTION>
Cut-off Date Loan Balances of the Initial Group I Mortgage Loans(1)
Percent of Aggregate
Cut-off Date Loan
Range of Number Aggregate Balance of all
Cut-off Date of Cut-off Date Initial Group I
Loan Balances ($) Mortgage Loans Loan Balance Mortgage Loans
----------------------- ------------------ ---------------------- -----------------------
<S> <C> <C> <C>
4,678.01- 25,000.00 291 $ 5,750,372.64 2.63%
25,000.01- 50,000.00 941 36,006,500.18 16.44
50,000.01- 75,000.00 762 46,724,427.99 21.33
75,000.01- 100,000.00 409 35,467,380.04 16.19
100,000.01- 125,000.00 267 29,921,176.88 13.66
125,000.01- 150,000.00 169 23,091,314.68 10.54
150,000.01- 175,000.00 94 15,233,101.89 6.96
175,000.01- 200,000.00 60 11,125,857.08 5.08
200,000.01- 225,000.00 42 8,872,027.68 4.05
225,000.01- 250,000.00 24 5,572,329.56 2.54
275,000.01- 300,000.00 1 285,873.20 0.13
300,000.01- 325,000.00 2 630,580.72 0.29
325,000.01- 327,270.00 1 327,269.78 0.15
- -------------------------------- ------------------ ---------------------- -----------------------
Total.......................... 3,063 $219,008,212.32 100.00%
================== ====================== =======================
</TABLE>
(1) As of the Initial Cut-off Date, the average Cut-off Date Loan
Balance of the Initial Group I Mortgage Loans was approximately $71,501.21.
<PAGE>
<TABLE>
<CAPTION>
Geographic Distribution of the Initial Group I Mortgage Loans(1)
Percent of Aggregate
Cut-off Date Loan
Number Aggregate Balance of all
of Cut-off Date Initial Group I
State Mortgage Loans Loan Balance Mortgage Loans
- ----------------------------------------- ------------------ ------------------------ ----------------------
<S> <C> <C> <C>
Alabama................................. 1 $ 30,600.00 0.01%
Arizona................................. 92 5,742,928.99 2.62
Arkansas................................ 26 1,220,050.02 0.56
California.............................. 740 65,471,579.78 29.89
Colorado................................ 76 6,032,510.12 2.75
Connecticut............................. 9 728,778.73 0.33
Delaware................................ 11 707,389.45 0.32
District of Columbia.................... 3 252,788.35 0.12
Florida................................. 285 19,999,679.54 9.13
Georgia................................. 57 3,737,374.16 1.71
Hawaii.................................. 40 4,105,309.08 1.87
Idaho................................... 7 411,772.57 0.19
Illinois................................ 138 9,941,162.05 4.54
Indiana................................. 36 2,040,757.03 0.93
Iowa.................................... 22 1,249,605.71 0.57
Kansas.................................. 17 910,116.87 0.42
Kentucky................................ 8 479,947.85 0.22
Louisiana............................... 15 868,558.25 0.40
Maine................................... 3 239,928.81 0.11
Maryland................................ 20 1,586,478.89 0.72
Massachusetts........................... 51 4,090,830.01 1.87
Michigan................................ 63 3,722,648.22 1.70
Minnesota............................... 54 3,020,427.88 1.38
Mississippi............................. 30 1,356,563.24 0.62
Missouri................................ 49 2,770,153.38 1.26
Montana................................. 19 1,203,220.62 0.55
Nebraska................................ 1 49,921.64 0.02
Nevada.................................. 35 2,210,198.53 1.01
New Hampshire........................... 2 145,061.28 0.07
New Jersey.............................. 36 2,532,398.68 1.16
New Mexico.............................. 39 2,830,380.90 1.29
North Carolina.......................... 63 4,457,848.59 2.04
North Dakota............................ 2 63,800.00 0.03
Ohio.................................... 94 5,615,958.38 2.56
Oklahoma................................ 41 2,697,975.06 1.23
Oregon.................................. 42 3,416,171.24 1.56
Pennsylvania............................ 127 6,332,760.48 2.89
Rhode Island............................ 6 571,815.50 0.26
South Carolina.......................... 30 1,780,505.24 0.81
Tennessee............................... 58 3,671,571.00 1.68
Texas................................... 435 25,525,484.14 11.66
Utah.................................... 21 1,356,414.14 0.62
Virginia................................ 45 3,627,157.53 1.66
Washington.............................. 71 7,492,963.71 3.42
West Virginia........................... 5 360,128.22 0.16
Wisconsin............................... 36 2,197,311.98 1.00
Wyoming................................. 2 151,226.48 0.07
------------------ ------------------------ ----------------------
Total........................ 3,063 $ 219,008,212.32 100.00%
================== ======================== ======================
</TABLE>
(1) The greatest zip code concentration of the Initial Group I
Mortgage Loans, by Cut-off Date Principal Balances, was approximately 0.55% in
the 94605 zip code.
<PAGE>
<TABLE>
<CAPTION>
Property Types of the Initial Group I Mortgage Loans
Percent of Aggregate
Cut-off Date Loan
Number Aggregate Balance of all
of Cut-off Date Initial Group I
Property Type Mortgage Loans Loan Balance Mortgage Loans
- ----------------------------------------- ------------------ ------------------------ ----------------------
<S> <C> <C> <C>
Single family........................... 2,682 $ 190,883,371.07 87.16%
Two- to four-family..................... 163 13,459,081.41 6.15
PUD..................................... 86 7,559,388.59 3.45
Condominium............................. 68 3,795,994.67 1.73
Manufactured Housing.................... 64 3,310,376.58 1.51
------------------ ------------------------ ----------------------
Total........................ 3,063 $ 219,008,212.32 100.00%
================== ======================== ======================
</TABLE>
<TABLE>
<CAPTION>
Occupancy Status of the Initial Group I Mortgage Loans
Percent of
Aggregate Cut-off
Number Aggregate Date Loan Balance of
of Cut-off Date all Initial Group I
Occupancy Status Mortgage Loans Loan Balance Mortgage Loans
- ----------------------------------------- ------------------ ------------------------ ----------------------
<S> <C> <C> <C>
Owner-occupied.......................... 2,685 $ 195,909,060.12 89.45%
Investor................................ 362 21,947,264.29 10.02
Second Home............................. 16 1,151,887.91 0.53
------------------ ------------------------ ----------------------
Total........................ 3,063 $ 219,008,212.32 100.00%
================== ======================== ======================
</TABLE>
<TABLE>
<CAPTION>
Lien Priorities of the Initial Group I Mortgage Loans
Percent of Aggregate
Cut-off Date Loan
Number Aggregate Balance of all
of Cut-off Date Initial Group I
Lien Priority Mortgage Loans Loan Balance Mortgage Loans
- ----------------------------------------- ------------------ ------------------------ ----------------------
<S> <C> <C> <C>
First lien.............................. 2,520 $ 198,275,873.43 90.53%
Second lien............................. 543 20,732,338.89 9.47
------------------ ------------------------ ----------------------
Total........................ 3,063 $ 219,008,212.32 100.00%
================== ======================== ======================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Months Since Origination of the Initial Group I Mortgage Loans(1)
Percent of
Aggregate Cut-off
Number Aggregate Date Loan Balance of
Months Since of Cut-off Date all Initial Group I
Origination Mortgage Loans Loan Balance Mortgage Loans
- ----------------------------------- ----------------- ------------------------- ----------------------
<S> <C> <C> <C>
0 1,245 $ 91,896,963.72 41.96%
1 1,329 96,421,221.73 44.03
2 411 26,522,683.56 12.11
3 32 2,155,401.67 0.98
4 4 255,654.08 0.12
5 31 1,153,808.81 0.53
6 7 308,948.02 0.14
7 2 163,346.10 0.07
8 1 105,529.31 0.05
9 1 24,655.32 0.01
- ----------------------------------- ----------------- ------------------------- ----------------------
Total.......... 3,063 $ 219,008,212.32 100.00%
================= ========================= ======================
</TABLE>
(1) As of the Initial Cut-off Date, the weighted average number of
months since origination of the Initial Group I Mortgage Loans was
approximately 0.76 months.
<TABLE>
<CAPTION>
Documentation Levels of the Initial Group I Mortgage Loans
Percent of Aggregate
Cut-off Date Loan
Number Aggregate Balance of all Initial
of Cut-off Date Group I
Loan Programs Mortgage Loans Loan Balance Mortgage Loans
- ----------------------------------------- ------------------ ------------------------ --------------------------
<S> <C> <C> <C>
Full Documentation...................... 2,163 $ 152,917,190.13 69.82%
Stated Income........................... 900 66,091,022.19 30.18
------------------ ------------------------ --------------------------
Total...................... 3,063 $ 219,008,212.32 100.00%
================== ======================== ==========================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Credit Grades for the Initial Group I Mortgage Loans
Percent of
Aggregate Cut-off
Number Aggregate Date Loan Balance of
of Cut-off Date all Initial Group I
Credit Grade Mortgage Loans Loan Balance Mortgage Loans
- ----------------------------------------- ------------------ ------------------------ ----------------------
<S> <C> <C> <C>
A+...................................... 1,068 $ 79,625,658.78 36.36%
A+MO*................................... 1 45,000.00 0.02
A-...................................... 905 69,720,789.80 31.83
A-MO*................................... 53 3,424,847.19 1.56
B....................................... 505 34,965,721.27 15.97
C....................................... 395 23,158,209.50 10.57
C-...................................... 73 3,848,025.14 1.76
C-HS**.................................. 63 4,219,960.64 1.93
------------------ ------------------------ ----------------------
Total........................ 3,063 $ 219,008,212.32 100.00%
================== ======================== ======================
______________
* Underwritten pursuant to the Mortgage Credit Only program.
** Underwritten pursuant to the Home Saver program.
</TABLE>
<TABLE>
<CAPTION>
Purpose of Origination of the Initial Group I Mortgage Loans
Percent of
Aggregate Cut-off
Number Aggregate Date Loan Balance of
of Cut-off Date all Initial Group I
Purpose Mortgage Loans Loan Balance Mortgage Loans
- ----------------------------------------- ------------------ ------------------------ ----------------------
<S> <C> <C> <C>
Cash Out Refinance...................... 2,336 $ 161,814,955.04 73.89%
Purchase................................ 224 16,779,897.15 7.66
Rate/Term Refinance..................... 503 40,413,360.13 18.45
------------------ ------------------------ ----------------------
Total........................ 3,063 $ 219,008,212.32 100.00%
================== ======================== ======================
</TABLE>
<TABLE>
<CAPTION>
Prepayment Premium Periods for the Initial Group I Mortgage Loans
Percent of
Aggregate Cut-off
Number Aggregate Date Loan Balance of
Prepayment Premium Periods of Cut-off Date all Initial Group I
(Months) Mortgage Loans Loan Balance Mortgage Loans
- ----------------------------------------- ------------------ ------------------------ ----------------------
<S> <C> <C> <C>
0.......................... 967 $ 56,717,136.57 25.90%
3.......................... 1 61,600.00 0.03
6.......................... 16 889,122.89 0.41
12.......................... 30 2,684,946.95 1.23
24.......................... 65 5,499,239.23 2.51
36.......................... 363 23,383,804.38 10.68
42.......................... 48 2,772,000.08 1.27
48.......................... 1 167,933.23 0.08
60.......................... 1,572 126,832,428.99 57.91
- ----------------------------------------- ------------------ ------------------------ ----------------------
Total........................ 3,063 $ 219,008,212.32 100.00%
================== ======================== ======================
</TABLE>
<PAGE>
Initial Group II Mortgage Loan Statistics
The Initial Group II Mortgage Loans will consist of 99 fixed-rate,
fully amortizing Mortgage Loans evidenced by Mortgage Notes secured by
Mortgages on Mortgaged Properties located in 21 states. Approximately 89.31%
of the Initial Group II Mortgage Loans are secured by first liens on the
related Mortgaged Properties, and the remainder are secured by second liens on
the related Mortgaged Properties. The aggregate Cut-off Date Loan Balances of
the Initial Group II Mortgage Loans totaled approximately $29,633,223.38. The
Initial Group II Mortgage Loans bear interest at fixed Mortgage Rates ranging
from approximately 7.2500% to 14.6300% per annum. The weighted average
Mortgage Rate for the Initial Group II Mortgage Loans was approximately
9.9742% per annum. The lowest Cut-off Date Loan Balance of any Initial Group
II Mortgage Loan was approximately $123,291.09 and the highest was
approximately $1,199,327.26. The average Cut-off Date Loan Balance of the
Initial Group II Mortgage Loans was approximately $299,325.49. The weighted
average original term to stated maturity of the Initial Group II Mortgage
Loans was approximately 339.57 months. The weighted average remaining term to
stated maturity of the Initial Group II Mortgage Loans was approximately
338.72 months. As of the Initial Cut-off Date, the weighted average number of
months that have elapsed since origination of the Initial Group II Mortgage
Loans was approximately 0.84 months. The lowest and highest Combined
Loan-to-Value Ratios of the Initial Group II Mortgage Loans at origination
were approximately 42.64% and 95.00%, respectively. The weighted average
Combined Loan-to-Value Ratio of the Initial Group II Mortgage Loans was
approximately 77.21%. The weighted average Combined Loan-to-Value Ratio of the
Initial Group II Mortgage Loans that represent second liens on the related
Mortgaged Properties was approximately 77.60%.
Approximately 4.87% of the Initial Group II Mortgage Loans are
secured by non-owner-occupied (including second homes) Mortgaged Properties
(based solely upon statements made by the related Mortgagors at the time of
origination of the related Mortgage Loans).
Approximately 10.15%, 1.35%, 0.91% and 87.59% of the Initial Group II
Mortgage Loans have original stated maturities of approximately 15 years, 20
years, 25 years and 30 years, respectively. No Initial Group II Mortgage Loan
is scheduled to mature later than June 1, 2029.
As of June 1, 1999, approximately 1.02% of the Initial Group II
Mortgage Loans were 30 days Delinquent, and no Mortgage Loan was 60 days or
more Delinquent.
<PAGE>
The Initial Group II Mortgage Loans are expected to have the
following characteristics as of the Initial Cut-off Date (it being understood
that the sum in any column may not equal the indicated total due to rounding):
<TABLE>
<CAPTION>
Combined Loan-to-Value Ratios of the Initial Group II Mortgage Loans(1)
Percent of Aggregate
Cut-off Date Loan
Number Aggregate Balance of all
Range of Combined Loan-to-Value Ratios of Cut-off Date Initial Group II
(%) Mortgage Loans Loan Balance Mortgage Loans
- ----------------------------------------- ------------------ ------------------------ -----------------------
<S> <C> <C> <C>
42.64 - 45.00 1 $ 170,000.00 0.57%
45.01 - 50.00 1 261,550.00 0.88
50.01 - 55.00 4 1,094,807.49 3.69
55.01 - 60.00 2 1,103,600.62 3.72
60.01 - 65.00 6 1,946,045.59 6.57
65.01 - 70.00 10 2,597,851.53 8.77
70.01 - 75.00 13 4,602,955.22 15.53
75.01 - 80.00 17 5,378,656.47 18.15
80.01 - 85.00 27 7,338,946.59 24.77
85.01 - 90.00 16 4,708,164.61 15.89
90.01 - 95.00 2 430,645.26 1.45
- ----------------------------------------- ------------------ ------------------------ -----------------------
Total.............................. 99 $ 29,633,223.38 100.00%
================== ======================== =======================
</TABLE>
(1) As of the Initial Cut-off Date, the weighted average Combined
Loan-to-Value Ratio of the Initial Group II Mortgage Loans was approximately
77.21%.
<PAGE>
<TABLE>
<CAPTION>
Loan Rates of the Initial Group II Mortgage Loans(1)
Percent of Aggregate
Cut-off Date Loan
Balance of all
Number Aggregate Initial
Range of Loan of Cut-off Date Group II
Rates (%) Mortgage Loans Loan Balance Mortgage Loans
- -------------------------- ------------------ ------------------------ -----------------------
<S> <C> <C> <C>
7.2500- 7.5000 1 $ 424,000.00 1.43%
7.5001- 8.0000 7 1,937,510.37 6.54
8.0001- 8.5000 1 455,000.00 1.54
8.5001- 9.0000 20 7,657,219.83 25.84
9.0001- 9.5000 11 3,131,858.90 10.57
9.5001- 10.0000 13 3,853,484.52 13.00
10.0001- 10.5000 10 3,572,086.29 12.05
10.5001- 11.0000 12 3,049,136.22 10.29
11.0001- 11.5000 5 1,352,477.94 4.56
11.5001- 12.0000 9 2,042,257.17 6.89
12.0001- 12.5000 1 148,169.94 0.50
12.5001- 13.0000 5 1,177,896.73 3.97
13.5001- 14.0000 3 656,036.57 2.21
14.5001- 14.6300 1 176,088.90 0.59
- -------------------------- ------------------ ------------------------ -----------------------
Total............ 99 $ 29,633,223.38 100.00%
================== ======================== =======================
</TABLE>
(1) As of the Initial Cut-off Date, the weighted average Mortgage
Rate of the Initial Group II Mortgage Loans was approximately 9.9742% per
annum.
<PAGE>
<TABLE>
<CAPTION>
Original Terms to Maturity of the Initial Group II Mortgage Loans(1)
Percent of Aggregate
Cut-off Date Loan
Number Aggregate Balance of all Initial
Original Terms to of Cut-off Date Group II
Maturity (months) Mortgage Loans Loan Balance Mortgage Loans
- ------------------------------------ --------------------- --------------------- ------------------------------------
<S> <C> <C> <C>
180 18 $ 3,007,030.45 10.15%
240 1 400,000.00 1.35
300 1 270,544.19 0.91
360 79 25,955,648.74 87.59
- ------------------------------------ --------------------- --------------------- ------------------------------------
Total......................... 99 $ 29,633,223.38 100.00%
===================== ===================== ====================================
</TABLE>
(1) As of the Initial Cut-off Date, the weighted average original
term to maturity of the Initial Group II Mortgage Loans was approximately
339.57 months.
<TABLE>
<CAPTION>
Remaining Terms to Maturity of the Initial Group II Mortgage Loans(1)
Percent of Aggregate
Cut-off Date Loan
Number Aggregate Balance of all Initial
Range of Remaining Terms to of Cut-off Date Group II
Maturity (months) Mortgage Loans Loan Balance Mortgage Loans
- ----------------------------------------- ------------------ ------------------------ ---------------------------
<S> <C> <C> <C>
174 1 $ 148,169.94 0.50%
175-186 17 2,858,860.51 9.65
235-246 1 400,000.00 1.35
295-306 1 270,544.19 0.91
355-360 79 25,955,648.74 87.59
- ----------------------------------------- ------------------ ------------------------ ---------------------------
Total................................ 99 $ 29,633,223.38 100.00%
================== ======================== ===========================
</TABLE>
(1) As of the Initial Cut-off Date, the weighted average remaining
term to maturity of the Initial Group II Mortgage Loans was approximately
338.72 months.
<PAGE>
<TABLE>
<CAPTION>
Cut-off Date Loan Balances of the Initial Group II Mortgage Loans(1)
Percent of Aggregate
Cut-off Date Loan
Range of Number Aggregate Balance of all Initial
Initial Cut-off Date of Cut-off Date Group II
Loan Balances ($) Mortgage Loans Loan Balance Mortgage Loans
- ------------------------------- ------------------ ---------------------- ------------------------
<S> <C> <C> <C>
123,290.01 - 125,000.00 1 $ 123,291.09 0.42%
125,000.01 - 150,000.00 10 1,439,234.67 4.86
150,000.01 - 175,000.00 3 503,752.77 1.70
175,000.01 - 200,000.00 2 359,347.89 1.21
225,000.01 - 250,000.00 14 3,414,618.30 11.52
250,000.01 - 275,000.00 21 5,502,481.55 18.57
275,000.01 - 300,000.00 12 3,464,795.40 11.69
300,000.01 - 325,000.00 10 3,112,517.14 10.50
325,000.01 - 350,000.00 7 2,340,771.96 7.90
350,000.01 - 375,000.00 3 1,089,927.24 3.68
375,000.01 - 400,000.00 4 1,581,000.00 5.34
400,000.01 - 425,000.00 3 1,253,750.00 4.23
425,000.01 - 450,000.00 1 445,347.64 1.50
450,000.01 - 475,000.00 2 927,600.00 3.13
475,000.01 - 500,000.00 1 497,700.00 1.68
500,000.01 - 525,000.00 1 525,000.00 1.77
525,000.01 - 550,000.00 2 1,073,622.15 3.62
775,000.01 - 800,000.00 1 779,138.32 2.63
1,175,000.01 - 1,199,328.00 1 1,199,327.26 4.05
- --------------------------------- ------------------ ---------------------- ------------------------
Total.......................... 99 $29,633,223.38 100.00%
================== ====================== ========================
</TABLE>
(1) As of the Initial Cut-off Date, the average Cut-off Date Loan
Balance of the Initial Group II Mortgage Loans was approximately $299,325.49.
<PAGE>
<TABLE>
<CAPTION>
Geographic Distribution of the Initial Group II Mortgage Loans(1)
Percent of Aggregate
Cut-off Date Loan
Number Aggregate Balance of all Initial
of Cut-off Date Group II
State Mortgage Loans Loan Balance Mortgage Loans
- ------------------------------------------ ------------------ ------------------------ -------------------------
<S> <C> <C> <C>
California.............................. 54 $14,872,723.26 50.19%
Colorado................................ 1 326,500.00 1.10
Connecticut............................. 1 246,384.99 0.83
Florida................................. 3 1,196,600.00 4.04
Georgia................................. 1 123,291.09 0.42
Hawaii.................................. 2 978,969.79 3.30
Illinois................................ 7 2,404,440.98 8.11
Kansas.................................. 1 351,719.00 1.19
Maryland................................ 1 240,996.84 0.81
Massachusetts........................... 3 852,952.78 2.88
Michigan................................ 1 779,138.32 2.63
Minnesota............................... 2 925,000.00 3.12
Montana................................. 1 289,841.26 0.98
New Jersey.............................. 1 327,320.73 1.10
North Carolina.......................... 2 655,250.00 2.21
Ohio.................................... 2 626,986.17 2.12
Rhode Island............................ 1 241,600.00 0.82
Texas................................... 6 1,862,540.09 6.29
Utah.................................... 3 675,977.73 2.28
Virginia................................ 1 150,000.00 0.51
Washington.............................. 5 1,504,990.35 5.08
------------------ ------------------------ -------------------------
Total........................ 99 $29,633,223.38 100.00%
================== ======================== =========================
(1) The greatest zip code concentration of the Initial Group II
Mortgage Loans, by Initial Cut-off Date Principal Balances, was approximately
5.31% in the 91011 zip code.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Property Types of the Initial Group II Mortgage Loans
Percent of Aggregate
Cut-off Date Loan
Number Aggregate Balance of all Initial
of Cut-off Date Group II
Property Type Mortgage Loans Loan Balance Mortgage Loans
- ----------------------------------------- ------------------ ------------------------ ------------------------
<S> <C> <C> <C>
Single family........................... 90 $27,304,030.65 92.14%
PUD..................................... 5 1,456,557.10 4.92
Two- to four-family..................... 3 723,239.15 2.44
Condominium............................. 1 149,396.48 0.50
------------------ ------------------------ ------------------------
Total........................ 99 $29,633,223.38 100.00%
================== ======================== ========================
</TABLE>
<TABLE>
<CAPTION>
Occupancy Status of the Initial Group II Mortgage Loans
Percent of Aggregate
Cut-off Date Loan
Number Aggregate Balance of all Initial
of Cut-off Date Group II
Occupancy Status Mortgage Loans Loan Balance Mortgage Loans
- ----------------------------------------- ------------------ ------------------------ -------------------------
<S> <C> <C> <C>
Owner-occupied.......................... 94 $28,189,418.28 95.13%
Investor................................ 4 1,043,805.10 3.52
Second Home............................. 1 400,000.00 1.35
------------------ ------------------------ -------------------------
Total........................ 99 $29,633,223.38 100.00%
================== ======================== =========================
</TABLE>
<TABLE>
<CAPTION>
Lien Priorities of the Initial Group II Mortgage Loans
Percent of Aggregate
Cut-off Date Loan
Balance of all
Number Aggregate Initial
of Cut-off Date Group II
Lien Priority Mortgage Loans Loan Balance Mortgage Loans
- ----------------------------------------- ------------------ ------------------------ ----------------------
<S> <C> <C> <C>
First lien.............................. 80 $26,466,091.86 89.31%
Second lien............................. 19 3,167,131.52 10.69
------------------ ------------------------ ----------------------
Total........................ 99 $29,633,223.38 100.00%
================== ======================== ======================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Months Since Origination of the Initial Group II Mortgage Loans(1)
Percent of Aggregate
Cut-off Date Loan
Number Aggregate Balance of all
Months Since of Cut-off Date Initial Group II
Origination Mortgage Loans Loan Balance Mortgage Loans
- ----------------------------------- ----------------- ------------------------- -------------------------
<S> <C> <C> <C>
0 40 $12,718,350.00 42.92%
1 40 11,631,232.80 39.25
2 15 4,189,571.80 14.14
3 1 324,462.30 1.09
5 2 621,436.54 2.10
6 1 148,169.94 0.50
- ----------------------------------- ----------------- ------------------------ -------------------------
Total.......... 99 $29,633,223.38 100.00%
================= ========================= =========================
</TABLE>
(1) As of the Initial Cut-off Date, the weighted average number of
months since origination of the Initial Group II Mortgage Loans was
approximately 0.84 months.
<TABLE>
<CAPTION>
Documentation Levels of the Initial Group II Mortgage Loans
Percent of Aggregate
Cut-off Date Loan
Number Aggregate Balance of all Initial
of Cut-off Date Group II Mortgage
Loan Programs Mortgage Loans Loan Balance Loans
- ----------------------------------------- ------------------ ------------------------ ------------------------
<S> <C> <C> <C>
Full Documentation...................... 62 $19,233,447.01 64.91%
Stated Income........................... 37 10,399,776.37 35.09
------------------ ------------------------ ------------------------
Total...................... 99 $29,633,223.38 100.00%
================== ======================== ========================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Credit Grades for the Initial Group II Mortgage Loans
Percent of Aggregate
Cut-off Date Loan
Balance of all
Number Aggregate Initial
of Cut-off Date Group II
Credit Grade Mortgage Loans Loan Balance Mortgage Loans
- ----------------------------------------- ------------------ ------------------------ ------------------------
<S> <C> <C> <C>
A+...................................... 47 $14,958,821.93 50.48%
A-...................................... 32 8,972,787.66 30.28
A-MO*................................... 1 258,502.39 0.87
B....................................... 9 2,840,443.09 9.59
C....................................... 5 1,112,263.24 3.75
C-...................................... 1 250,000.00 0.84
C-HS**.................................. 4 1,240,405.07 4.19
------------------ ------------------------ ------------------------
Total........................ 99 $29,633,223.38 100.00%
================== ======================== ========================
______________
* Underwritten pursuant to the Mortgage Credit Only program.
** Underwritten pursuant to the Home Saver program.
</TABLE>
<TABLE>
<CAPTION>
Purpose of Origination of the Initial Group II Mortgage Loans
Percent of Aggregate
Cut-off Date Loan
Number Aggregate Balance of all
of Cut-off Date Initial Group II
Purpose Mortgage Loans Loan Balance Mortgage Loans
- ----------------------------------------- ------------------ ------------------------ -------------------------
<S> <C> <C> <C>
Cash Out Refinance...................... 73 $21,224,411.39 71.62%
Rate/Term Refinance..................... 20 6,414,420.64 21.65
Purchase................................ 6 1,994,391.35 6.73
------------------ ------------------------ -------------------------
Total........................ 99 $29,633,223.38 100.00%
================== ======================== =========================
</TABLE>
<TABLE>
<CAPTION>
Prepayment Premium Periods for the Initial Group II Mortgage Loans
Percent of Aggregate
Cut-off Date Loan
Balance of all
Number Aggregate Initial
Prepayment Premium Periods of Cut-off Date Group II
(mos): Mortgage Loans Loan Balance Mortgage Loans
- ----------------------------------------- ------------------ ------------------------ ------------------------
<S> <C> <C> <C>
0............................. 22 $6,818,312.51 23.01%
6............................. 1 351,719.00 1.19
12............................ 3 659,046.02 2.22
24............................ 5 1,377,361.80 4.65
36............................ 12 3,293,564.28 11.11
42............................ 2 925,000.00 3.12
60............................ 54 16,208,219.77 54.70
- ----------------------------------------- ------------------ ------------------------ ------------------------
Total........................ 99 $29,633,223.38 100.00%
================== ======================== ========================
</TABLE>
<PAGE>
Payments on the Mortgage Loans
Substantially all of the Mortgage Loans provide for the amortization
of the amounts financed under the Mortgage Loans over a series of
substantially equal monthly payments.
Substantially all of the Mortgage Loans provide for monthly payments
by the related Mortgagor according to the actuarial method (such Mortgage
Loans, "Actuarial Loans"). Actuarial Loans provide that interest is charged to
the Mortgagors thereunder, and payments are due from such Mortgagors, as of a
scheduled day of each month that is fixed at the time of origination.
Scheduled monthly payments made by Mortgagors on the Actuarial Loans either
earlier or later than the scheduled due dates thereof will not affect the
amortization schedule or the relative application of such payments to
principal and interest.
Conveyance of the Additional Mortgage Loans
The Pooling and Servicing Agreement permits the Trust to acquire up
to approximately $76,358,564.30 in aggregate principal balance of Additional
Mortgage Loans during the Pre-Funding Period. Amounts on deposit in the
Pre-Funding Accounts with respect to Loan Group I and Loan Group II initially
will be equal to $67,257,787.68 and $9,100,776.62, respectively. Amounts on
deposit in the Pre-Funding Accounts will be applied to purchase Additional
Mortgage Loans from the Seller. Accordingly, the statistical characteristics
of the Mortgage Loans in the Trust will vary at the end of the Pre-Funding
Period following the acquisition of any Additional Mortgage Loans.
The inclusion of the Additional Mortgage Loans in the Trust during
the Pre-Funding Period will be subject to the consent of the Certificate
Insurer as well as to the following requirements (unless the Certificate
Insurer, in its discretion, waives any such requirements): (i) no Additional
Mortgage Loan may be 30 days delinquent as of its Cut-off Date; (ii) no
Additional Mortgage Loan may have a remaining term to maturity in excess of 30
years; (iii) no Additional Mortgage Loan may have a Loan-to-Value Ratio
greater than 95%; (iv) no Additional Group I Mortgage Loan may have a Cut-off
Date Loan Balance in excess of $327,000 and no Additional Group II Mortgage
Loan may have a Cut-off Date Loan Balance in excess of $600,000; and (v)
following the purchase of such Additional Mortgage Loans by the Trust, the
Mortgage Loans included in each Loan Group (a) will have a weighted average
Loan Rate of at least 10.2000%; (b) will have a weighted average combined
Loan-to-Value Ratio of not more than 76.00%; and (c) will have a weighted
average remaining term to stated maturity of not more than 360 months.
THE ORIGINATOR AND THE SERVICER
Underwriting Standards; Representations
The Initial Mortgage Loans will be acquired by the Depositor from the
Seller, who in turn will have acquired the Initial Mortgage Loans from the
Originator. The Additional Mortgage Loans will be acquired by the Trust
directly from the Seller. All of the Mortgage Loans will have been originated
or acquired by the Originator generally in accordance with the underwriting
criteria described below.
The information set forth below with regard to the Originator's
underwriting standards has been provided to the Depositor or compiled from
information provided to the Depositor by the Originator. None of the
Depositor, the Trustee, the Trust Administrator, the Seller, the Underwriters
or any of their respective affiliates has made any independent investigation
of such information or has made or will make any representation as to the
accuracy or completeness of such information.
The Originator's underwriting standards are primarily intended to
assess the value of the mortgaged property and to evaluate the adequacy of
such property as collateral for the mortgage loan. All of the Mortgage Loans
were also underwritten with a view toward the resale thereof in the secondary
mortgage market. While the Originator's primary consideration in underwriting
a mortgage loan is the value of the mortgaged property, the Originator also
considers, among other things, a mortgagor's credit history, repayment ability
and debt service-to-income ratio, as well as the type and use of the mortgaged
property. The Mortgage Loans generally bear higher rates of interest than
mortgage loans that are originated in accordance with Fannie Mae and Freddie
Mac standards, which is likely to result in rates of delinquencies and
foreclosures that are higher, and that may be substantially higher, than those
experienced by portfolios of mortgage loans underwritten in a more traditional
manner.
As a result of the Originator's underwriting criteria, changes in the
values of Mortgaged Properties may have a greater effect on the delinquency,
foreclosure and loss experience on the Mortgage Loans than such changes would
be expected to have on mortgage loans that are originated in a more
traditional manner. No assurance can be given that the values of the related
Mortgaged Properties have remained or will remain at the levels in effect on
the dates of origination of the related Mortgage Loans.
The Mortgage Loans will have been originated generally in accordance
with the underwriting guidelines of the Originator (the "Underwriting
Guidelines" ). On a case-by-case basis, exceptions to the Underwriting
Guidelines are made where compensating factors exist.
Each applicant completes an application which includes information
with respect to the applicant's liabilities, income, credit history,
employment history and personal information. The Underwriting Guidelines
require a credit report on each applicant from a credit reporting company. The
report typically contains information relating to such matters as credit
history with local and national merchants and lenders, installment debt
payments and any record of defaults, bankruptcies, repossessions or judgments.
Mortgaged properties that are to secure mortgage loans generally are appraised
by qualified independent appraisers. Such appraisers inspect and appraise the
subject property and verify that such property is in acceptable condition.
Following each appraisal, the appraiser prepares a report which includes a
market value analysis based on recent sales of comparable homes in the area
and, when deemed appropriate, replacement cost analysis based on the current
cost of constructing a similar home. All appraisals are required to conform to
the Uniform Standards of Professional Appraisal Practice adopted by the
Appraisal Standards Board of the Appraisal Foundation and are generally on
forms acceptable to Fannie Mae and Freddie Mac. The Underwriting Guidelines
require a review of the appraisal by a qualified employee of the Originator or
by an appraiser retained by the Originator.
The Mortgage Loans were originated consistent with and generally
conform to the Underwriting Guidelines' "Full Documentation", "Limited
Documentation" and "Stated Income Documentation" residential loan programs.
Under each of the programs, the Originator reviews the applicant's source of
income, calculates the amount of income from sources indicated on the loan
application or similar documentation, reviews the credit history of the
applicant, calculates the debt service-to-income ratio to determine the
applicant's ability to repay the loan, reviews the type and use of the
property being financed, and reviews the property. In determining the ability
of the applicant to repay the loan, a rate (the "Qualifying Rate") has been
created under the Underwriting Guidelines that generally is equal to the
lesser of the fully indexed interest rate on the loan being applied for or one
percent above the initial interest rate on such loan (in the case of six-month
LIBOR loans that do not provide for a delayed first adjustment) or is
generally equal to the initial interest rate on such loan (in the case of
other loans). The Underwriting Guidelines require that mortgage loans be
underwritten in a standardized procedure which complies with applicable
federal and state laws and regulations and requires the Originator's
underwriters to be satisfied that the value of the property being financed, as
indicated by an appraisal and a review of the appraisal, currently supports
the outstanding loan balance. In general, the maximum loan amount for mortgage
loans originated under the programs is $500,000. The Underwriting Guidelines
generally permit loans on one- to four-family residential properties to have
(i) a loan-to-value ratio ("LTV") at origination of up to 90% with respect to
non-conforming first liens, (ii) a combined loan-to-value ratio ("CLTV") at
origination of up to 90% with respect to non-conforming second liens and (iii)
a CLTV at origination of up to 100% with respect to conforming second liens,
in each case depending on, among other things, the purpose of the mortgage
loan, a mortgagor's credit history, repayment ability and debt
service-to-income ratio, as well as the type and use of the property. With
respect to Mortgage Loans secured by mortgaged properties acquired by a
mortgagor under a "lease option purchase", the LTV of the related mortgage
loan is based on the lower of the appraised value at the time of origination
of such mortgage loan or the sale price of the related mortgaged property if
the "lease option purchase price" was set less than 12 months prior to
origination and is based on the appraised value at the time of origination if
the "lease option purchase price" was set 12 months or more prior to
origination.
The Underwriting Guidelines require that the income of each applicant
be verified. The specific income documentation required for the Originator's
various programs is as follows: under the Full Documentation program,
applicants generally are required to submit two written forms of verification
of stable income for at least 12 months; under the Limited Documentation
programs, one such form of verification is required for 12 months; under the
Stated Income Documentation program, an applicant may be qualified based upon
monthly income as stated on the mortgage loan application if the applicant
meets certain criteria. All the foregoing programs require that, with respect
to salaried employees, there be a telephone verification of the applicant's
employment. Verification of the source of funds (if any) required to be
deposited by the applicant into escrow in the case of a purchase money loan is
required when the LTV is greater than 70%.
In evaluating the credit quality of borrowers, the Originator
utilizes credit bureau risk scores (a "FICO score"), a statistical ranking of
likely future credit performance developed by Fair, Isaac & Company and the
three national credit data repositories--Equifax, TransUnion and Experian.
The Underwriting Guidelines have the following categories and
criteria for grading the potential likelihood that an applicant will satisfy
the repayment obligations of a mortgage loan:
Non-Conforming First Lien Mortgage Loans:
"A+" Risk. Under the "A+" risk category, the applicant must have
generally repaid installment or revolving debt according to its terms or must
have a FICO score of 640 or higher. A maximum of one 30-day late payment and
no 60-day late payments within the last 12 months is acceptable on an existing
mortgage loan. An existing mortgage loan is required to be current at the time
the application is submitted. No open collection accounts or open charge-offs
may remain open after the funding of the loan. No bankruptcy or notice of
default filings may have occurred during the preceding three years; provided,
however, that if the borrower's bankruptcy has been discharged during the past
three years and the borrower has re-established a credit history otherwise
complying with the credit parameters set forth in this paragraph, then the
borrower may qualify for a mortgage loan. The mortgaged property must be in at
least average condition. A maximum LTV of 90% (or 85% for mortgage loans
originated under the Stated Income Documentation program) is permitted for a
mortgage loan on a single family owner-occupied property. A maximum LTV of 85%
is permitted for a mortgage loan on a non-owner occupied property, an
owner-occupied condominium or a two- to four-family residential property. The
maximum LTV for rural, remote or unique properties is 75%. The maximum CLTV
(including any related subordinate lien) is 100% for either a refinance loan
or a purchase money loan. The debt service-to-income ratio is generally 45% or
less.
"A-" Risk. Under the "A-" risk category, an applicant must have
generally repaid installment or revolving debt according to its terms or must
have a FICO score of 620 or higher. A maximum of three 30-day late payment and
no 60-day late payments within the last 12 months is acceptable on an existing
mortgage loan. An existing mortgage loan is required to be current at the time
of funding of the loan. Minor derogatory items are allowed as to non-mortgage
credit, and a letter of explanation may be required under the Full
Documentation program. Medical derogatories are not considered. Open
collection accounts or open charge-offs affecting title with balances of less
than $500 may remain open after funding of the loan. No bankruptcy may have
occurred during the preceding two years. No notice of default filings may have
occurred during the preceding three years; provided, however, that if the
borrower's bankruptcy has been discharged during the past two years and the
borrower has re-established a credit history otherwise complying with the
credit parameters set forth in this paragraph, then the borrower may qualify
for a mortgage loan. The mortgaged property must be in at least average
condition. A maximum LTV of 90% (or 80% for mortgage loans originated under
the Limited Documentation and Stated Income Documentation programs) is
permitted for a mortgage loan on a single family owner-occupied property. A
maximum LTV of 80% (or 70% for mortgage loans originated under the Limited
Documentation and Stated Income Documentation programs) is permitted for a
mortgage loan on a non-owner-occupied property. A maximum LTV of 85% (or 75%
for mortgage loans originated under the Stated Income Documentation program)
is permitted for a mortgage loan on an owner-occupied condominium or a two- to
four-family residential property. The maximum LTV for rural, remote, or unique
properties is 60%. The maximum CLTV (including any related subordinate lien)
is 85% for a refinance loan and 80% for a purchase money loan. The debt
service-to-income ratio is generally 50% or less.
"B" Risk. Under the "B" risk category, an applicant may have
experienced isolated credit problems, but should have generally repaid
installment or revolving debt according to its terms or must have a FICO score
of 600 or higher. A maximum of one 60-day late payment within the last 12
months is acceptable on an existing mortgage loan. An existing mortgage loan
must be less than 60 days late at the time of funding of the loan. As to
non-mortgage credit, some prior defaults may have occurred and a letter of
explanation may be required under the Full Documentation program. Medical
derogatories are not considered. Generally, open charge-offs or collection
accounts with balances of less than $1,000 may remain open after the funding
of the loan. No bankruptcy or notice of default filings by the applicant may
have occurred during the preceding two years; provided, however, that if the
borrower's bankruptcy has been discharged during the past two years and the
borrower has re-established a credit history otherwise complying with the
credit parameters set forth in this paragraph, the borrower may qualify for a
mortgage loan. The mortgaged property must be in at least average condition. A
maximum LTV of 80% (or 75% for mortgage loans originated under the Limited
Documentation and Stated Income Documentation programs) is permitted for a
mortgage loan on an owner-occupied detached property originated under the Full
Documentation program. A maximum LTV of 75% (or 70% for mortgage loans
originated under the Limited Documentation and Stated Income Documentation
programs) is permitted for a mortgage loan on a non-owner-occupied property,
an owner-occupied condominium or a two- to four-family residential property.
The maximum LTV for rural, remote or unique properties is 70%. The maximum
CLTV (including any related subordinate lien) is 100% for a refinance loan and
95% for a purchase money loan. The debt service-to-income ratio is generally
55% or less.
"C" Risk. Under the "C" risk category, an applicant may have
experienced significant credit problems in the past. A maximum of one 90-day
late payment within the last 12 months is acceptable on an existing mortgage
loan. An existing mortgage loan must be less than 90 days late at the time of
funding of the loan. As to non-mortgage credit, significant prior defaults may
have occurred. Open charge-offs or collection accounts with balances of less
than $2,500 may remain open after the funding of the loan. No bankruptcy or
notice of default filings by the applicant may have occurred during the
preceding 12 months; provided, however, that if the borrower's bankruptcy has
been discharged during the past 12 months and the borrower has re-established
a credit history otherwise complying with the credit parameters set forth in
this paragraph, the borrower may quality for a mortgage loan. The mortgaged
property must be in average condition. Generally, a maximum LTV of 75% for a
mortgage loan on a single family, owner-occupied property for a Full
Documentation program (or 70% for mortgage loans originated under the Limited
Documentation and Stated Income Documentation programs) is permitted. A
maximum LTV of 70% (or 65% for mortgage loans originated under the Limited
Documentation and the Stated Income Documentation programs) is permitted for a
mortgage loan on a non-owner-occupied property, an owner-occupied condominium
or a two-to-four family residential property. The maximum LTV for rural,
remote or unique properties is 70%. The maximum CLTV (including any related
subordinate lien) is 95% for a refinance loan and for a purchase money loan.
The debt service-to-income ratio is generally 59% or less.
"C-" Risk. Under the "C-" risk category, an applicant may have
experienced significant credit problems in the past. A maximum of two 90-day
late payments and one 120-day late payment is acceptable on an existing
mortgage loan. An existing mortgage loan must be less than 90 days late at the
time of funding of the loan. As to non-mortgage credit, significant prior
defaults may have occurred. Open charge-offs or collection accounts with
balances less than $5,000 may remain open after the funding of the loan. There
may be no current notice of default and any bankruptcy must be discharged. The
mortgaged property may exhibit some deferred maintenance. A maximum LTV of 70%
(or 55% for mortgage loans originated under the Limited Documentation and
Stated Income Documentation programs) is permitted for a mortgage loan on a
single family owner-occupied property. A maximum LTV of 65% (or 50% for
mortgage loans originated under the Limited Documentation and Stated Income
Documentation programs) is permitted for a mortgage loan on a non-owner
occupied property, an owner-occupied condominium or a two- to four-family
residential property. The maximum LTV for rural, remote or unique properties
is 60%. The maximum CLTV (including any related subordinate lien) is 85% for a
refinance loan and 80% for a purchase money loan. The debt service-to-income
ratio is generally 59% or less.
Mortgage Credit Only ("MO"). The Mortgage Credit Only program allows
for three 30-day late payments and no 60-day late payments within the last 12
months on an existing mortgage loan. An existing mortgage loan is not required
to be current at the time the application is submitted. Derogatory items are
allowed as to non-mortgage credit. No bankruptcy or notice of default filings
may have occurred during the preceding two years; provided, however, that if
the borrower's bankruptcy has been discharged during the past two years and
the borrower has re-established a credit history otherwise complying with the
credit parameters set forth in this paragraph, the borrower may then qualify
for a mortgage loan. The mortgaged property must be in at least average
condition. A maximum LTV of 75% for mortgage loans originated under either the
Full or Limited Documentation programs is permitted for a mortgage loan on a
single family owner-occupied property. Mortgage Credit Only loans are not made
available under the Stated Income Documentation program. A maximum LTV of 70%
is permitted for a mortgage loan on a non-owner occupied property, second
home, owner-occupied condominium, or two- to four-family residential property.
The Mortgage Credit Only program is not available for rural, remote or unique
properties. The maximum CLTV (including any related subordinate lien) is 90%
for a refinance loan. The debt service-to-income ratio is generally equal to
or less than 55%. The maximum loan amount is $250,000.
Home Saver Program ("HS"). The Originator originates loans under a
program called "Home Saver" to enable borrowers with an existing delinquent
loan to preserve their home ownership. The existing loan may be over 90 days
delinquent, but any bankruptcy proceeding must be dismissed before the loan is
funded. The LTV may not exceed 65% (or 60% for loans originated under the
Limited Documentation program). Home Saver loans are not made available under
the Stated Income Documentation Program. A maximum LTV of 60% (or 55% for
mortgage loans originated under the Limited Documentation program) is
permitted for a mortgage loan on a non-owner occupied property, owner-occupied
condominium or a two- to four-family residential property. The Home Saver
program is not available for rural, remote or unique properties. The maximum
CLTV (including any related subordinate lien) is 80% for a refinance loan. The
maximum loan amount is $300,000 (or $200,000 for loans originated under the
Limited Documentation program).
Exceptions. As described above, the foregoing categories and criteria
are guidelines only. On a case-by-case basis, it may be determined that an
applicant warrants a debt service-to-income ratio exception, a pricing
exception, a loan-to-value exception, an exception from certain requirements
of a particular risk category, etc. (collectively called an "exception"). An
exception may generally be allowed if the application reflects certain
compensating factors, among others: low LTV; pride of ownership; a maximum of
one 30-day late payment on all mortgage loans during the last 12 months; and
stable employment or ownership of current residence of five or more years. An
exception may also be allowed if the applicant places a down payment through
escrow of at least 20% of the purchase price of the mortgaged property or if
the new loan reduces the applicant's monthly aggregate mortgage payment by 25%
or more. Accordingly, certain mortgagors may qualify in a more favorable risk
category that, in the absence of such compensating factors, would satisfy only
the criteria of a less favorable risk category.
Non-Conforming Second Lien Mortgage Loans:
"A+" Risk. Under the "A+" risk category, the applicant must have
generally repaid installment or revolving debt according to its terms or must
have a FICO score of 640 or higher. A maximum of one 30-day late payment and
no 60-day late payments within the last 12 months is acceptable on an existing
mortgage loan. An existing mortgage loan is required to be current at the time
the application is submitted. No open collection accounts or open charge-offs
may remain open after the funding of the loan. No bankruptcy or notice of
default filings may have occurred during the preceding three years; provided,
however, that if the borrower's bankruptcy has been discharged during the past
three years and the borrower has re-established a credit history otherwise
complying with the credit parameters set forth in this paragraph, then the
borrower may qualify for a mortgage loan. The mortgaged property must be in at
least average condition. A maximum CLTV of 90% (or 85% for mortgage loans
originated under the Limited Documentation and Stated Income Documentation
programs) is permitted for a mortgage loan on a single family owner-occupied
property. A maximum CLTV of 85% is permitted for a mortgage loan on a
non-owner occupied property, an owner-occupied condominium or a two- to
four-family residential property. The maximum CLTV for rural, remote or unique
properties is 75%. The debt service-to-income ratio generally ranges from 42%
to 45% or less, depending on the Qualifying Rate and the CLTV.
"A-" Risk. Under the "A-" risk category, an applicant must have
generally repaid installment or revolving debt according to its terms or must
have a FICO score of 620 or higher. A maximum of three 30-day late payments
and no 60-day late payment within the last 12 months are acceptable on an
existing mortgage loan. An existing mortgage loan is required to be current at
the time of funding of the loan. Minor derogatory items are allowed as to
non-mortgage credit, and a letter of explanation may be required under the
Full Documentation program. Medical derogatories are not considered. Open
collection accounts or open charge-offs affecting title with balances of less
than $500 may remain open after funding of the loan. No bankruptcy may have
occurred during the preceding two years. No notice of default filings may have
occurred during the preceding three years; provided, however, that if the
borrower's bankruptcy has been discharged during the past two years and the
borrower has re-established a credit history otherwise complying with the
credit parameters set forth in this paragraph, then the borrower may qualify
for a mortgage loan. The mortgaged property must be in at least average
condition. A maximum CLTV of 90% (or 80% for mortgage loans originated under
the Limited Documentation and Stated Income Documentation programs) is
permitted for a mortgage loan on a single family owner-occupied property. A
maximum CLTV of 80% (or 70% for mortgage loans originated under the Limited
Documentation and Stated Income Documentation programs) is permitted for a
mortgage loan on a non-owner-occupied property. A maximum CLTV of 85% (or 75%
for mortgage loans originated under the Limited Documentation and Stated
Income Documentation programs) is permitted for a mortgage loan secured by an
owner-occupied condominium or a two- to four-family residential property. The
maximum CLTV for rural, remote, or unique properties is 75%. The debt
service-to-income ratio is generally 50% or less.
"B" Risk. Under the "B" risk category, an applicant may have
experienced isolated credit problems, but should have generally repaid
installment or revolving debt according to its terms or must have a FICO score
of 600 or higher. A maximum of one 60-day late payment within the last 12
months is acceptable on an existing mortgage loan. An existing mortgage loan
must be less than 60 days late at the time of funding of the loan. As to
non-mortgage credit, some prior defaults may have occurred and a letter of
explanation may be required under the Full Documentation program. Medical
derogatories are not considered. Generally, open charge-offs or collection
accounts with balances of less than $1,000 may remain open after the funding
of the loan. No bankruptcy or notice of default filings by the applicant may
have occurred during the preceding two years; provided, however, that if the
borrower's bankruptcy has been discharged during the past two years and the
borrower has re-established a credit history otherwise complying with the
credit parameters set forth in this paragraph, the borrower may qualify for a
mortgage loan. The mortgaged property must be in at least average condition. A
maximum CLTV of 80% (or 75% for mortgage loans originated under the Limited
Documentation and Stated Income Documentation programs) is permitted for a
mortgage loan on an owner-occupied detached property. A maximum CLTV of 75%
(or 70% for mortgage loans originated under the Limited Documentation and
Stated Income Documentation programs) is permitted for a mortgage loan on a
non-owner-occupied property, an owner-occupied condominium or a two- to
four-family residential property. The maximum CLTV for rural, remote or unique
properties is 70%. The debt service-to-income ratio is generally 55% or less.
"C" Risk. Under the "C" risk category, an applicant may have
experienced significant credit problems in the past. A maximum of one 90-day
late payment within the last 12 months is acceptable on an existing mortgage
loan. An existing mortgage loan must be less than 90 days late at the time of
funding of the loan. As to non-mortgage credit, significant prior defaults may
have occurred. Open charge-offs or collection accounts with balances of less
than $2,500 may remain open after the funding of the loan. No bankruptcy or
notice of default filings by the applicant may have occurred during the
preceding 12 months; provided, however, that if the borrower's bankruptcy has
been discharged during the past 12 months and the borrower has re-established
a credit history otherwise complying with the credit parameters set forth in
this paragraph, the borrower may qualify for a mortgage loan. The mortgaged
property must be in average condition. Generally, a maximum CLTV of 75% for a
mortgage loan on a single family, owner-occupied property for a Full
Documentation program (or 70% for mortgage loans originated under the Limited
Documentation, and Stated Income Documentation programs) is permitted. A
maximum CLTV of 70% (or 65% for mortgage loans originated under the Limited
Documentation and the Stated Income Documentation programs) is permitted for a
mortgage loan on a non-owner-occupied property, an owner-occupied condominium
or a two- to-four family residential property. The maximum CLTV for rural,
remote or unique properties is 70%. The debt service-to-income ratio is
generally 59% or less.
"C-" Risk. Under the "C-" risk category, an applicant may have
experienced significant credit problems in the past. A maximum of two 90-day
late payments and one 120-day late payment is acceptable on an existing
mortgage loan. An existing mortgage loan must be less than 90 days late at the
time of funding of the loan. As to non-mortgage credit, significant prior
defaults may have occurred. Open charge-offs or collection accounts with
balances of less than $5,000 may remain open after the funding of the loan.
There may be no current notice of default and any bankruptcy must be
discharged. The mortgaged property may exhibit some deferred maintenance. A
maximum CLTV of 70% (or 65% for mortgage loans originated under the Limited
Documentation and Stated Income Documentation programs) is permitted for a
mortgage loan on a single family, owner-occupied property. A maximum CLTV of
65% (or 60% for mortgage loans originated under the Limited Documentation and
Stated Income Documentation programs) is permitted for a mortgage loan on a
non-owner occupied property, an owner-occupied condominium or a two- to
four-family residential property. The maximum CLTV for rural, remote or unique
properties is 65%. The debt service-to-income ratio is generally 59% or less.
Exceptions. As described above, the foregoing categories and criteria
are guidelines only. On a case-by-case basis, it may be determined that an
applicant warrants a debt service-to-income ratio exception, a pricing
exception, a loan-to-value exception, an exception from certain requirements
of a particular risk category, etc. (collectively called an "exception"). An
exception may generally be allowed if the application reflects certain
compensating factors, among others: low CLTV; pride of ownership; a maximum of
one 30-day late payment on all mortgage loans during the last 12 months; and
stable employment or ownership of current residence of five or more years. An
exception may also be allowed if the applicant places a down payment through
escrow of at least 20% of the purchase price of the mortgaged property or if
the new loan reduces the applicant's monthly aggregate mortgage payment by 25%
or more. Accordingly, certain mortgagors may qualify in a more favorable risk
category that, in the absence of such compensating factors, would satisfy only
the criteria of a less favorable risk category.
Conforming Second Lien Mortgage Loans:
"A+" Risk. Under the "A+" risk category, the applicant must have
generally repaid installment or revolving debt according to its terms or must
have a FICO score of 720 or higher. A maximum of no late payments in the last
12 months and one 30-day late payment within the last 24 months is acceptable
on an existing mortgage loan. An existing mortgage loan is required to be
current at the time the application is submitted. No open collection accounts
or open charge-offs may remain open after the funding of the loan. No
bankruptcy filings may have occurred during the preceding five years;
provided, however, that if the borrower's bankruptcy has been discharged
during the past five years and the borrower has re-established a credit
history otherwise complying with the credit parameters set forth in this
paragraph, then the borrower may qualify for a mortgage loan. The mortgaged
property must be in at least average condition. A maximum CLTV of 100% is
permitted for a mortgage loan on an owner-occupied single-family residence,
townhome or planned unit development. A maximum CLTV of 90% is permitted for a
mortgage loan on an owner-occupied condominium or a two- to four-family
residential property. The maximum debt service-to-income ratio is 45%, however
a 5% debt service-to-income ratio allowance may be made based on underwriter
discretion and compensating factors.
"A" Risk. Under the "A" risk category, an applicant must have
generally repaid installment or revolving debt according to its terms or must
have a FICO score of 680 or higher. A maximum of one 30-day late payment and
no 60-day late payments within the last 24 months is acceptable on an existing
mortgage loan. An existing mortgage loan is required to be current at the time
the application is submitted. Minor derogatory items are allowed as to
non-mortgage credit, and a letter of explanation may be required under the
Full Documentation program. No bankruptcy or notice of default filings may
have occurred during preceding five years; provided, however, that if the
borrower's bankruptcy has been discharged during the past five years and the
borrower has re-established a credit history otherwise complying with the
credit parameters set forth in this paragraph, then the borrower may qualify
for a mortgage loan. The mortgaged property must be in at least average
condition. A maximum CLTV of 100% is permitted for a mortgage loan on an
owner-occupied single-family residence, townhome or planned unit development.
A maximum CLTV of 90% is permitted for a mortgage loan on an owner-occupied
condominium or two- to four-family residential property. The debt
service-to-income ratio is 45%, however a 5% debt service-to-income ratio
allowance may be made based on underwriter discretion and compensating
factors.
"B+" Risk. Under the "B+" risk category, an applicant may have
experienced isolated credit problems, but should have generally repaid
installment or revolving debt according to its terms or must have a FICO score
of 640 or higher. A maximum of one 30-day late payment within the last 12
months and two 30-day late payments within the last 24 months is acceptable on
an existing mortgage loan. No bankruptcy filings by the applicant may have
occurred during the preceding five years; provided, however, that if the
borrower's bankruptcy has been discharged during the past five years and the
borrower has re-established a credit history otherwise complying with the
credit parameters set forth in this paragraph, the borrower may qualify for a
mortgage loan. The mortgaged property must be in at least average condition. A
maximum CLTV of 100% is permitted for a mortgage loan on an owner-occupied
single-family residence, townhome or planned unit development. A maximum CLTV
of 90% is permitted for a mortgage loan on an owner-occupied condominium or a
two- to-four family residential property. The maximum debt service-to-income
ratio is 42%, however a 5% debt service-to-income ratio allowance may be made
based on underwriter discretion and compensating factors.
"B" Risk. Under the "B" risk category, an applicant may have
experienced isolated credit problems but should have generally repaid
installment or revolving debt according to its terms or must have a FICO score
of 610 or higher for loans with CLTVs of 85% or higher, or 600 or higher for
loans with CLTVs of less than 85%. A maximum of one 30-day late payment within
the last 12 months and two 30-day late payments within the last 24 months is
acceptable on an existing mortgage loan. No bankruptcy filings by the
applicant may have occurred during the preceding five years; provided,
however, that if the borrower's bankruptcy has been discharged during the past
five years and the borrower has re-established a credit history otherwise
complying with the credit parameters set forth in this paragraph, the borrower
may qualify for a mortgage loan. The mortgaged property must be in average
condition. A maximum CLTV of 100% is permitted for a mortgage loan on an
owner-occupied single-family residence, townhome or planned unit development.
A maximum CLTV of 90% is permitted for a mortgage loan on an owner-occupied
condominium or a two-to-four-family residential property. The maximum debt
service-to-income ratio is 42%, however a 5% debt service-to-income ratio
allowance may be made based on underwriter discretion and compensating
factors.
Exceptions. As described above, the foregoing categories and criteria
are guidelines only. On a case-by-case basis, it may be determined that an
applicant warrants a debt service-to-income ratio exception, a pricing
exception, a loan-to-value exception, an exception from certain requirements
of a particular risk category, etc. (collectively called an "exception"). An
exception may generally be allowed if the application reflects certain
compensating factors, among others: low CLTV; pride of ownership; a maximum of
one 30-day late payment on all mortgage loans during the last 12 months; and
stable employment or ownership of current residence of five or more years. An
exception may also be allowed if the applicant places a down payment through
escrow of at least 20% of the purchase price of the mortgaged property or if
the new loan reduces the applicant's monthly aggregate mortgage payment by 25%
or more. Accordingly, certain mortgagors may qualify in a more favorable risk
category that, in the absence of such compensating factors, would satisfy only
the criteria of a less favorable risk category.
The Originator commenced receiving applications for mortgage loans
under its regular lending program in February 1996. Accordingly, other than to
the limited extent as described below under "--The Servicer" herein, the
Originator (whether as an originator or acquirer of mortgage loans) does not
have representative historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of examining the Originator's
(as a servicer of such mortgage loans) performance in servicing mortgage loans
similar to the Mortgage Loans.
The Servicer
The information set forth in the following paragraphs has been
provided by the Servicer. None of the Depositor, the Trustee, the Trust
Administrator or the Underwriters or any of their respective affiliates has
made or will make any representation as to the accuracy or completeness of
such information.
New Century Mortgage Corporation (the "Company") is a wholly-owned
subsidiary of New Century Financial Corporation ("NCFC"), a public company.
The Company is a consumer finance and mortgage banking company that
originates, sells and services first and second mortgage loans and other
consumer loans. The company emphasizes the origination of mortgage loans that
are commonly referred to as non-conforming "B&C" loans. The Company commenced
lending operations on February 26, 1996. It is headquartered in Irvine,
California.
For the three-month period ended March 31, 1999, the Company
originated and purchased approximately $892 million in mortgage loans. For the
same three-month period, the Company sold approximately $296 million of
mortgage loans, mostly on a servicing-retained basis, in whole loan sales and
approximately $577 million of mortgage loans through securitization.
As of March 31, 1999, the Company had retail and wholesale branch
offices in 32 states, and was originating mortgage loans through 4 regional
operating centers, 65 wholesale sales offices and 79 retail sales offices. As
of March 31, 1999, the Company had approximately 1,433 employees.
Loan Loss and Delinquency
The Company commenced lending operations in February 1996, commenced
its default related servicing operations in September 1997 and as of June 1999
is directly handling certain servicing duties that it used to outsource,
including payment processing, foreclosure proceedings, loss mitigation, REO
dispositions, loan setup, escrow administration, monthly billings, cashiering
and lockbox operation and sweeps, demands and payoff requests, year-end tax
reporting, routine customer calls and correspondence and mortgage pool data
reporting. Accordingly, the Company has no representative historical
delinquency, bankruptcy, foreclosure or default experience that may be
referred to for purposes of estimating future delinquency and loss experience
of the Mortgage Loans.
However, the following table sets forth certain information regarding
the loan loss and delinquency experience of mortgage loans for which the
Company is servicer or Servicer. The mortgage loans for which this information
is provided include those originated or acquired under the Company's regular
lending program and either owned by the Company or previously sold to trusts
in transactions in which the Company was appointed as servicer or Servicer.
Because the Company commenced loan origination only in February 1996,
all of the mortgage loans included in the statistics below are seasoned less
than 34 months. Moreover, because mortgage loans are continually being
originated and added to the group for which such statistics are compiled, the
average seasoning of the mortgage loans included in such statistics is
considerably shorter. Because newly originated mortgage loans will not be
added to the Mortgage Pool after the Pre-Funding Period, the Mortgage Pool
will consist of a static group of Mortgage Loans, and accordingly the actual
loss and delinquency percentages with respect to the Mortgage Pool are likely
to be substantially higher than those indicated below.
Certain of the mortgage loans in the statistics below are or were
serviced by a subservicer for New Century. Accordingly, such performance
statistics reflect the servicing practices of that subservicer as well as the
quality and type of mortgage loans. These servicing practices are not
necessarily representative of the practices employed by the Company in its
servicing and administrative duties.
<PAGE>
<TABLE>
<CAPTION>
Delinquency and Foreclosure Experience
of the Company's Servicing Portfolio as of March 31, 1999
Percentage
Dollar of Total
Amount Servicing Portfolio
<S> <C> <C>
Delinquency(1)
30-59 Days $ 54,017,641 1.25%
60-89 Days $ 14,840,514 0.34%
90 Days or more $ 33,468,445 0.77%
Loans in Foreclosure(2) $ 117,513,246 2.71%
REO Properties(2) $ 20,025,368 0.46%
Total Servicing Portfolio $4,337,814,198
- --------------------------------
(1) The period of delinquency is based on the number of days payments are
contractually past due. The delinquency statistics for the period
exclude loans in foreclosure.
(2) The percentage of loans in foreclosure and REO properties is based on
the dollar amount of loans in foreclosure and REO properties as a
percentage of the total dollar amount of the mortgage loans in the
servicing portfolio as of the date indicated.
</TABLE>
THE POOLING AND SERVICING AGREEMENT
General
The Certificates will be issued pursuant to a pooling and servicing
agreement dated as of June 1, 1999 (the "Pooling and Servicing Agreement"),
among the Depositor, the Servicer, the Seller, the Trust Administrator and the
Trustee. The trust created under the Pooling and Servicing Agreement (the
"Trust") will consist of (i) all of the Depositor's right, title and interest
in the Mortgage Loans, including in each case the related mortgage notes,
mortgages and other related documents, (ii) all payments on or collections in
respect of the Mortgage Loans due after the applicable Cut-off Dates, 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 revenued 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. The Offered Certificates will be transferable and
exchangeable at the corporate trust offices of the Trust Administrator.
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.
Assignment of the Mortgage Loans
On the Closing Date, the Seller will transfer ownership of the
Initial Mortgage Loans to the Depositor. Immediately after such transfer,
pursuant to the Pooling and Servicing Agreement, the Depositor will sell,
transfer, assign, set over and otherwise convey without recourse to the
Trustee, in trust for the benefit of the holders of the Certificates and the
Certificate Insurer, all right, title and interest of the Depositor in and to
each such Initial Mortgage Loan and all right, title and interest in and to
all other assets included in the Trust Fund, including all principal and
interest payments due thereon after the Initial Cut-off Date. On each
Additional Transfer Date, the Seller will sell, transfer, assign, set over and
otherwise convey without recourse to the Trustee, in trust for the benefit of
the holders of the Certificates and the Certificate Insurer, all right, title
and interest of the Seller in and to each Additional Mortgage Loan, including
all principal and interest payments due thereon after the applicable Cut-off
Date.
In connection with each such transfer and assignment, the Seller will
deliver, or cause to be delivered, the following documents (collectively
constituting the "Trustee's Mortgage File") to the Trust Administrator, as
custodian for the Trustee, with respect to each Mortgage Loan: (i) the
original Mortgage Note, endorsed in blank or to the order of the Trustee, with
all prior and intervening endorsements showing a complete chain of endorsement
from the originator of the Mortgage Loan to the Seller; (ii) the original
Mortgage with evidence of recording thereon (or, if the original Mortgage has
not been returned from the applicable public recording office or is not
otherwise available, a copy of the Mortgage certified by a responsible officer
of the Seller or by the closing attorney or by an officer of the title insurer
or agent of the title insurer which issued the related title insurance policy
or commitment therefor to be a true and complete copy of the original Mortgage
submitted for recording); (iii) the original executed assignment of the
Mortgage executed by the Seller to the Trustee or in blank, acceptable for
recording except with respect to any currently unavailable information; (iv)
the original assignment and any intervening assignments of the Mortgage,
showing a complete chain of assignment from the originator of the Mortgage
Loan to the Seller (or, if any such assignment has not been returned from the
applicable public recording office or is not otherwise available, a copy of
such assignment certified by a responsible officer of the Seller or by the
closing attorney or by an officer of the title insurer or agent of the title
insurer which issued the related title insurance policy or commitment therefor
to be a true and complete copy of such assignment submitted for recording);
(v) the original, or a copy certified by the originator of the Mortgage Loan
to be a true and complete copy of the original, of each assumption,
modification, written assurance or substitution agreement, if any; and (vi) an
original, or a copy certified by the Seller to be a true and complete copy of
the original, of a lender's title insurance policy, or if a lender's title
policy has not been issued as of the Closing Date, a marked-up commitment
(binder) (including any marked additions thereto or deletions therefrom) to
issue such policy; provided, that with respect to the Mortgage Loans, the
Seller anticipates delivery to the Trustee of the documents set forth in (vi)
above within 15 days following the Closing Date.
On each Additional Transfer Date, the Seller will deliver, or cause
to be delivered, to the Trust Administrator, as custodian for the Trustee, the
Trustee's Mortgage File with respect to each Additional Mortgage Loan to be
conveyed on such date.
The Trust Administrator will review the Mortgage Loan documents
relating to the Initial Mortgage Loans on or prior to the Closing Date and
will review the Mortgage Loan documents relating to the Additional Mortgage
Loans on or prior to each Additional Transfer Date, and will hold such
documents in trust for the benefit of the holders of the Certificates and the
Certificate Insurer. After the Closing Date, if any document is found to be
missing or defective in any material respect, the Trust Administrator is
required to notify the Seller, the Servicer, the Trustee, the Depositor and
the Certificate Insurer in writing. If the Seller cannot or does not cure such
omission or defect within 60 days after its receipt of notice from the Trust
Administrator, the Seller will be required to repurchase the related Mortgage
Loan (the "Defective Loan") from the Trust Fund at a price (the "Purchase
Price") to include 100% of the Loan Balance thereof plus accrued and unpaid
interest thereon, calculated at a rate equal to the difference between the
Mortgage Rate and the Servicing Fee Rate (or, if New Century Mortgage
Corporation is no longer the Servicer, at the applicable Mortgage Rate)
through the day immediately preceding the due date in the Due Period preceding
the Distribution Date on which such Purchase Price will be distributed. Rather
than repurchase the Defective Loan as provided above, the Seller may remove
such Defective Loan (a "Deleted Mortgage Loan") from the Trust Fund and
substitute in its place another Mortgage Loan of like kind (a "Replacement
Mortgage Loan"); provided, however, that such substitution is permitted only
within two years after the Closing Date and may not be made unless an opinion
of counsel is provided to the effect that such substitution would not
disqualify the Trust Fund as a REMIC or result in a prohibited transaction tax
under the Code. Any Replacement Mortgage Loan generally will, on the date of
substitution, among other characteristics set forth in the Pooling and
Servicing Agreement, (i) have a Loan Balance, after deduction of the principal
portion of the scheduled payment due in the Due Period ending in the month
succeeding the month during which such substitution occurred, not in excess
of, and not substantially less than the Loan Balance of the Deleted Mortgage
Loan (the amount of any shortfall to be deposited by the Seller in the
Collection Account not later than the succeeding Determination Date and held
for distribution to the holders of the Certificates on the related
Distribution Date), (ii) have a Mortgage Rate not less than (and not more than
one percentage point greater than) the Mortgage Rate of the Deleted Mortgage
Loan, (iii) have a Combined Loan-to-Value Ratio not higher than that of the
Deleted Mortgage Loan, (iv) have a remaining term to maturity not more than
two years greater than, nor more than two years less than, that of the Deleted
Mortgage Loan, (v) have the same or lower credit risk, as measured by credit
risk category under the Originator's underwriting guidelines and (vi) comply
with all of the representations and warranties set forth in the Pooling and
Servicing Agreement as of the date of substitution. This cure, repurchase or
substitution obligation constitutes the sole remedy available to the holders
of the Offered Certificates or the Trustee for omission of, or a material
defect in, a Mortgage Loan document.
The Seller
NC Capital Corporation (the "Seller"), a California corporation,
obtained the mortgage loans from the Originator. The Seller will transfer the
Mortgage Loans to the Depositor pursuant to a mortgage loan purchase agreement
dated as of June 1, 1999 (the "Mortgage Loan Purchase Agreement"), between the
Seller and the Depositor.
The Trustee
Firstar Bank Milwaukee, N.A., a national banking association, will
act as Trustee for the Certificates pursuant to the Pooling and Servicing
Agreement. The Trustee's offices for notices under the Pooling and Servicing
Agreement are located at 1555 North River Drive, Suite 301, Milwaukee,
Wisconsin 53212, and its telephone number is (414) 905-5000. In the event the
Trust Administrator advises the Trustee that it is unable to continue to
perform its obligations pursuant to the terms of the Pooling and Servicing
Agreement prior to the appointment of a successor, the Trustee is obligated to
perform such obligations until a new trust administrator is appointed.
The principal compensation to be paid to the Trustee in respect of
its obligations under the Pooling and Servicing Agreement will consist of a
specified portion of the Administrative Fee. The "Administrative Fee" will
accrue at the rate of 0.0095% per annum (the "Administrative Fee Rate") on the
aggregate Loan Balance of the Mortgage Loans (the "Administrative Fee"). 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 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) resulting from a breach of the
Servicer's or the Trust Administrator's obligations and duties under the
Pooling and Servicing Agreement, (ii) that constitutes a specific liability of
the Trustee under the Pooling and Servicing Agreement or (iii) 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.
The Trust Administrator
U.S. Bank National Association, a national banking association, will
act as Trust Administrator for the Certificates pursuant to the Pooling and
Servicing Agreement. The Trust Administrator's offices for notices under the
Pooling and Servicing Agreement are located at 180 East Fifth Street, St.
Paul, Minnesota 55101, and its telephone number is (612) 973-5800. The Trust
Administrator will perform certain administrative functions on behalf of the
Trustee and will act as initial paying agent, certificate registrar and
custodian.
The principal compensation to be paid to the Trust Administrator in
respect of its obligations under the Pooling and Servicing Agreement will
consist of a specified portion of the Administrative Fee. The Pooling and
Servicing Agreement will provide that the Trust Administrator and any
director, officer, employee or agent of the Trust Administrator 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 Trust Administrator, including the compensation and
expenses and disbursements of its agents and counsel, in the ordinary course
of the Trust Administrator's performance in accordance with the provisions of
the Pooling and Servicing Agreement) incurred by the Trust Administrator in
connection with any pending or threatened claim or legal action 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) resulting from a breach of the Servicer's or the
Trustee's obligations and duties under the Pooling and Servicing Agreement,
(ii) that constitutes a specific liability of the Trust Administrator under
the Pooling and Servicing Agreement or (iii) incurred by reason of willful
misfeasance, bad faith or negligence in the performance of the Trust
Administrator's duties under the Pooling and Servicing Agreement or as a
result of a breach, or by reason of reckless disregard, of the Trust
Administrator's obligations and duties under the Pooling and Servicing
Agreement.
Servicing and Other Compensation and Payment of Expenses
The principal compensation to be paid to the Servicer in respect of
its servicing activities for the Certificates will consist of the Servicing
Fee. The "Servicing Fee" will accrue at a rate of 0.50% per annum (the
"Servicing Fee Rate") on the aggregate Loan Balances of the Mortgage Loans. As
additional servicing compensation, the Servicer will be entitled to retain all
assumption fees, late payment charges and other miscellaneous servicing fees
(with the exception of prepayment premiums, which will be distributed to the
holders of the Class P Certificates) to the extent collected from mortgagors,
together with any interest or other income earned on funds held in the
Certificate Account and any escrow accounts.
Adjustment to Servicing Fee in Connection with Certain Prepaid Mortgage Loans
When a borrower prepays all of a Mortgage Loan between scheduled
monthly payment dates (each, a "due date"), the borrower pays interest on the
amount prepaid only to the date of prepayment. This results in a shortfall in
the collection of interest on the Mortgage Loan, as compared with the interest
that would otherwise have been collected and available for distribution to
Certificateholders. In order to mitigate the effect of any such shortfall in
interest distributions to holders of the Offered Certificates on any
Distribution Date (a "Prepayment Interest Shortfall"), the amount of the
Servicing Fee otherwise payable to the Servicer for such month shall, to the
extent of such shortfall, be deposited by the Servicer in the Collection
Account for distribution to holders of the Offered Certificates on such
Distribution Date. However, any such reduction in the Servicing Fee will be
made only to the extent of the Servicing Fee otherwise payable to the Servicer
with respect to payments on the Mortgage Loans received during the Due Period
relating to such Distribution Date. Any such deposit by the Servicer will be
reflected in the distributions to holders of the Offered Certificates made on
the Distribution Date on which the Principal Prepayment received would be
distributed. See "Description of the Certificates--Example of Distributions"
herein.
Advances
Subject to the following limitations, the Servicer will be obligated
to advance or cause to be advanced prior to each Distribution Date its own
funds, or funds in the Collection Account that constitute amounts held for
future distribution, in an amount equal to the aggregate of all payments of
principal and interest, net of the Servicing Fee, that were due during the
related Due Period on the Mortgage Loans 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
through foreclosure or deed in lieu of foreclosure (any such advance, a
"Delinquency Advance").
Delinquency 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
Delinquency 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 to make any Delinquency 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 Civil Relief Act.
All Delinquency Advances will be reimbursable to the Servicer from
late collections, insurance proceeds and liquidation proceeds from the
Mortgage Loan as to which such unreimbursed Delinquency Advance was made. In
addition, any Delinquency Advances previously made in respect to any Mortgage
Loan that are at any time 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 Delinquency Advance, the Trustee will be obligated
to make any such Delinquency Advance, to the extent required in the Pooling
and Servicing Agreement.
Certain Matters Regarding the Certificate Insurer
Pursuant to the terms of the Pooling and Servicing Agreement, unless
there exists a continuance of any failure by the Certificate Insurer to make a
required payment under the Policy or there exists a proceeding in bankruptcy
by or against the Certificate Insurer (either such condition, an Insurer
Default, as defined herein), the Certificate Insurer will be entitled to
exercise, among others, the following rights of the holders of the Offered
Certificates, without the consent of such holders, and the holders of the
Offered Certificates may exercise such rights only with the prior written
consent of the Certificate Insurer: (i) the right to direct the Trustee to
terminate the rights and obligations of the Servicer; (ii) the right to
consent or to direct any waivers of defaults by the Servicer; (iii) the right
to remove the Trustee pursuant to the Pooling and Servicing Agreement; and
(iv) the right to institute proceedings against the Servicer in the event of
default by the Servicer and refusal of the Trustee to institute such
proceedings. In addition, unless an Insurer Default exists, the Certificate
Insurer will have the right to direct all matters relating to any proceeding
seeking the avoidance as a preferential transfer under applicable bankruptcy,
insolvency, receivership or similar law of any distribution made with respect
to the Offered Certificates, and, unless an Insurer Default exists, the
Certificate Insurer's consent will be required prior to, among other things,
(x) the removal of the Trustee or the Trust Administrator, (y) the appointment
of any successor Trustee, Trust Administrator or Servicer or (z) any amendment
to the Pooling and Servicing Agreement.
DESCRIPTION OF THE CERTIFICATES
General
The Offered 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.
The New Century Home Equity Loan Certificates, Series 1999-NCA will
consist of the Class A-1 Certificates, Class A-2 Certificates, Class A-3
Certificates, Class A-4 Certificates, Class A-5 Certificates, Class A-6
Certificates, Class A-7 Certificates and Class A-8IO Certificates
(collectively, the "Offered Certificates"), the Class P Certificates, and the
Class R Certificates (the "Residual Certificates"). The Offered Certificates,
Private Certificates and Residual Certificates are collectively referred to
herein as the "Certificates." The Residual Certificates do not have a
principal balance and will evidence a residual interest in the Trust Fund.
The Offered Certificates will have Original Certificate Principal
Balances or a Certificate Notional Balance (in the case of the Class A-8IO
Certificates) specified on the cover hereof or described herein and, together
with the Private Certificates and the Residual Certificates, will evidence the
entire beneficial ownership interest in the Trust Fund. The aggregate of the
Original Certificate Principal Balances of the Offered Certificates is
$325,000,000. The Certificate Notional Balance of the Class A-8IO Certificates
initially is $25,000,000. The Class A-8IO Certificates will consist of two
non-separable payment components, the "Class A-8IO-I Component" and "Class
A-8IO-II Component" (together, the "Class A-8IO Components"). The notional
balances of the Class A-8IO-I Component and the Class A-8IO-II Component
initial will be equal to $23,000,000 and $2,000,000, respectively, and
thereafter will be calculated as described herein. Interest distributable to
holders of the Class A-8IO Certificates will be calculated on the basis of
interest accrued on the notional principal balances of the Class A-8IO-I
Component and the Class A-8IO-II Component during the first thirty-six Accrual
Periods. Thereafter, no further interest will accrue on the Class A-8IO
Components and no further distributions will be made on the Class A-8IO
Certificates.
The Offered Certificates will be issued in book-entry form as
described below. The Offered Certificates will be issued in minimum dollar
denominations or notional balances of $50,000 and integral multiples of $1,000
in excess thereof. The assumed final maturity dates for the Classes of Offered
Certificates are the applicable Distribution Dates set forth in the table
below:
Classes Assumed Final Maturity Dates
- ------------------------------ ----------------------------------
Class A-1 June 25, 2016
Class A-2 February 25, 2022
Class A-3 April 25, 2025
Class A-4 November 25, 2027
Class A-5 January 25, 2029
Class A-6 October 25, 2028
Class A-7 July 25, 2029
Class A-8IO June 25, 2002
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 The Depository Trust Company ("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 Pooling and Servicing 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 "DTC 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 DTC 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 DTC 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 DTC Rules, as in effect from time to time.
Cedelbank, societe anonyme ("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
Distribution 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 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 Pooling and Servicing
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 Pooling and Servicing 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 Pooling and Servicing 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, the Trust Administrator 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.
Distributions
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 July 1999 (each, a "Distribution
Date"), to the persons in whose names such Certificates are registered at the
close of business on the last Business Day of the month preceding the month of
the related Distribution Date (each, a "Record Date").
Deposits into the Collection Account
The Servicer shall establish and maintain or cause to be established
and maintained an account (the "Collection Account") on behalf of the Trustee
for the benefit of the Certificateholders. Within two business days after
receipt (or, if applicable, on or prior to such other date as may be specified
in the Pooling and Servicing Agreement), the Servicer will remit to the
Trustee (or, in the event the Collection Account is maintained with another
institution pursuant to the Pooling and Servicing Agreement, to such
institution) for deposit into the Collection Account the following payments
and collections received or made by it subsequent to the applicable Cut-off
Date (to the extent not applied in computing the applicable Cut-off Date Loan
Balance) or received prior to the applicable Cut-off Date but due the Trust
Fund:
(i) (a) all payments on account of scheduled principal on
the Mortgage Loans (including any amount deemed to be principal with
respect to REO Property) that are due subsequent to the applicable
Cut-off Date and (b) all Principal Prepayments;
(ii) all payments on account of interest on the Mortgage
Loans (net of the related Servicing Fee) that are due after the
applicable Cut-off Date;
(iii) with respect to any Mortgage Loan, all proceeds of any
related insurance policies (to the extent such proceeds are not
applied to the restoration of the related Mortgaged Property or
released to the related Mortgagor in accordance with the Servicer's
normal servicing procedures) ("Insurance Proceeds"), and all other
cash amounts received either (a) through eminent domain or
condemnation with respect to the Mortgaged Properties or (b) in
connection with the liquidation of defaulted Mortgage Loans
("Liquidation Proceeds"), together with the net proceeds on a monthly
basis received with respect to any Mortgaged Properties acquired by
the Servicer by foreclosure, deed in lieu of foreclosure or
otherwise, net of the sum of (A) all unreimbursed Servicing Advances
(as defined in the Pooling and Servicing Agreement) and unreimbursed
Delinquency Advances, if any, with respect to such Mortgage Loan, (B)
all accrued interest on such Mortgage Loan at the applicable Net
Mortgage Rate from the due date as to which interest was last paid by
the related Mortgagor through the due date in the Due Period relating
to the Distribution Date in which such proceeds are required to be
distributed on such Mortgage Loan (to the extent not already covered
in (A) above), (C) all accrued and unpaid Servicing Fees, if any, and
(D) without duplication, liquidation expenses;
(iv) all payments made by the Servicer in respect of
Prepayment Interest Shortfalls;
(v) any amount required to be deposited by the Servicer in
connection with any losses on investment of funds in the Collection
Account;
(vi) any amounts required to be deposited by the Servicer
with respect to any deductible clause in any blanket hazard insurance
policy maintained by the Servicer in lieu of requiring each Mortgagor
to maintain a primary hazard insurance policy;
(vii) all proceeds of any Mortgage Loans or property
acquired in respect of Mortgage Loans through foreclosure and
purchased by the Servicer and all amounts required to be deposited in
connection with shortfalls in the principal amount of Replacement
Mortgage Loans;
(viii) all prepayment premiums, if any, collected during the
related Due Period;
(ix) the amount of any Delinquency Advances to be deposited
to the Collection Account pursuant to the Pooling and Servicing
Agreement; and
(x) all amounts required to be deposited therein in respect
of repurchases of Mortgage Loans as provided in the Pooling and
Servicing Agreement.
Withdrawals from the Collection Account
The Servicer, or the Trust Administrator at the written request of
the Servicer, will withdraw funds from the Collection Account for the
following purposes:
(i) to deposit into the Certificate Account prior to 3:00
p.m., New York time, on the Servicer Remittance Date immediately
preceding each Distribution Date (after having received Delinquency
Advances for such period) the related Interest Remittance Amount and
the related Principal Remittance Amount, net of amounts to be paid as
follows:
(A) to pay to the Originator, with respect
to each Mortgage Loan that has previously been purchased or
replaced, all amounts received thereon relating to any month
or Due Period subsequent to the month of such purchase or
substitution, as the case may be;
(B) to reimburse the Servicer for any
Delinquency Advance or Servicing Advance previously made
that the Servicer has determined to be nonrecoverable; and
(C) to reimburse the Depositor and the
Servicer for certain losses, liabilities, costs and expenses
reimbursable to them pursuant to the Pooling and Servicing
Agreement;
(ii) to pay to the Servicer (x) when collected on the
related Mortgage Loan, all recovered and previously unreimbursed
Delinquency Advances and Servicing Advances (but only to the extent
received from the related Mortgagor) and (y) any interest or
investment income earned on funds deposited in the Collection Account
(net of investment losses);
(iii) to reimburse the Servicer, the Trust Administrator or
the Trustee, as the case may be, for expenses reasonably incurred in
respect of any breach or defect giving rise to a repurchase
obligation under the Pooling and Servicing Agreement, including any
expenses arising out of the enforcement of the purchase obligation,
but only to the extent included in the related purchase price;
(iv) to pay to the Servicer the excess, if any, of any Net
Recovery Proceeds (as defined in the Pooling and Servicing Agreement)
over the Loan Balance of the related Mortgage Loan, to the extent any
such excess was deposited into the Collection Account;
(v) to withdraw any amount not required to be deposited into
the Collection Account, which amount shall include all interest and
principal payments as to which the related due date occurs on or
prior to the applicable Cut-off Date;
(vi) to clear and terminate the Collection Account pursuant
to the Pooling and Servicing Agreement upon the termination of the
Trust Fund;
(vii) in the event of a prepayment or satisfaction of a
Mortgage Loan, to pay the refunds and expenses to which the Mortgagor
is entitled as set forth on requests submitted by the Servicer; and
(viii) to pay to the holders of the Class P Certificates,
any prepayment premiums collected on the Mortgage Loans in the
calendar month prior to the related Distribution Date (such amounts
to be paid directly to such holders on such Distribution Date).
Deposits into the Certificate Account
The Trust Administrator shall maintain a certificate account (the
"Certificate Account") on behalf of the Trustee for the benefit of the
registered holders of the Certificates. The Trust Administrator on behalf of
the Trustee shall, promptly upon receipt, deposit into the Certificate Account
and retain therein the following:
(i) the amounts withdrawn from the Collection Account as
described under clause (i) under "--Withdrawals from the Collection
Account" above;
(ii) any amount received by the Trust Administrator on
behalf of the Trustee in connection with a termination of the Trust
Fund;
(iii) any amount received from the Servicer and required to
be deposited therein in respect of losses on investment of funds in
the Certificate Account; and
(iv) the amount, if any, required to be withdrawn from
either Pre-Funding Account or either Capitalized Interest Account in
respect of the first Distribution Date.
Withdrawals from the Certificate Account
The Trust Administrator on behalf of the Trustee will withdraw funds
from the Certificate Account and apply them not later than 1:00 p.m., New York
time, on each Distribution Date as follows:
(i) first, to pay the Trustee and the Trust
Administrator the Administrative Fee for such Distribution Date;
(ii) second, to pay to the Servicer any interest or
investment income earned on funds deposited in the Certificate
Account (net of investment losses); and
(iii) third, any remaining amounts then on deposit in the
Certificate Account (the "Available Funds"), to make distributions as
described under "--Allocation of Available Funds" below.
Pre-Funding Accounts and Capitalized Interest Accounts
On the Closing Date, the Seller will deposit approximately
$67,257,787.68 (the "Group I Pre-Funded Amount") into an account (the "Group I
Pre-Funding Account"), and will deposit $9,100,776.62 (the "Group II
Pre-Funded Amount") into a separate account (the "Group II Pre-Funding
Account"), in each case to be maintained by the Trust Administrator on behalf
of the Trustee for the benefit of the holders of the Group I Certificates and
Group II Certificates, as applicable. The Group I Pre-Funding Account will be
used to acquire Group I Additional Mortgage Loans and the Group II Pre-Funding
Account will be used to acquire Group II Additional Mortgage Loans, in each
case during the period beginning on the Closing Date and generally terminating
on the earlier to occur of (i) the date on which the amount on deposit in each
Pre-Funding Account (exclusive of any investment earnings) is less than
$100,000 and (ii) July 25, 1999 (the "Pre-Funding Period"). The Pre-Funded
Amounts will be reduced during the Pre-Funding Period by the amount thereof
used to purchase Additional Mortgage Loans in accordance with the Pooling and
Servicing Agreement. Any Group I Pre-Funded Amount or Group II Pre-Funded
Amount remaining at the end of the Pre-Funding Period (the "Unutilized Funding
Amount") will be distributed to holders of Group I Certificates and Group II
Certificates, respectively, on the first Distribution Date in reduction of the
related Certificate Principal Balances, thus resulting in an unscheduled
distribution of principal in respect of the related Certificates on such date.
In the case of the Group I Certificates, holders will be entitled to a pro
rata distribution of such Unutilized Funding Amount, on the basis of the
respective Original Certificate Principal Balances of the related Classes, as
described in "-- Allocation of Available Funds" below.
In addition, on the Closing Date the Seller will deposit an aggregate
amount of approximately $486,059.24 into two separate accounts (each, a
"Capitalized Interest Account") to be maintained by the Trust Administrator on
behalf of the Trustee for the benefit of holders of the Group I Certificates
and Group II Certificates, as applicable. Amounts on deposit in each
Capitalized Interest Account will be applied during the Pre-Funding Period to
the extent necessary to ensure that the full amount of interest required to be
distributed to holders of the related Classes of Offered Certificates is
distributed. Amounts remaining in the Capitalized Interest Accounts after the
end of the Pre-Funding Period will be paid to the Seller.
Amounts on deposit in the Pre-Funding Accounts and the Capitalized
Interest Accounts will be invested in Eligible Investments (as defined in the
Pooling and Servicing Agreement). All interest and any other investment
earnings on amounts on deposit in the Pre-Funding Accounts and the Capitalized
Interest Accounts will be paid to the Seller. Neither the Pre-Funding Accounts
nor the Capitalized Interest Accounts will be assets of the REMIC. For federal
income tax purposes, the Pre-Funding Accounts and the Capitalized Interest
Accounts will be owned by, and all investment earnings on amounts in the
Pre-Funding Accounts and the Capitalized Interest Accounts will be taxable to,
the Seller.
Allocation of Available Funds
Distributions to holders of the Certificates will be made on each
Distribution Date in an amount equal to the amount of Available Funds plus any
Insured Payments, if applicable.
I. On each Distribution Date, the Trust Administrator will withdraw (a)
from the Certificate Account all Available Funds then on deposit that are
attributable to the Group I Mortgage Loans (the "Group I Available Funds") and
(b) from an account (the "Policy Payments Account") maintained by the Trustee
pursuant to the terms of the Pooling and Servicing Agreement, the amount of
any Insured Payment with respect to the Group I Certificates and will
distribute the same in the following order of priority:
(i) to the holders of each Class of Group I Certificates and
the Class A-8IO Certificates, their pro rata share (based on the
amount of interest each Class of Group I Certificates and the Class
A-8IO-I Component are entitled to receive) of the related Interest
Distribution Amounts for such Distribution Date;
(ii) to the holders of the Classes of Group I Certificates,
an amount equal to the Group I Basic Principal Distribution Amount,
in the order of priority specified below;
(iii) to the Certificate Insurer, the Premium Amount for
Group I for such Distribution Date (to the extent such payment will
not cause an Insured Payment to be required);
(iv) to the Certificate Insurer, the Reimbursement Amount
for Group I for such Distribution Date (to the extent such payment
will not cause an Insured Payment to be required);
(v) to the holders of the Class of Group II Certificates and
the Class A-8IO-II Component, an amount equal to the excess, if any,
of (x) the related Interest Distribution Amounts for such
Distribution Date over (y) the amount actually distributed to the
holders of such Class and Component on such Distribution Date
pursuant to subclause II(i) below;
(vi) to the holders of the Class of Group II Certificates,
an amount equal to the excess, if any, of (x) the Certificate
Principal Balance thereof (after giving effect to all distributions
thereon on such Distribution Date from the Group II Available Funds)
over (y) related Loan Group Balance on the last day of the
immediately preceding Prepayment Period;
(vii) to holders of the Classes of Group I Certificates, in
the order of priority described below, an amount equal to the Group I
Extra Principal Distribution Amount; and
(viii) to the holders of the Class of Group II Certificates,
an amount equal to the excess, if any, of (x) the Group II Principal
Distribution Amount for such Distribution Date over (y) the amount
actually distributed to such holders on such Distribution Date
pursuant to subclauses II(ii) and II(vii) from the Group II Available
Funds, plus, any remaining OC Deficiency Amount for such Distribution
Date for the Group II Certificates.
Except as otherwise specified below, distributions of principal to
holders of the Classes of Group I Certificates will be made in the following
priority:
first, to the Class A-6 Certificates, in an amount equal to the
Class A-6 Priority Distribution Amount;
second, to the Class A-1 Certificates, until their Certificate
Principal Balance is reduced to zero;
third, to the Class A-2 Certificates, until their Certificate
Principal Balance is reduced to zero;
fourth, to the Class A-3 Certificates, until their Certificate
Principal Balance is reduced to zero;
fifth, to the Class A-4 Certificates, until their Certificate
Principal Balance is reduced to zero;
sixth, to the Class A-5 Certificates, until their Certificate
Principal Balance is reduced to zero; and
seventh, to the Class A-6 Certificates, until their Certificate
Principal Balance is reduced to zero.
The "Class A-6 Priority Distribution Amount" for any Distribution
Date will be equal the product of (a) the Group I Basic Principal Distribution
Amount, (b) the Class A-6 Pro Rata Percentage and (c) the Shift Percentage
(such product in no event to exceed 100% of the Group I Basic Principal
Distribution Amount).
The "Class A-6 Pro Rata Percentage" for any Distribution Date will be
equal to a fraction, the numerator of which is the Certificate Principal
Balance of the Class A-6 Certificates on such Distribution Date and the
denominator of which is the aggregate of the Certificate Principal Balances of
all Classes of Group I Certificates on such Distribution Date.
The "Shift Percentage" for any Distribution Date will be the
percentage indicated below:
Distribution Date occurring in Shift Percentage
------------------------------ ----------------
July 1999 through June 2002.......... 0%
July 2002 through June 2004.......... 45%
July 2004 through June 2005.......... 80%
July 2005 through June 2006.......... 100%
July 2007 and thereafter............. 300%
Notwithstanding the foregoing, on the first Distribution Date, the
related Pre-Funding Distribution Amount, if any, will be distributed as
principal of the Classes of Group I Certificates on a pro rata basis
(calculated based on their Original Certificate Principal Balances).
II. On each Distribution Date, the Trust Administrator will withdraw (a)
from the Certificate Account all Available Funds then on deposit that are
attributable to the Group II Mortgage Loans (the "Group II Available Funds")
and (b) from the Policy Payments Account, the amount of any Insured Payment
with respect to the Group II Certificates and will distribute the same in the
following order of priority:
(i) to the holders of the Class of Group II Certificates and
the Class A-8IO Certificates, their pro rata share (based on the
amount of interest the Class of Group II Certificates and the Class
A-8IO-II Component are entitled to receive) of the related Interest
Distribution Amounts for such Distribution Date;
(ii) to the holders of the Class of Group II Certificates,
an amount equal to the Group II Basic Principal Distribution Amount,
until the Certificate Principal Balance thereof has been reduced to
zero;
(iii) to the Certificate Insurer, the Premium Amount for Group
II for such Distribution Date (to the extent such payment will not
cause an Insured Payment to be required);
(iv) to the Certificate Insurer, the Reimbursement Amount for
Group II for such Distribution Date (to the extent such payment will
not cause an Insured Payment to be required);
(v) to the holders of the Classes of Group I Certificates
and the Class A-8IO-I Component, an amount equal to the excess, if
any, of (x) the related Interest Distribution Amounts for such
Distribution Date over (y) the amount actually distributed to the
holders of such Classes and Component on such Distribution Date
pursuant to subclause I(i) above;
(vi) to the holders of the Classes of Group I Certificates,
an amount equal to the excess, if any, of (x) the Certificate
Principal Balances of such Classes (after giving effect to all
distributions thereon on such Distribution Date from the Group I
Available Funds) over (y) the related Loan Group Balance on the last
day of the immediately preceding Prepayment Period;
(vii) to the holders of the Class of Group II Certificates,
an amount equal to the Group II Extra Principal Distribution Amount;
and
(viii) to the holders of the Classes of Group I
Certificates, an amount equal to the excess, if any, of (x) the Group
I Principal Distribution Amount for such Distribution Date over (y)
the amount actually distributed to such holders on such Distribution
Date pursuant to subclauses I(ii) and I(vii) from the Group I
Available Funds, plus, any remaining OC Deficiency Amount for the
Group I Certificates for such Distribution Date.
Notwithstanding the foregoing, on the first Distribution Date, the
related Pre-Funding Distribution Amount, if any, will be distributed as
principal of the Class of Group II Certificates.
On each Distribution Date, any remaining amounts after giving effect
to the distributions specified in clauses I and II above will be paid, first,
as principal to the holders of the Class P Certificates until the principal
balance thereof is reduced to zero, and, thereafter, to the holders of the
Class R Certificates.
On each Distribution Date, all amounts representing prepayment
premiums from the Mortgage Loans in each Loan Group received during the
related Prepayment Period will be distributed to the holders of the Class P
Certificates.
Notwithstanding the foregoing, in the event an OC Deficit exists on
any Distribution Date and the aggregate amount distributable as principal
(including any draws made under the Certificate Insurance Policy) on the
Offered Certificates is not sufficient to eliminate such OC Deficit, then all
amounts distributable as principal of the Group I Certificates on such
Distribution Date will be allocated concurrently to the outstanding Classes of
Group I Certificates, pro rata, on the basis on their respective Certificate
Principal Balances.
Definitions
Many of the defined terms listed below may apply to both Loan Groups
and to both Certificate Groups. However, certain of the terms are sometimes
used in this Prospectus Supplement to refer to a particular Loan Group and
Certificate Group by the adjectival use of the words "related" and "Group".
The "Accrual Period" for the Offered Certificates (other than the
Class A-1 Certificates) for a given Distribution Date will be the calendar
month preceding the month of such Distribution Date and will be calculated
based on a 360-day year consisting of twelve 30-day months. The "Accrual
Period" for the Class A-1 Certificates for a given Distribution Date will be
the actual number of days (based on a 360-day year) included in the period
commencing on the immediately preceding Distribution Date and ending on the
day immediately preceding such Distribution Date; provided, however, that the
initial Accrual Period for the Class A-1 Certificates will be the actual
number of days included in the period commencing on the Closing Date and
ending on and including July 25, 1999.
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
OC Release Amount, if any, for such Distribution Date.
The "Call Option Date" is the first Distribution Date on which the
aggregate Loan Balance of the Mortgage Loans in the Trust Fund is less than or
equal to 10% of the aggregate of the Cut-off Date Loan Balances (but in no
event prior to the Distribution Date in June 2002).
A "Certificate Group" means either the Group I Certificates or the
Group II Certificates, as the context may require.
A "Certificate Insurer Default" occurs when the Certificate Insurer
fails to make payments under the Policy in accordance with the terms and
conditions thereof.
The "Certificate Notional Balance" of the Class A-8IO Certificates
for any Distribution Date will be equal to the sum of the Class A-8IO-I
Component Notional Balance and the Class A-8IO-II Component Notional Balance.
The "Certificate Principal Balance" of each Class of Offered
Certificates, as of any Distribution Date, will be equal to the Certificate
Principal Balance of such Class on the Closing Date (the "Original Certificate
Principal Balance") minus all distributions in respect of principal allocated
to such Class on all prior Distribution Dates.
The "Class A-8IO-I Component Notional Balance" for any Distribution
Date will be equal to the Certificate Principal Balance of the Class A-6
Certificates.
The "Class A-8IO-II Component Notional Balance" for any Distribution
Date will be equal to the lesser of (a) $2,000,000 and (b) the Certificate
Principal Balance of the Class A-7 Certificates.
A Mortgage Loan is "Delinquent" if any monthly payment due thereon is
not made by the close of business on the day such monthly payment is scheduled
to be due. A Mortgage Loan is "30 days Delinquent" if such monthly payment has
not been received by the close of business on the corresponding day of the
month immediately succeeding the month in which such monthly payment was due
or, if there was no such corresponding day (e.g., as when a 30-day month
follows a 31-day month in which a payment was due on the 31st day of such
month), then on the last day of such immediately succeeding month; and
similarly for "60 days Delinquent", etc.
A "Due Period" with respect to any Distribution Date is the period
beginning on the second day of the month in the month preceding the
Distribution Date and ending on the first day of the month in 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 and (y) the related OC Deficiency Amount.
The "General Excess Available Amount" for a Certificate Group and any
Distribution Date is the amount, if any, by which the related Available Funds
for such Distribution Date (net of the related Pre-Funding Distribution
Amount, if any) exceeds the aggregate amount distributed on such Distribution
Date pursuant to subclauses (i) through (vi) of clause I or II, as applicable,
under "--Allocation of Available Funds" above.
The "Insured Distribution Amount" for a Certificate Group and any
Distribution Date is the sum of (i) the Interest Distribution Amounts for the
related Class or Classes of Offered Certificates and the applicable Component
of the Class A-8IO Certificates and (ii) the related OC Deficit (such OC
Deficit being calculated using related Available Funds only).
The "Interest Distribution Amount" for any Distribution Date and each
Class of Offered Certificates and each of the Class A-8IO Components equals
the amount of interest accrued during the related Accrual Period on the
Certificate Principal Balance or Component Notional Balance, as applicable, of
such Class or Component at the related Pass-Through Rate, net of (x) the
related Prepayment Interest Shortfalls to the extent not covered by the
related Servicing Fee and (y) related shortfalls resulting from the Civil
Relief Act.
The "Interest Remittance Amount" for a Loan Group and any
Distribution Date is the aggregate amount of all scheduled interest payments
due on the Mortgage Loans in such Loan Group during the related Due Period,
which were either collected or advanced, net of the related Servicing Fee and
the related Administrative Fee, minus the aggregate of the related Prepayment
Interest Shortfalls during the previous calendar month to the extent not
covered by application of the Servicing Fee.
The "Loan Balance" of any Mortgage Loan with respect to any date of
determination is the outstanding scheduled principal balance thereof
calculated in accordance with the terms of the related Mortgage Note, after
giving effect to all payments of scheduled principal due on or prior to such
date of determination, whether or not received on the date of calculation, and
all payments of unscheduled principal received prior to the month of such date
of determination; provided, however, that the Loan Balance for any Mortgage
Loan that has been liquidated through foreclosure sale, trustee's sale,
disposition of the related REO Property or taking of the related Mortgaged
Property by eminent domain shall be zero as of the end of the month in which
such Mortgage Loan becomes liquidated and at all times thereafter.
The "Loan Group Balance" for a Loan Group with respect to any date of
determination is the aggregate of the Loan Balances of all Mortgage Loans in
such Loan Group as of such date.
The "Net WAC Cap" for any Distribution Date and Certificate Group
will be equal to (A) the average of the Loan Rates of the related Loan Group
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 Loan Balances as of the first day of the related
Prepayment Period, minus (B) the sum of (i) the Servicing Fee Rate, (ii) the
Administrative Fee Rate, (iii) the rate at which the premium payable to the
Certificate Insurer is calculated, multiplied by a fraction the numerator of
which is the aggregate Certificate Principal Balance of the related
Certificate Group and the denominator of which is the related Loan Group
Balance and (iv) on and prior to the Distribution Date in June 2002, the
amount (expressed as a percentage) of the interest distributable on such
Distribution Date on the related Class A-8IO Component (calculated on the
basis of the related Loan Group Balance and on the basis of an assumed 360-day
year consisting of twelve 30-day months).
An "OC Deficiency Amount" for a Certificate Group and any
Distribution Date equals the amount, if any, by which the related OC 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 on such Distribution Date).
An "OC Deficit" exists for any Distribution Date if (a) the aggregate
Certificate Principal Balance of all Classes of Offered Certificates (after
giving effect to all distributions to be made thereon on such Distribution
Date) exceeds (b) the sum of the Loan Group Balances on the last day of the
immediately preceding Prepayment Period.
The "OC Release Amount" for a Certificate Group and any Distribution
Date is equal to, if certain delinquency and loss tests specified in the
Pooling and Servicing Agreement have been satisfied, 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 OC Target Amount for such
Distribution Date.
The "OC Stepdown Date" for a Certificate Group means the later to
occur of (x) the Distribution Date in January 2002 and (y) the first
Distribution Date on which (i) the related OC Target Amount has been met and
(ii) the Loan Group Balance of each Loan Group has been reduced to 50% of the
related Loan Group Balance as of the Cut-off Date.
The "OC Target Amount" for a Certificate Group and any Distribution
Date is a specified level of overcollateralization determined in accordance
with the Pooling and Servicing Agreement.
The "Overcollateralized Amount" for a Certificate Group and any
Distribution Date is the amount, if any, by which (a) the related Loan Group
Balance on the last day of the immediately preceding Prepayment Period exceeds
(b) the aggregate Certificate Principal Balance of the Class or Classes in
such Certificate Group as of such Distribution Date after giving effect to
distributions to be made thereon on such Distribution Date.
The "Pass-Through Rate" for any Distribution Date and Class of
Offered Certificates will be as follows:
Class A-1 One-Month LIBOR plus 0.15%*
Class A-2 6.68% per annum
Class A-3 6.76% per annum
Class A-4 7.22% per annum*
Class A-5 7.55% per annum*
Class A-6 7.11% per annum*
Class A-7 7.32% per annum*
Class A-8IO **
- --------------------
* Subject to the Net WAC Cap.
** The Class A-8IO Certificates will consist of the Class A-8IO-I Component
and Class A-8IO-II Component. During the first thirty-six Accrual
Periods, the Class A-8IO-I Component will bear interest on the Class
A-8IO-I Component Notional Balance at a per annum rate of 1.875%, and the
Class A-8IO-II Component will bear interest on the Class A-8IO-II
Component Notional Balance at a per annum rate of 2.625%. Thereafter, no
interest will accrue on the Class A-8IO Components. As a result, no
distributions will be made on the Class A-8IO Certificates after the June
2002 Distribution Date.
In addition, if the Servicer fails to exercise its option to terminate
the Trust on the earliest permitted date as described below under
"Optional Termination," the Pass-Through Rates on the following Classes
of Offered Certificates will increase to the rates specified below:
Class A-5 8.05%
Class A-6 7.61%
Class A-7 7.82%
The "Pre-Funding Distribution Amount" means, as to either Certificate
Group and the first Distribution Date, the related Unutilized Funding Amount,
if any.
The "Premium Amount" payable to the Certificate Insurer on any
Distribution Date equals one-twelfth of the product of a per annum rate set
forth in the Pooling and Servicing Agreement (which may increase after an
event of default under the Insurance Agreement) and the Certificate Principal
Balance of the Offered Certificates; provided, however, that for any
Distribution Date on which a Certificate Insurer Default has occurred and is
continuing, the Premium Amount will be zero.
The "Principal Distribution Amount" for a 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.
A "Principal Prepayment" is any mortgagor payment or other recovery
of principal on a Mortgage Loan that is received in advance of its scheduled
due date and is not accompanied by an amount representing scheduled interest
due on any date or dates in any month or months in or subsequent to the month
of prepayment.
The "Principal Remittance Amount" means, with respect to each Loan
Group and any Distribution Date, the sum of the amounts specified in clause
(i), clause (iii), clause (vi), clause (vii), clause (ix) (with respect to the
principal portion of such Delinquency Advances only) and clause (x) under
"--Deposits to the Collection Account" above with respect to the Mortgage
Loans in the related Loan Group, in the case of clause (i)(a) and clause (ix)
to the extent such amounts relate to scheduled principal payments due during
the related Due Period, or any prior Due Period for which there was no related
Delinquency Advance, and received by the related Determination Date, and, in
each other case, to the extent such amounts relate to principal and are
actually received during the preceding calendar month.
A "Realized Loss" (i) with respect to any defaulted Mortgage Loan
that is finally liquidated (a "Liquidated Loan") is the amount of loss
realized equal to the portion of the Loan Balance remaining unpaid after
application of all amounts recovered (net of amounts reimbursable for related
Delinquency Advances, expenses and Servicing Fees towards interest and
principal owing on the Mortgage Loan and (ii) with respect to certain Mortgage
Loans the principal balances or the scheduled payments of principal of which
have been reduced in connection with bankruptcy proceedings, the amount of
such reduction.
The "Reimbursement Amount" as of any Distribution Date is the amount
of all Insured Payments made by the Certificate Insurer pursuant to the
Certificate Insurance Policy and other amounts owed to the Certificate Insurer
pursuant to the Insurance Agreement (together with interest thereon at the
rate specified in the Insurance Agreement) that have not been previously
repaid as of such Distribution Date.
Calculation of One-Month LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Accrual Period with respect to the Class A-1 Certificates
following the initial Accrual Period (each such date, a "LIBOR Determination
Date"), the Trust Administrator will determine the London interbank offered
rate for one-month United States dollar deposits ("One-Month LIBOR") for such
Accrual Period 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 Trust Administrator 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 Trust
Administrator and (iv) not controlling, controlled by or under common control
with, the Depositor, the Originator, the Servicer or any successor Servicer.
On each LIBOR Determination Date, One-Month LIBOR for the related
Accrual Period for the Class A-1 Certificates will be established by the Trust
Administrator as follows:
(a) If on such LIBOR Determination Date two or more
Reference Banks provide such offered quotations, One-Month
LIBOR for the related Accrual Period will be the arithmetic
mean of such offered quotations (rounded upwards if
necessary to the nearest whole multiple of 0.0625%).
(b) If on such LIBOR Determination Date fewer than
two Reference Banks provide such offered quotations,
One-Month LIBOR for the related Accrual Period will be the
higher of (x) One-Month LIBOR as determined on the previous
LIBOR Determination Date and (y) the Reserve Interest Rate.
The "Reserve Interest Rate" will be the rate per annum that
the Trust Administrator 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 Trust Administrator 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 Trust Administrator can determine no such
arithmetic mean, the lowest one-month United States dollar
lending rate which New York City banks selected by the Trust
Administrator are quoting on such LIBOR Determination Date
to leading European banks.
The establishment of One-Month LIBOR on each LIBOR Determination Date
by the Trust Administrator and the Trust Administrator's calculation of the
rate of interest applicable to the Class A-1 Certificates for the related
Accrual Period will (absent manifest error) be final and binding.
Credit Enhancement
The Certificate Insurance Policy. The following summary of the terms
of the Certificate Insurance Policy does not purport to be complete and is
qualified in its entirety by reference to the Certificate Insurance Policy. A
form of the Certificate Insurance Policy may be obtained upon request from the
Depositor.
Simultaneously with the issuance of the Offered Certificates, the
Certificate Insurer will deliver the Certificate Insurance Policy to the
Trustee for the benefit of the holders of the Offered Certificates. Under the
Certificate Insurance Policy, the Certificate Insurer will irrevocably and
unconditionally guarantee to the Trustee on each Distribution Date for the
benefit of the holders of the Offered Certificates, the full and complete
payment of Insured Payments with respect to the Offered Certificates,
calculated in accordance with the original terms of the applicable Offered
Certificates when issued and without regard to any amendment or modification
of the applicable Offered Certificates or the Pooling and Servicing Agreement
(except amendments or modifications to which the Certificate Insurer has given
its prior written consent). "Insured Payments" with respect to any
Distribution Date shall mean the sum of (i) any shortfall (other than
Prepayment Interest Shortfalls not covered by the Servicing Fee and shortfalls
resulting from application of the Civil Relief Act) in amounts available in
the Certificate Account to pay the Interest Distribution Amount on such
Certificates for such Distribution Date and (ii) any OC Deficit (such OC
Deficit to be calculated using Available Funds only). The Certificate
Insurance Policy does not cover Prepayment Interest Shortfalls, shortfalls
resulting from application of the Civil Relief Act or adjustments in the
Pass-Through Rate on any Class of Offered Certificates resulting from
application of the related Net WAC Cap.
Payment of claims on the Certificate Insurance Policy made in respect
of an Insured Payment will be made by the Certificate Insurer following
Receipt by the Certificate Insurer of the appropriate notice for payment on
the later to occur of (i) 12:00 noon New York City time, on the second
Business Day following Receipt of such notice for payment and (ii) 12:00 noon
New York City time, on the date on which such payment was due on the related
Offered Certificates.
If payment of any principal or current interest on any Offered
Certificates is avoided as a preference payment under applicable bankruptcy,
insolvency, receivership or similar law, the Certificate Insurer will cause
such amount to be paid on the later of (a) the date when due to be paid
pursuant to the Order referred to below or (b) the first to occur of (i) the
fourth Business Day following Receipt by the Certificate Insurer from the
Trust Administrator on behalf of the Trustee of (A) a certified copy of the
order (the "Order") of the court or other governmental body which exercised
jurisdiction to the effect that the holder of an Offered Certificate is
required to return the amount of any such interest or principal payment
distributed with respect to the related Offered Certificates during the term
of the Certificate Insurance Policy because such distributions were avoidable
as preference payments under applicable bankruptcy law, (B) a certificate of
the holders of the Offered Certificate that the Order has been entered and is
not subject to any stay and (C) an assignment duly executed and delivered by
the holder of the Offered Certificate, in such form as is reasonably required
by the Certificate Insurer and provided to the holder of the Offered
Certificate by the Certificate Insurer, irrevocably assigning to the
Certificate Insurer all rights and claims of the holder of the Offered
Certificate relating to or arising under the related Offered Certificates
against the debtor which made such preference payment or otherwise with
respect to such preference payment, or (ii) the date of Receipt by the
Certificate Insurer from the Trust Administrator of the items referred to in
clauses (A), (B) and (C) above if, at least four Business Days prior to such
date of Receipt, the Certificate Insurer shall have received written notice
from the Trust Administrator on behalf of the Trustee that such items were to
be delivered on such date and such date was specified in such notice. Such
payment shall be disbursed to the receiver, conservator, debtor-in-possession
or trustee in bankruptcy named in the Order and not to the Trustee, the Trust
Administrator or any holder of an Offered Certificate directly (unless a
holder of the Offered Certificate has previously paid such amount to the
receiver, conservator, debtor-in-possession or trustee in bankruptcy named in
the Order, in which case such payment shall be disbursed to the Trust
Administrator on behalf of the Trustee for distribution to such holder of the
Offered Certificate upon proof of such payment reasonably satisfactory to the
Certificate Insurer).
The terms "Receipt" and "Received" with respect to the Certificate
Insurance Policy shall mean actual delivery to the Certificate Insurer and to
its fiscal agent appointed by the Certificate Insurer at its option, if any,
prior to 12:00 noon, New York City time, on a Business Day; delivery either on
a day that is not a Business Day or after 12:00 noon, New York City time,
shall be deemed to be Receipt on the next succeeding Business Day. If any
notice or certificate given under the Certificate Insurance Policy by the
Trust Administrator on behalf of the Trustee is not in proper form or is not
properly completed, executed or delivered, it shall be deemed not to have been
Received, and the Certificate Insurer or the fiscal agent shall promptly so
advise the Trust Administrator on behalf of the Trustee and the Trust
Administrator on behalf of the Trustee may submit an amended notice.
Under the Certificate Insurance Policy, "Business Day" means any day
other than (i) a Saturday or Sunday or (ii) a day on which banking
institutions in New York or California or any other city in which the
principal office of any successor servicer, the Trust Administrator or
successor Trust Administrator or Trustee or successor Trustee are authorized
or obligated by law, executive order or governmental decree to be closed.
The Certificate Insurer's obligations under the Certificate Insurance
Policy in respect of Insured Payments shall be discharged to the extent funds
are transferred to the Trust Administrator on behalf of the Trustee as
provided in the Certificate Insurance Policy, whether or not such funds are
properly applied by the Trust Administrator on behalf of the Trustee.
The Certificate Insurer will be subrogated to the rights of each
Certificateholder to receive payments of principal and interest, on the
Certificates to the extent of any payment by the Certificate Insurer under the
Certificate Insurance Policy. For a description of the rights and powers of
the Certificate Insurer upon an Event of Default or a Servicer Termination
Trigger Event under the Pooling and Servicing Agreement, see "--Rights upon
Event of Default or Servicer Termination Trigger Event" below.
Claims under the Certificate Insurance Policy constitute direct,
unsecured and unsubordinated obligations of the Certificate Insurer ranking
not less than pari passu with other unsecured and unsubordinated indebtedness
of the Certificate Insurer for borrowed money. Claims against the Certificate
Insurer under the Certificate Insurance Policy and claims against the
Certificate Insurer under each other financial guaranty insurance policy
issued thereby constitute pari passu claims against the general assets of the
Certificate Insurer. The terms of the Certificate Insurance Policy cannot be
modified, altered or affected by any other agreement or instrument, or by the
merger, consolidation or dissolution of the Depositor. The Certificate
Insurance Policy by its terms may not be cancelled or revoked prior to payment
in full of the Offered Certificates. The Certificate Insurance Policy is
governed by the laws of the State of New York.
The Certificate Insurance Policy is not covered by the
Property/Casualty Insurance Security fund specified in Article 76 of the New
York Insurance Law.
To the fullest extent permitted by applicable law, the Certificate
Insurer agrees under the Certificate Insurance Policy not to assert, and
waives, for the benefit of each holder of Offered Certificates, all its rights
(whether by counterclaim, setoff or otherwise) and defenses (including,
without limitation, the defense of fraud), whether acquired by subrogation,
assignment or otherwise, to the extent that such rights and defenses may be
available to the Certificate Insurer to avoid payment of its obligations under
the Certificate Insurance Policy in accordance with the express provisions of
the Certificate Insurance Policy.
Pursuant to the terms of the Pooling and Servicing Agreement, unless
a Certificate Insurer default exists, the Certificate Insurer shall be deemed
to be the holder of the Certificates for certain purposes (other than with
respect to payment on the Certificates), will be entitled to exercise all
rights of the Certificateholders thereunder, without the consent of such
holders, and the Certificateholders may exercise such rights only with the
prior written consent of the Certificate Insurer. In addition, the Certificate
Insurer will have certain additional rights as third party beneficiary to the
Pooling and Servicing Agreement. Provided no Certificate Insurer Default (as
defined in the Pooling and Servicing Agreement) has occurred and is
continuing, the Certificate Insurer shall have the right to direct certain
actions of the Servicer and Trustee.
The Depositor, the Seller, the Servicer and the Certificate Insurer
will enter into an Insurance and Indemnity Agreement (the "Insurance
Agreement") pursuant to which the Seller and the Servicer will agree to
reimburse, with interest, the Certificate Insurer for amounts paid pursuant to
claims under the Policy. Such Parties will further agree to pay the
Certificate Insurer all reasonable charges and expenses which the Certificate
Insurer may pay or incur relative to any amounts paid under the Certificate
Insurance Policy or otherwise in connection with the transaction and to
indemnify the Certificate Insurer against certain liabilities. Amounts owing
by the Seller and Servicer under the Insurance Agreement will generally be
payable solely from, the Trust Estate. An event of default by the Seller or
the Servicer under the Insurance Agreement will constitute an Event of Default
by the Seller or the Servicer under the Pooling and Servicing Agreement and
allow the Certificate Insurer among other things, to direct the Trustee to
terminate the Servicer. An "event of default" by the Company under the
Insurance Agreement includes (i) failure to pay when due any amount owed under
the Insurance Agreement or certain other documents, (ii) the Seller's or the
Servicer's untruth or incorrectness in any material respect of any
representation or warranty of the Company in the Insurance Agreement, the
Agreement or certain other documents, (iii) the Seller's or the Servicer's
failure to perform or to observe any covenant or agreement in the Insurance
Agreement, the Pooling and Servicing Agreement and certain other documents,
(iv) the Seller's or Servicer's failure to pay its debts in general or the
occurrence of certain events of insolvency or bankruptcy with respect to the
Seller or the Servicer, (v) the occurrence of an Event of Default under the
Pooling and Servicing Agreement or certain other documents and (vi) the
failure of the Mortgage Loans to meet certain performance tests.
Overcollateralization. The weighted average of the Loan Rates for the
Mortgage Loans in each Loan Group, net of certain Trust expenses, 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 related Certificate Group. This acceleration
feature creates overcollateralization (i.e., the excess of the Loan Group
Balances over the aggregate Certificate Principal Balance of the Classes of
Offered Certificates). Once the required level of overcollateralization is
reached, and subject to the provisions described in the next paragraph, the
acceleration feature will cease, until necessary to maintain the required
level of overcollateralization.
The Pooling and Servicing Agreement provides that, subject to certain
floors, caps and triggers, the required level of overcollateralization may
increase or decrease over time. Any decrease in the required level of
overcollateralization below that provided for in the Pooling and Servicing
Agreement will occur at the sole discretion of the Certificate Insurer. Any
such decrease will have the effect of reducing certain amounts that otherwise
would have been distributable to holders of the Offered Certificates.
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 "--Allocation of Available Funds."
<PAGE>
Example of Distributions
The following chart sets forth an example of distributions on the
Certificates for the first month of the Trust Fund's existence:
<TABLE>
<S> <C>
June 1, 1999 Cut-off Date.
June 2, 1999 to
July 1, 1999 Initial Due Period. The Servicer receives scheduled payments of principal and
interest. For succeeding Distribution Dates, the Due Period will commence on
the second day of the preceding calendar month and end on the first day of
such month.
June 1, 1999 to
June 30, 1999 The Servicer receives Principal Prepayments and interest thereon to the date
of such prepayment. (1)
June 30, 1999 Record Date (the last Business Day of the month preceding the month of the
related Distribution Date). (2)
July 15, 1999 Determination Date (the fifteenth
day of the month of such Distribution Date
or, if such fifteenth day is not a Business
Day, the preceding Business Day).
July 18, 1999 Servicer Advance Date.(3)
July 26, 1999 Distribution Date.(4)
Succeeding monthly periods follow the pattern of above.
______________
(1) Principal Prepayments received during this period will be distributed to
holders of the Certificates on July 26, 1999 (to the extent not applied
in computing the Cut-off Date Pool Balance). When a Mortgage Loan is
prepaid in full, interest on the amount prepaid is collected only from
the last due date as to which the most recent scheduled payment was made
by the borrower to the date of prepayment.
(2) Distributions of principal and interest on July 26, 1999 will be made
to holders of the Certificates of record as of the close of business
on the Record Date.
(3) No later than each Servicer Remittance Date, the Servicer is required to
make Delinquency Advances with respect to the Mortgage Loans.
(4) The Trust Administrator will make distributions to holders of the
Certificates on the 25th day of the month in which the related Due
Period ends, or if such day is not a Business Day, on the next Business
Day.
</TABLE>
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 faster (or slower) than the rate
anticipated by the investor during the period immediately following the
issuance of the Offered Certificates may not be fully offset by a subsequent
like decrease (or increase) in the rate of Principal Prepayments in a like
amount.
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 Trust Fund."
The "Assumed Final Maturity Date" for each Class of Offered
Certificates is as set forth herein under "Description of the
Certificates--General". For the Class A-1, Class A-2, Class A-3, Class A-4
Class A-5, Class A-6 and Class A-7 Certificates, such date is the date on
which the "Original Certificate Principal Balance" set forth herein for such
Class less all amounts distributed to the related Certificateholders on
account of principal would be reduced to zero, assuming that no prepayments
are received on the Mortgage Loans, scheduled monthly payments of principal of
and interest on each of the Mortgage Loans are timely received and no excess
cashflow is used to make accelerated payments of principal to the
Certificateholders of such Classes of Offered Certificates. The Assumed Final
Maturity Date for the A-8I0 Certificates is the thirty-sixth Distribution
Date. 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 and (iii) the
Servicer may cause a termination of the Mortgage Loans in the Trust Fund as
provided herein.
The model used in this Prospectus Supplement with respect to the
Mortgage Loans is the prepayment assumption (the "Prepayment Assumption")
which represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of mortgage loans for the life of such
mortgage loans. With respect to the Mortgage Loans in the Trust Fund, the
Prepayment Assumption assumes constant prepayment rates of 4.0% per annum of
the then outstanding principal balance of the Mortgage Loans in the first
month of the life of the Mortgage Loans and an additional 1.455% per annum
(i.e., 16% divided by 11) in each month thereafter until the twelfth month.
Beginning in the twelfth month and in each month thereafter during the life of
the Mortgage Loans, the Prepayment Assumption assumes a constant prepayment
rate of 20% per annum. As used in the table below, 0% Prepayment Assumption
assumes prepayment rates equal to 0% of the Prepayment Assumption (i.e., no
prepayments). Correspondingly, 130% Prepayment Assumption assumes prepayment
rates equal to 130% of the Prepayment Assumption and so forth.
Each of the Prepayment Scenarios in the table on page S-71 assumes
the respective percentages of Prepayment Assumptions described thereunder. For
example, Prepayment Scenario III assumes 65% of the Prepayment Assumption with
respect to the Mortgage Loans in the Trust Fund.
The tables on pages S-71 through S-78 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-71 through S-78. 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-72 through S-78 were determined assuming that: (i) the Mortgage Loans
consist of sub-pools of mortgage loans with Cut-off Date Loan Balances,
Mortgage Rates, original and remaining terms to maturity and original
amortization terms as set forth in the table below, (ii) the Closing Date for
the Offered Certificates occurs on June 24, 1999 and the Offered Certificates
were sold to investors by the Underwriters on the Closing Date, (iii)
distributions on the Offered Certificates are made on the 25th day of each
month regardless of the day on which the Distribution Date actually occurs,
commencing in July 1999, in accordance with the priorities described herein,
(iv) the prepayment rates with respect to the Mortgage Loans are a multiple of
the Prepayment Assumption as stated in the "Prepayment Scenarios" table below,
(v) prepayments include thirty days' interest thereon, (vi) the Originator 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 Call Option Date" in the tables below, (vii)
the OC Target Amount is set initially as specified in the Pooling and
Servicing Agreement and thereafter decreases in accordance with the provisions
of the Pooling and Servicing Agreement, (viii) scheduled payments for all
Mortgage Loans are received on the second day of each month, 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 the 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
of the Closing Date, (xi) Sub-Pools 1, 2, 3 and 4 for each respective Loan
Group (specified in the table below) will be transferred to the Trust Fund in
June 1999 with scheduled principal payments on such Mortgage Loans being
received by the Servicer during the Due Period beginning June 2, 1999 and
passed through to holders of the Offered Certificates on the Distribution Date
in July 1999; (xii) sufficient funds will be available in the Capitalized
Interest Account to cover any shortfalls in interest due to the Pre-Funding
Account and the transfer of Mortgage Loans described in clause (xi); (xiii) no
reinvestment income from any Account is earned and available for distribution;
(xiv) the Administrative Fee Rate is equal to 0.02% per annum; (xv) the amount
on deposit in the Pre-Funding Account at the end of the Pre-Funding Period is
zero; and (xvi) the Class A-1 Pass-Through Rate is 5.17375% for each
Distribution Date. Nothing contained in the foregoing assumptions should be
construed as a representation that the Mortgage Loans will not experience
delinquencies or losses.
<PAGE>
<TABLE>
<CAPTION>
Assumed Mortgage Loan Sub-Pools
Cut-off Date Original Term to Remaining Term to Original
Loan Balance Maturity Maturity Amortization Term
Sub-Pool ($) Mortgage Rate (Months) (Months) (Months)
<S> <C> <C> <C> <C> <C>
Loan Group I:
1 27,961,050.07 10.9116% 177 176 177
2 13,877,775.10 11.1730% 172 171 172
3 134,330,025.68 9.8180% 354 353 354
4 42,839,361.47 10.7434% 349 348 349
5* 8,586,912.27 10.9116% 177 177 177
6* 4,261,901.36 11.1730% 172 172 172
7* 41,252,893.08 9.8180% 354 354 354
8* 13,156,080.97 10.7434% 349 349 349
Loan Group II:
1 1,911,377.54 12.4724% 180 178 180
2 1,095,652.91 11.8681% 180 179 180
3 20,903,533.33 9.5262% 357 356 357
4 5,722,659.60 10.4135% 360 359 360
5* 586,997.03 12.4724% 180 180 180
6* 336,694.78 11.8681% 180 180 180
7* 6,419,617.15 9.5262% 357 357 357
8* 1,757,467.66 10.4135% 360 360 360
- ----------------------
* Assumed to be Additional Mortgage Loans.
</TABLE>
<TABLE>
<CAPTION>
Prepayment Scenarios
=============================================================================================================================
Prepayment Scenario: Scenario Scenario Scenario Scenario Scenario Scenario Scenario Scenario
I II III IV V VI VII VIII
=============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% of the Prepayment Assumption 0% 35% 65% 100% 130% 150% 175% 200%
=============================================================================================================================
</TABLE>
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of each Class of Offered Certificates, and
set forth the percentages of the Original Certificate Principal Balance of
each such Class that would be outstanding after each of the dates shown, at
various Prepayment Scenarios.
<PAGE>
<TABLE>
<CAPTION>
Percent of Original Certificate Principal Balance Outstanding*
Class A-1 Prepayment Scenario
-------------------------------------------------------------------------------
Distribution Date Scenario Scenario Scenario Scenario Scenario Scenario Scenario Scenario
I II III IV V VI VII VIII
------------------- ------------------- ---------------------------------------
- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage........ 100% 100% 100% 100% 100% 100% 100% 100%
June 25, 2000............. 88% 75% 64% 51% 40% 32% 23% 13%
June 25, 2001............. 83% 51% 24% 0% 0% 0% 0% 0%
June 25, 2002............. 79% 29% 0% 0% 0% 0% 0% 0%
June 25, 2003............. 75% 10% 0% 0% 0% 0% 0% 0%
June 25, 2004............. 71% 0% 0% 0% 0% 0% 0% 0%
June 25, 2005............. 66% 0% 0% 0% 0% 0% 0% 0%
June 25, 2006............. 60% 0% 0% 0% 0% 0% 0% 0%
June 25, 2007............. 56% 0% 0% 0% 0% 0% 0% 0%
June 25, 2008............. 50% 0% 0% 0% 0% 0% 0% 0%
June 25, 2009............. 44% 0% 0% 0% 0% 0% 0% 0%
June 25, 2010............. 37% 0% 0% 0% 0% 0% 0% 0%
June 25, 2011............. 29% 0% 0% 0% 0% 0% 0% 0%
June 25, 2012............. 20% 0% 0% 0% 0% 0% 0% 0%
June 25, 2013............. 10% 0% 0% 0% 0% 0% 0% 0%
June 25, 2014............. 1% 0% 0% 0% 0% 0% 0% 0%
June 25, 2015............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2016............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2017............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2018............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2019............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2020............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2021............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2022............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2023............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2024............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2025............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2026............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2027............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2028............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2029............. 0% 0% 0% 0% 0% 0% 0% 0%
Weighted Average Life 8.23 2.18 1.41 1.06 0.90 0.82 0.75 0.70
(years) to Maturity.......
Weighted Average Life 8.23 2.18 1.41 1.06 0.90 0.82 0.75 0.70
(years) to Call Option
Date......................
* Rounded to the nearest whole percentage.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percent of Original Certificate Principal Balance Outstanding*
Class A-2 Prepayment Scenario
-------------------------------------------------------------------------------
Distribution Date Scenario Scenario Scenario Scenario Scenario Scenario Scenario Scenario
I II III IV V VI VII VIII
------------------- ------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage........ 100% 100% 100% 100% 100% 100% 100% 100%
June 25, 2000............. 100% 100% 100% 100% 100% 100% 100% 100%
June 25, 2001............. 100% 100% 100% 90% 45% 16% 0% 0%
June 25, 2002............. 100% 100% 83% 8% 0% 0% 0% 0%
June 25, 2003............. 100% 100% 32% 0% 0% 0% 0% 0%
June 25, 2004............. 100% 86% 0% 0% 0% 0% 0% 0%
June 25, 2005............. 100% 56% 0% 0% 0% 0% 0% 0%
June 25, 2006............. 100% 28% 0% 0% 0% 0% 0% 0%
June 25, 2007............. 100% 8% 0% 0% 0% 0% 0% 0%
June 25, 2008............. 100% 0% 0% 0% 0% 0% 0% 0%
June 25, 2009............. 100% 0% 0% 0% 0% 0% 0% 0%
June 25, 2010............. 100% 0% 0% 0% 0% 0% 0% 0%
June 25, 2011............. 100% 0% 0% 0% 0% 0% 0% 0%
June 25, 2012............. 100% 0% 0% 0% 0% 0% 0% 0%
June 25, 2013............. 100% 0% 0% 0% 0% 0% 0% 0%
June 25, 2014............. 100% 0% 0% 0% 0% 0% 0% 0%
June 25, 2015............. 92% 0% 0% 0% 0% 0% 0% 0%
June 25, 2016............. 80% 0% 0% 0% 0% 0% 0% 0%
June 25, 2017............. 66% 0% 0% 0% 0% 0% 0% 0%
June 25, 2018............. 52% 0% 0% 0% 0% 0% 0% 0%
June 25, 2019............. 35% 0% 0% 0% 0% 0% 0% 0%
June 25, 2020............. 17% 0% 0% 0% 0% 0% 0% 0%
June 25, 2021............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2022............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2023............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2024............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2025............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2026............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2027............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2028............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2029............. 0% 0% 0% 0% 0% 0% 0% 0%
Weighted Average Life 18.96 6.33 3.70 2.52 2.01 1.78 1.56 1.41
(years) to Maturity.......
Weighted Average Life 18.96 6.33 3.70 2.52 2.01 1.78 1.56 1.41
(years) to Call Option
Date......................
* Rounded to the nearest whole percentage.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percent of Original Certificate Principal Balance Outstanding*
Class A-3 Prepayment Scenario
-------------------------------------------------------------------------------
Distribution Date Scenario Scenario Scenario Scenario Scenario Scenario Scenario Scenario
I II III IV V VI VII VIII
------------------- ------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage........ 100% 100% 100% 100% 100% 100% 100% 100%
June 25, 2000............. 100% 100% 100% 100% 100% 100% 100% 100%
June 25, 2001............. 100% 100% 100% 100% 100% 100% 79% 43%
June 25, 2002............. 100% 100% 100% 100% 49% 14% 0% 0%
June 25, 2003............. 100% 100% 100% 45% 0% 0% 0% 0%
June 25, 2004............. 100% 100% 86% 0% 0% 0% 0% 0%
June 25, 2005............. 100% 100% 49% 0% 0% 0% 0% 0%
June 25, 2006............. 100% 100% 18% 0% 0% 0% 0% 0%
June 25, 2007............. 100% 100% 0% 0% 0% 0% 0% 0%
June 25, 2008............. 100% 88% 0% 0% 0% 0% 0% 0%
June 25, 2009............. 100% 67% 0% 0% 0% 0% 0% 0%
June 25, 2010............. 100% 46% 0% 0% 0% 0% 0% 0%
June 25, 2011............. 100% 26% 0% 0% 0% 0% 0% 0%
June 25, 2012............. 100% 6% 0% 0% 0% 0% 0% 0%
June 25, 2013............. 100% 0% 0% 0% 0% 0% 0% 0%
June 25, 2014............. 100% 0% 0% 0% 0% 0% 0% 0%
June 25, 2015............. 100% 0% 0% 0% 0% 0% 0% 0%
June 25, 2016............. 100% 0% 0% 0% 0% 0% 0% 0%
June 25, 2017............. 100% 0% 0% 0% 0% 0% 0% 0%
June 25, 2018............. 100% 0% 0% 0% 0% 0% 0% 0%
June 25, 2019............. 100% 0% 0% 0% 0% 0% 0% 0%
June 25, 2020............. 100% 0% 0% 0% 0% 0% 0% 0%
June 25, 2021............. 97% 0% 0% 0% 0% 0% 0% 0%
June 25, 2022............. 73% 0% 0% 0% 0% 0% 0% 0%
June 25, 2023............. 46% 0% 0% 0% 0% 0% 0% 0%
June 25, 2024............. 16% 0% 0% 0% 0% 0% 0% 0%
June 25, 2025............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2026............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2027............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2028............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2029............. 0% 0% 0% 0% 0% 0% 0% 0%
Weighted Average Life 23.85 10.87 6.10 3.98 3.07 2.66 2.28 2.00
(years) to Maturity.......
Weighted Average Life 23.85 10.87 6.10 3.98 3.07 2.66 2.28 2.00
(years) to Call Option
Date......................
* Rounded to the nearest whole percentage.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percent of Original Certificate Principal Balance Outstanding*
Class A-4 Prepayment Scenario
-------------------------------------------------------------------------------
Distribution Date Scenario Scenario Scenario Scenario Scenario Scenario Scenario Scenario
I II III IV V VI VII VIII
------------------- ------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage........ 100% 100% 100% 100% 100% 100% 100% 100%
June 25, 2000............. 100% 100% 100% 100% 100% 100% 100% 100%
June 25, 2001............. 100% 100% 100% 100% 100% 100% 100% 100%
June 25, 2002............. 100% 100% 100% 100% 100% 100% 78% 47%
June 25, 2003............. 100% 100% 100% 100% 87% 57% 25% 0%
June 25, 2004............. 100% 100% 100% 96% 45% 19% 0% 0%
June 25, 2005............. 100% 100% 100% 65% 19% 0% 0% 0%
June 25, 2006............. 100% 100% 100% 41% 1% 0% 0% 0%
June 25, 2007............. 100% 100% 99% 30% 0% 0% 0% 0%
June 25, 2008............. 100% 100% 81% 17% 0% 0% 0% 0%
June 25, 2009............. 100% 100% 64% 5% 0% 0% 0% 0%
June 25, 2010............. 100% 100% 48% 0% 0% 0% 0% 0%
June 25, 2011............. 100% 100% 34% 0% 0% 0% 0% 0%
June 25, 2012............. 100% 100% 21% 0% 0% 0% 0% 0%
June 25, 2013............. 100% 88% 10% 0% 0% 0% 0% 0%
June 25, 2014............. 100% 73% 0% 0% 0% 0% 0% 0%
June 25, 2015............. 100% 62% 0% 0% 0% 0% 0% 0%
June 25, 2016............. 100% 51% 0% 0% 0% 0% 0% 0%
June 25, 2017............. 100% 41% 0% 0% 0% 0% 0% 0%
June 25, 2018............. 100% 31% 0% 0% 0% 0% 0% 0%
June 25, 2019............. 100% 22% 0% 0% 0% 0% 0% 0%
June 25, 2020............. 100% 13% 0% 0% 0% 0% 0% 0%
June 25, 2021............. 100% 5% 0% 0% 0% 0% 0% 0%
June 25, 2022............. 100% 0% 0% 0% 0% 0% 0% 0%
June 25, 2023............. 100% 0% 0% 0% 0% 0% 0% 0%
June 25, 2024............. 100% 0% 0% 0% 0% 0% 0% 0%
June 25, 2025............. 84% 0% 0% 0% 0% 0% 0% 0%
June 25, 2026............. 50% 0% 0% 0% 0% 0% 0% 0%
June 25, 2027............. 13% 0% 0% 0% 0% 0% 0% 0%
June 25, 2028............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2029............. 0% 0% 0% 0% 0% 0% 0% 0%
Weighted Average Life 27.02 17.38 11.11 7.07 5.09 4.30 3.59 3.05
(years) to Maturity.......
Weighted Average Life 27.02 17.35 11.08 7.05 5.09 4.30 3.59 3.05
(years) to Call Option
Date......................
* Rounded to the nearest whole percentage.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percent of Original Certificate Principal Balance Outstanding*
Class A-5 Prepayment Scenario
------------------------------------------------------------------------------
Distribution Date Scenario Scenario Scenario Scenario Scenario Scenario Scenario Scenario
I II III IV V VI VII VIII
------------------- ---------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage........ 100% 100% 100% 100% 100% 100% 100% 100%
June 25, 2000............. 100% 100% 100% 100% 100% 100% 100% 100%
June 25, 2001............. 100% 100% 100% 100% 100% 100% 100% 100%
June 25, 2002............. 100% 100% 100% 100% 100% 100% 100% 100%
June 25, 2003............. 100% 100% 100% 100% 100% 100% 100% 100%
June 25, 2004............. 100% 100% 100% 100% 100% 100% 85% 43%
June 25, 2005............. 100% 100% 100% 100% 100% 94% 50% 20%
June 25, 2006............. 100% 100% 100% 100% 100% 64% 31% 11%
June 25, 2007............. 100% 100% 100% 100% 90% 57% 29% 11%
June 25, 2008............. 100% 100% 100% 100% 70% 42% 19% 7%
June 25, 2009............. 100% 100% 100% 100% 51% 27% 10% 1%
June 25, 2010............. 100% 100% 100% 87% 35% 17% 4% 0%
June 25, 2011............. 100% 100% 100% 66% 23% 9% 0% 0%
June 25, 2012............. 100% 100% 100% 49% 15% 4% 0% 0%
June 25, 2013............. 100% 100% 100% 36% 8% 0% 0% 0%
June 25, 2014............. 100% 100% 100% 26% 4% 0% 0% 0%
June 25, 2015............. 100% 100% 85% 18% 1% 0% 0% 0%
June 25, 2016............. 100% 100% 70% 13% 0% 0% 0% 0%
June 25, 2017............. 100% 100% 58% 8% 0% 0% 0% 0%
June 25, 2018............. 100% 100% 46% 5% 0% 0% 0% 0%
June 25, 2019............. 100% 100% 37% 2% 0% 0% 0% 0%
June 25, 2020............. 100% 100% 29% 0% 0% 0% 0% 0%
June 25, 2021............. 100% 100% 22% 0% 0% 0% 0% 0%
June 25, 2022............. 100% 93% 16% 0% 0% 0% 0% 0%
June 25, 2023............. 100% 75% 11% 0% 0% 0% 0% 0%
June 25, 2024............. 100% 58% 6% 0% 0% 0% 0% 0%
June 25, 2025............. 100% 42% 2% 0% 0% 0% 0% 0%
June 25, 2026............. 100% 27% 0% 0% 0% 0% 0% 0%
June 25, 2027............. 100% 12% 0% 0% 0% 0% 0% 0%
June 25, 2028............. 31% 0% 0% 0% 0% 0% 0% 0%
June 25, 2029............. 0% 0% 0% 0% 0% 0% 0% 0%
Weighted Average Life 28.87 25.64 19.35 13.64 10.51 8.72 6.88 5.43
(years) to Maturity.......
Weighted Average Life 28.25 21.67 14.25 9.92 7.67 6.56 5.43 4.63
(years) to Call Option
Date......................
* Rounded to the nearest whole percentage.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percent of Original Certificate Principal Balance Outstanding*
Class A-6 Prepayment Scenario
-------------------------------------------------------------------------------
Distribution Date Scenario Scenario Scenario Scenario Scenario Scenario Scenario Scenario
I II III IV V VI VII VIII
------------------- ------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage........ 100% 100% 100% 100% 100% 100% 100% 100%
June 25, 2000............. 100% 100% 100% 100% 100% 100% 100% 100%
June 25, 2001............. 100% 100% 100% 100% 100% 100% 100% 100%
June 25, 2002............. 100% 100% 100% 100% 100% 100% 100% 100%
June 25, 2003............. 99% 96% 93% 90% 87% 85% 82% 79%
June 25, 2004............. 99% 92% 86% 81% 75% 72% 67% 63%
June 25, 2005............. 97% 85% 76% 66% 58% 53% 47% 40%
June 25, 2006............. 95% 77% 65% 52% 42% 36% 29% 22%
June 25, 2007............. 88% 56% 39% 24% 15% 11% 7% 6%
June 25, 2008............. 80% 41% 24% 11% 5% 3% 1% 0%
June 25, 2009............. 73% 30% 14% 5% 2% 1% 0% 0%
June 25, 2010............. 65% 22% 8% 2% 1% 0% 0% 0%
June 25, 2011............. 57% 15% 5% 1% 0% 0% 0% 0%
June 25, 2012............. 48% 11% 3% 0% 0% 0% 0% 0%
June 25, 2013............. 40% 7% 1% 0% 0% 0% 0% 0%
June 25, 2014............. 34% 5% 1% 0% 0% 0% 0% 0%
June 25, 2015............. 31% 4% 0% 0% 0% 0% 0% 0%
June 25, 2016............. 27% 3% 0% 0% 0% 0% 0% 0%
June 25, 2017............. 24% 2% 0% 0% 0% 0% 0% 0%
June 25, 2018............. 20% 1% 0% 0% 0% 0% 0% 0%
June 25, 2019............. 17% 1% 0% 0% 0% 0% 0% 0%
June 25, 2020............. 13% 1% 0% 0% 0% 0% 0% 0%
June 25, 2021............. 10% 0% 0% 0% 0% 0% 0% 0%
June 25, 2022............. 8% 0% 0% 0% 0% 0% 0% 0%
June 25, 2023............. 5% 0% 0% 0% 0% 0% 0% 0%
June 25, 2024............. 3% 0% 0% 0% 0% 0% 0% 0%
June 25, 2025............. 2% 0% 0% 0% 0% 0% 0% 0%
June 25, 2026............. 1% 0% 0% 0% 0% 0% 0% 0%
June 25, 2027............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2028............. 0% 0% 0% 0% 0% 0% 0% 0%
June 25, 2029............. 0% 0% 0% 0% 0% 0% 0% 0%
Weighted Average Life
(years) to Maturity....... 13.90 9.01 7.67 6.84 6.36 6.10 5.84 5.61
Weighted Average Life
(years) to Call Option
Date...................... 13.90 9.00 7.65 6.77 6.15 5.66 5.03 4.51
* Rounded to the nearest whole percentage.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percent of Original Certificate Principal Balance Outstanding*
Class A-7 Prepayment Scenario
-------------------------------------------------------------------------------
Distribution Date Scenario Scenario Scenario Scenario Scenario Scenario Scenario Scenario
I II III IV V VI VII VIII
------------------- ------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage........ 100% 100% 100% 100% 100% 100% 100% 100%
June 25, 2000............. 97% 93% 89% 85% 81% 78% 75% 72%
June 25, 2001............. 95% 84% 75% 65% 57% 52% 46% 40%
June 25, 2002............. 94% 77% 64% 51% 41% 36% 30% 24%
June 25, 2003............. 93% 70% 55% 40% 30% 25% 19% 14%
June 25, 2004............. 92% 64% 46% 32% 22% 17% 12% 8%
June 25, 2005............. 90% 59% 40% 25% 16% 12% 8% 5%
June 25, 2006............. 89% 53% 34% 20% 12% 8% 5% 3%
June 25, 2007............. 87% 49% 29% 15% 9% 6% 3% 1%
June 25, 2008............. 85% 44% 25% 12% 6% 4% 2% 1%
June 25, 2009............. 83% 40% 21% 9% 4% 2% 1% 0%
June 25, 2010............. 81% 36% 18% 7% 3% 1% 0% 0%
June 25, 2011............. 78% 33% 15% 6% 2% 1% 0% 0%
June 25, 2012............. 75% 29% 13% 4% 1% 0% 0% 0%
June 25, 2013............. 72% 26% 11% 3% 1% 0% 0% 0%
June 25, 2014............. 69% 23% 9% 2% 0% 0% 0% 0%
June 25, 2015............. 67% 21% 7% 2% 0% 0% 0% 0%
June 25, 2016............. 64% 19% 6% 1% 0% 0% 0% 0%
June 25, 2017............. 61% 17% 5% 1% 0% 0% 0% 0%
June 25, 2018............. 58% 15% 4% 0% 0% 0% 0% 0%
June 25, 2019............. 55% 13% 3% 0% 0% 0% 0% 0%
June 25, 2020............. 51% 11% 3% 0% 0% 0% 0% 0%
June 25, 2021............. 47% 10% 2% 0% 0% 0% 0% 0%
June 25, 2022............. 43% 8% 1% 0% 0% 0% 0% 0%
June 25, 2023............. 38% 7% 1% 0% 0% 0% 0% 0%
June 25, 2024............. 33% 5% 1% 0% 0% 0% 0% 0%
June 25, 2025............. 27% 4% 0% 0% 0% 0% 0% 0%
June 25, 2026............. 21% 3% 0% 0% 0% 0% 0% 0%
June 25, 2027............. 14% 2% 0% 0% 0% 0% 0% 0%
June 25, 2028............. 6% 0% 0% 0% 0% 0% 0% 0%
June 25, 2029............. 0% 0% 0% 0% 0% 0% 0% 0%
Weighted Average Life
(years) to Maturity....... 19.17 9.70 6.31 4.34 3.39 2.96 2.54 2.22
Weighted Average Life
(years) to Call Option
Date...................... 19.07 9.32 5.85 4.01 3.14 2.74 2.36 2.07
* Rounded to the nearest whole percentage.
</TABLE>
<PAGE>
Sensitivity of the Class A-8IO Certificates
The yield to maturity of the Class A-8IO Certificates will, under
certain scenarios, be sensitive to the principal prepayment, repurchase and
default experience of the Mortgage Loans. In addition, remaining amounts on
deposit in the Pre-Funding Accounts will be distributed on the first
Distribution Date, which will reduce the Certificate Notional Balance of the
Class A-8-IO Certificates (and, accordingly, reduce the amounts distributed
thereon on subsequent Distribution Dates). Moreover, the yield to maturity
will be highly sensitive to the fact that the final distribution will be made
on the Class A-8-IO Certificates on the Distribution Date in June 2002.
Investors should carefully consider the associated risks, including the risk
that an extremely rapid rate of principal prepayments on the Mortgage Loans or
repurchases of Mortgage Loans could result in the failure of investors in the
Class A-8IO Certificates to recover their initial investments.
The following table (the "Yield Table") demonstrates the sensitivity
of the pre-tax yields on the Class A-8IO Certificates to various constant
Percentages of Prepayment Assumption by projecting the aggregate payments of
interest on such Certificates and the corresponding pre-tax yields on a
corporate bond equivalent ("CBE") basis, assuming distributions on the
Mortgage Loans are made as set forth above under "Description of the
Certificates-Weighted Average Lives."
<TABLE>
<CAPTION>
Pre-Tax Yields on the Class A-8IO Certificates
(Priced to Maturity)
Percentages of Prepayment Assumption
---------------------------------------------------------------------------------------------------
Assumed
Purchase Price 0% 35% 65% 100% 130% 150% 175% 200%
- ----------------------------------------------------------------------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$1,291,638.81 7.837 7.837 7.837 7.837 7.837 7.837 7.837 7.837
$1,299,451.31 7.416 7.416 7.416 7.416 7.416 7.416 7.416 7.416
$1,307,263.81 7.000 7.000 7.000 7.000 7.000 7.000 7.000 7.000
$1,315,076.31 6.588 6.588 6.588 6.588 6.588 6.588 6.588 6.588
$1,322,888.81 6.180 6.180 6.180 6.180 6.180 6.180 6.180 6.180
</TABLE>
The pre-tax yields set forth in the preceding table were calculated
by determining the monthly discount rates which, when applied to the assumed
streams of cash flows to be paid on the Class A-8IO Certificates, would cause
the discounted present value of such assumed streams of cash flows to the
Closing Date to equal the assumed purchase prices (which include accrued
interest), and converting such monthly rates to CBE rates. Such calculations
do not take into account the interest rates at which funds received by holders
of the Class A-8IO Certificates may be reinvested and consequently does not
purport to reflect the return on any investment in the Class A-8IO
Certificates when such reinvestment rates are considered.
It is highly unlikely that the Mortgage Loans will prepay at the same
rate until maturity or that all of the Mortgage Loans will prepay at the same
rate or time. As a result of these factors, the pre-tax yield on the Class
A-8IO Certificates is likely to differ from those shown in the table, even if
all of the Mortgage Loans prepay at the indicated percentages of the
Prepayment Assumption. No representation is made as to the actual rate of
principal payments on the Mortgage Loans (or the Mortgage Rates thereon) for
any period or over the life of the Class A-8IO Certificates or as to the yield
on the Class A-8IO Certificates. Investors must make their own decisions as to
the appropriate prepayment assumptions to be used in deciding whether to
purchase the Class A-8IO Certificates.
Reports to Holders of the Certificates
On each Distribution Date, the Trustee will forward to each holder of
a Certificate and the Certificate Insurer a statement generally setting forth:
(i) the aggregate amount of the distributions, separately
identified, with respect to each Class of Offered Certificates;
(ii) the amount of such distributions allocable to principal,
separately identifying the aggregate amount of any scheduled
principal, Principal Prepayments or other unscheduled recoveries of
principal included therein;
(iii) the amount of such distributions allocable to interest
and the calculation thereof;
(iv) the Certificate Principal Balance of each Class of Offered
Certificates after giving effect to the distribution of principal on
such Distribution Date;
(v) the Loan Group Balances and the Pool Balance as of the end
of the related Due Period;
(vi) the OC Target Amount and Overcollateralized Amount as of
such Distribution Date;
(vii) the related amount of the Servicing Fee paid to or
retained by the Servicer;
(viii) the amount of the Administrative Fee paid to the Trust
Administrator and the Trustee, in the aggregate;
(ix) the amount of Delinquency Advances and Servicing Advances
for the related Due Period;
(x) the number and aggregate Loan 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
Loan Balance of such Mortgage Loan as of the close of business on
the last day of such month and the date of acquisition thereof, as
well as the total number and Loan Balance of any REO Properties as
of the close of business on the last day of the preceding month;
(xii) the aggregate amount of Realized Losses incurred during
the preceding calendar month, as well as the cumulative amount of
Realized Losses;
(xiii) any OC Deficiency Amount after giving effect to the
distributions of principal on such Distribution Date;
(xiv) any OC Deficit after giving effect to distributions on
such Distribution Date;
(xv) the Reimbursement Amount, if any;
(xvi) the Pass-Through Rate for each Class of Offered
Certificates for such Distribution Date; and
(xvii) the amount on deposit in each Pre-Funding Account and in
each Capitalized Interest Account, separately stated.
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.
Amendment
The Pooling and Servicing Agreement may be amended by the Depositor,
the Seller, the Servicer, the Trust Administrator and the Trustee, without the
consent of the holders of the Certificates but only with the consent of the
Certificate Insurer, for any of the purposes set forth under "The Pooling and
Servicing Agreement--Amendment" in the Prospectus. In addition, the Pooling
and Servicing Agreement may be amended by the Depositor, the Seller, the
Servicer, the Trust Administrator and the Trustee with the consent of the
Certificate Insurer and the holders of a majority in interest of any Class of
Offered Certificates affected thereby for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of the
Pooling and Servicing Agreement or of modifying in any manner the rights of
the holders of Offered Certificates; provided, however, that no such amendment
may (i) reduce in any manner the amount of, or delay the timing of,
distributions required to be made on any Offered Certificate without the
consent of the holder of such Certificate; (ii) adversely affect in any
material respect the interests of the holders of any Class of the Offered
Certificates in a manner other than as described in clause (i) above, without
the consent of the holders of Offered Certificates of such Class evidencing
Percentage Interests aggregating at least 66%; or (iii) reduce the aforesaid
percentage of aggregate outstanding principal amounts of Offered Certificates,
the holders of which are required to consent to any such amendment, without
the consent of the holders of all such Certificates.
Optional Termination
The Servicer will have the right to repurchase all remaining Mortgage
Loans and REO Properties, if any, and thereby effect the early retirement of
the Certificates, subject to the aggregate Loan Balance of the Mortgage Loans
in the Trust Fund at the time of repurchase being less than or equal to 10% of
the aggregate of the Cut-off Date Loan Balances (but in no event prior to June
2002). In the event that the option is exercised, the repurchase will be made
at a price equal to the sum of (i) the greater of (a) 100% of the Loan Balance
of each Mortgage Loan and REO Property and (b) the fair market value (net of
accrued interest) of the Mortgage Loans and REO Properties determined as set
forth in the Pooling and Servicing Agreement, (ii) 30 days' interest thereon
at a rate equal to the applicable Mortgage Rate, and (iii) the aggregate
amount of (x) all unreimbursed Delinquency Advances, (y) all unreimbursed
out-of-pocket costs and expenses previously incurred by the Servicer in the
performance of its servicing obligations, to the extent such costs and
expenses relate to the Mortgage Loans and REO Properties then held as part of
the Trust Fund and (z) any accrued and unpaid Servicing Fees. 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 purchase which will result in unreimbursed Reimbursement
Amounts to the Certificate Insurer will require Certificate Insurer consent.
Any such repurchase of the Mortgage Loans and REO Properties will result in
the early retirement of the Certificates.
Optional Purchase of Defaulted Loans
As to any Mortgage Loan which is delinquent in payment by 90 days or
more, the Seller may, at its option, purchase such Mortgage Loan from the
Trust Fund at a price which includes 100% of the Loan Balance thereof plus
accrued interest thereon at the applicable Mortgage Rate from the date through
which interest was last paid by the related Mortgagor through the day before
the due date in the Due Period in which such purchase occurs; provided,
however, that (i) the total amount of such Mortgage Loans that may be
purchased by the Seller described in this paragraph (not including Mortgage
Loans repurchased due to a breach of a representation or warranty under the
Pooling and Servicing Agreement) may not exceed 5% of the aggregate of the
Cut-off Date Loan Balances and (ii) unless the Certificate Insurer otherwise
consents, the Mortgage Loans must be purchased in the order they become
delinquent.
Events of Default; Servicer Termination Trigger Event
Events of Default will consist, among other things, of: (i) any
failure by the Servicer to deposit in the Collection Account or Certificate
Account the required amounts or remit to the Trustee any payment which
continues unremedied for two Business Days; (ii) any failure by the Servicer
to observe or perform in any material respect any of its covenants or
agreements and 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 by
the Seller, the Trustee, the Trust Administrator, the Depositor, the
Certificate Insurer or the holders of Offered Certificates evidencing not less
than 51% of the voting rights evidenced by the Offered Certificates; (iii)
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 (iv) certain
defaults under the Insurance Agreement. As of any date of determination,
voting rights will be allocated among holders of the Offered Certificates as
described in the Pooling and Servicing Agreement. Voting rights will be
allocated among holders of the Certificates of each Class of Offered
Certificates in accordance with such holders' respective Percentage Interests
in such Class.
A "Servicer Termination Trigger Event" will occur if certain loss or
delinquency amounts are exceeded with respect to the Mortgage Loans, as
described in the Pooling and Servicing Agreement.
Rights Upon Event of Default or Servicer Termination Trigger Event
So long as an Event of Default under the Pooling and Servicing
Agreement remains unremedied, the Trustee at the direction of the Certificate
Insurer or the holders of Offered Certificates evidencing not less than 51% of
the voting rights (with the consent of the Certificate Insurer) may terminate
all of the rights and obligations of the Servicer in its capacity as servicer
with respect to the Trust Fund, 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 Delinquency Advances. If a Servicer
Termination Trigger Event occurs, the Trustee shall, but only upon receipt of
instructions from the Certificate Insurer, terminate all of the rights and
obligations of the Servicer under the Pooling and Servicing Agreement and in
and to the Mortgage Loans as described in the preceding sentence. 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 Mortgage Loans, including the delinquency experience of the
Mortgage Loans.
No holder of an Offered Certificate, solely by virtue of such
holder's status as a holder of an Offered Certificate, will have any right
under the Pooling and Servicing Agreement to institute any proceeding with
respect thereto, unless such holder previously has given to the Trustee
written notice of default and unless the holders of Offered Certificates
having not less than 51% of the voting rights evidenced by the Offered
Certificates so agree and have offered reasonable indemnity to the Trustee,
the Certificate Insurer shall have consented thereto and the Trustee for 60
days has neglected or refused to institute any such proceeding.
Pursuant to the Pooling and Servicing Agreement, the Servicer
covenants and agrees to act as the Servicer for an initial term from the
Closing Date to September 30, 1999, which term will be extendable by the
Certificate Insurer by notice to the Trustee for successive terms of three (3)
calendar months each, until the termination of the Trust Fund. The Servicer
will, upon its receipt of each such notice of extension (a "Servicer Extension
Notice") become bound for the duration of the term covered by such Servicer
Extension Notice to continue as the Servicer subject to and in accordance with
the other provisions of the Pooling and Servicing Agreement. If as of the
fifteenth (15th) day prior to the last day of any term of the Servicer, the
Trustee shall not have received any Servicer Extension Notice from the
Certificate Insurer, the Trustee will, within five (5) days thereafter, give
written notice of such nonreceipt to the Certificate Insurer and the Servicer.
The Certificate Insurer has agreed to extend each 90-day term of the Servicer,
in the absence of an Event of Default or Servicer Termination Event under the
Pooling and Servicing Agreement or an event of default under the Insurance
Agreement.
THE CERTIFICATE INSURER
The information set forth in this section has been provided by
Financial Security Assurance Inc. (the "Certificate Insurer"). No
representation is made by either of the Underwriters, the Trustee, the
Servicer, the Seller, the Depositor or any of their affiliates as to the
accuracy or completeness of such information or any information related to the
Certificate Insurer incorporated by reference herein.
General
The Certificate Insurer is a monoline insurance company incorporated
in 1984 under the laws of the State of New York. The Certificate Insurer is
licensed to engage in financial guaranty insurance business in all 50 states,
the District of Columbia and Puerto Rico.
The Certificate Insurer and its subsidiaries are engaged in the
business of writing financial guaranty insurance, principally in respect of
securities offered in domestic and foreign markets. In general, financial
guaranty insurance consists of the issuance of a guaranty of scheduled
payments of an issuer's securities - thereby enhancing the credit rating of
those securities - in consideration for the payment of a premium to the
insurer. The Certificate Insurer and its subsidiaries principally insure
asset-backed, collateralized and municipal securities. Asset-backed securities
are generally supported by residential mortgage loans, consumer or trade
receivables, securities or other assets having an ascertainable cash flow or
market value. Collateralized securities include public utility first mortgage
bonds and sale/leaseback obligation bonds. Municipal securities consist
largely of general obligation bonds, special revenue bonds and other special
obligations of state and local governments. The Certificate Insurer insures
both newly issued securities sold in the primary market and outstanding
securities sold in the secondary market that satisfy the Certificate Insurer's
underwriting criteria.
The Certificate Insurer is a wholly owned subsidiary of Financial
Security Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange
listed company. Major shareholders of Holdings include White Mountains
Insurance Group, Inc., MediaOne Capital Corporation, The Tokio Marine and Fire
Insurance Co., Ltd. and XL Capital Ltd. No shareholder of Holdings is
obligated to pay any debt of the Certificate Insurer or any claim under any
insurance policy issued by the Certificate Insurer or to make any additional
contribution to the capital of the Certificate Insurer.
The principal executive offices of the Certificate Insurer are
located at 350 Park Avenue, New York, New York 10022, and its telephone number
at that location is (212) 826-0100.
Reinsurance
Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written or reinsured from third parties by the Certificate
Insurer or its domestic or Bermuda operating insurance company subsidiaries
are generally reinsured among such companies on an agreed-upon percentage
substantially proportional to their respective capital, surplus and reserves,
subject to applicable statutory risk limitations. In addition, the Certificate
Insurer reinsures a portion of its liabilities under certain of its financial
guaranty insurance policies with other reinsurers under various treaties and
on a transaction-by-transaction basis. Such reinsurance is utilized by the
Certificate Insurer as a risk management device and to comply with certain
statutory and rating agency requirements; it does not alter or limit the
Certificate Insurer's obligations under any financial guaranty insurance
policy.
Ratings
The Certificate Insurer's insurance financial strength is rated "Aaa"
by Moody's. The Certificate Insurer's insurer financial strength is rated
"AAA" by Standard & Poor's and Standard & Poor's (Australia) Pty. Ltd. The
Certificate Insurer's claims-paying ability is rated "AAA" by Fitch IBCA, Inc.
and Japan Rating and Investment Information, Inc. Such ratings reflect only
the views of the respective rating agencies, are not recommendations to buy,
sell or hold securities and are subject to revision or withdrawal at any time
by such rating agencies.
Capitalization
The following table sets forth the capitalization of the Certificate
Insurer and its subsidiaries on the basis of generally accepted accounting
principles as of March 31, 1999:
March 31, 1999
(Unaudited)
(In thousands)
Deferred Premium Revenue
(net of prepaid reinsurance premiums).............. $ 512,383
----------
Surplus Notes...................................... 120,000
-------
20,973
Minority Interest..................................
Shareholder's Equity:
Common Stock....................................... 15,000
Additional Paid-In Capital......................... 706,117
Accumulated Other Comprehensive Income
(net of deferred income taxes)..................... 25,879
Accumulated Earnings............................... 391,745
-----------
Total Shareholder's Equity......................... 1,138,741
----------
Total Deferred Premium Revenue, Surplus
Notes, Minority Interest and Shareholder's $1,792,097
Equity.............................................
For further information concerning the Certificate Insurer, see the
Consolidated Financial Statements of the Certificate Insurer and subsidiaries,
and the notes thereto incorporated herein by reference. The Certificate
Insurer's financial statements are included as exhibits in the Annual Reports
on Form 10-K and the Quarterly Reports on Form 10-Q filed with the Securities
and Exchange Commission (the "Commission") by Holdings and may be reviewed at
the EDGAR web site maintained by the Commission and at Holding's website,
http://www.FSA.com. Copies of the statutory quarterly and annual statements
filed with the State of New York Insurance Department by the Certificate
Insurer are available upon request to the State of New York Insurance
Department.
Incorporation of Certain Documents by Reference
In addition to the documents described under "The Trust
Fund--Incorporation of Certain Information by Reference" in the Prospectus,
the consolidated financial statements of the Certificate Insurer included in
or as exhibits to the following documents, which have been filed with the
Securities and Exchange Commission by Holdings, are hereby incorporated by
reference in this Prospectus Supplement: (a) the Annual Report on Form 10-K of
Holdings for the year ended December 31, 1998, and (b) the Quarterly Report on
Form 10-Q for the period ended March 31, 1999.
All financial statements of the Certificate Insurer included in
documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the 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 Depositor will provide without charge to any person to whom this
Prospectus Supplement is delivered, upon oral or written request of such
person, a copy of any or all of the foregoing financial statements
incorporated by reference. Requests for such copies should be directed to the
Depositor at 600 Steamboat Road, Greenwich, Connecticut 06830.
The Trust Administrator on behalf of the Trust will undertake, for
purposes of determining any liability under the 1933 Act (as defined herein),
each filing of the Trust's annual report pursuant to section 13(a) or section
15(d) of the Exchange Act and each filing of the financial statements of the
Certificate Insurer included in or as an exhibit to the annual report of
Holdings filed pursuant to section 13(a) or section 15(d) of the Exchange Act
that is incorporated by reference in the Registration Statement (as defined in
the Prospectus) will be deemed to be a new registration statement relating to
the Securities offered hereby, and the offering of such Securities at that
time will be deemed to be the initial bona fide offering thereof.
Insurance Regulation
The Certificate Insurer is licensed and subject to regulation as a
financial guaranty insurance corporation under the laws of the State of New
York, its state of domicile. In addition, the Certificate Insurer and its
insurance subsidiaries are subject to regulation by insurance laws of the
various other jurisdictions in which they are licensed to do business. As a
financial guaranty insurance corporation licensed to do business in the State
of New York, the Certificate Insurer is subject to Article 69 of the New York
Insurance Law which, among other things, limits the business of each such
insurer to financial guaranty insurance and related lines, requires that each
such insurer maintain a minimum surplus to policyholders, establishes
contingency, loss and unearned premium reserve requirements for each such
insurer, and limits the size of individual transactions ("single risks") and
the volume of transactions ("aggregate risks") that may be underwritten by
each such insurer. Other provisions of the New York Insurance Law, applicable
to non-life insurance companies such as the Certificate Insurer, regulate,
among other things, permitted investments, payment of dividends, transactions
with affiliates, mergers, consolidations, acquisitions or sales of assets and
incurrence of liability for borrowings.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates against the purchase price of the Mortgage Loans transferred to
the Trust Fund.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Trust (other than the
Capitalized Interest Accounts and the Pre-Funding Accounts) will include two
segregated asset pools, with respect to which elections will be made to treat
each as a separate REMIC. One REMIC (the "Subsidiary REMIC") will issue
uncertificated subclasses of nonvoting interests ("Subsidiary REMIC Regular
Interests"), which will be designated as the regular interests in the
Subsidiary REMIC. The assets of Subsidiary REMIC will consist of Loan Group I
and Loan Group II and all other property in the Trust Fund (other than the
Capitalized Interest Accounts, the Pre-Funding Accounts and the Subsidiary
REMIC Regular Interests). The second REMIC (the "Master REMIC") will issue the
Offered Certificates, which will be designated as the regular interests in the
Master REMIC. The assets of the Master REMIC will consist of the Subsidiary
REMIC Regular Interests. The Class R Certificates will represent the
beneficial ownership of the residual interest in the Subsidiary REMIC and the
residual interest in the Master REMIC. The Class A-8I0 will represent the sole
class of interest only Certificates.
In the opinion of Brown & Wood LLP, tax counsel to the Trust and
counsel to the Underwriters, assuming compliance with the Pooling and
Servicing Agreement, the Trust Fund (other than the Pre-Funding Accounts and
the Capitalized Interest Accounts) will qualify as two separate REMICs, the
Offered Certificates will constitute "regular interests" in the Master REMIC
and the Residual Certificates will constitute the sole class of "residual
interests" in both REMICs.
The Offered Certificates generally will be treated as debt
instruments issued by the Master REMIC for federal income tax purposes. Income
on such Certificates must be reported under an accrual method of accounting.
Original Issue Discount
The Class A-8IO will, and the other class of Offered Certificates
may, be issued with original issue discount for federal income tax purposes.
For purposes of determining the amount and rate of accrual of original issue
discount and market discount, the Depositor intends to assume that there will
be prepayments on the Mortgage Loans at 130% of the Prepayment Assumption. No
representation is made as to whether the Mortgage Loans will prepay at that
rate or any other rate. See "Yield, Prepayment and Maturity Considerations"
herein and "Certain Material Federal Income Tax Consequences" in the
Prospectus.
A reasonable application of the principles of the OID Regulations to
the Class A-1 Certificates generally would be to calculate OID for each
period, computing such OID (a) by assuming that the value of the one-month
LIBOR will remain constant for purposes of determining the original yield to
maturity of the Class A-1 Certificates and projecting future distributions on
such Certificates, thereby treating such Certificates as fixed-rate
instruments to which the OID computation rules described in the Prospectus can
be applied, and (b) by accounting for any positive or negative variation in
the actual value of LIBOR in any period from its assumed value as a current
adjustment to OID with respect to such period.
If any Class of Offered Certificates is treated as being issued at a
premium, the holders of such Class of the Offered Certificates may elect under
Section 171 of the Internal Revenue Code of 1986, as amended (the "Code"), to
amortize such premium under the constant yield method and to treat such
amortizable premium as an offset to interest income on the Offered
Certificates. Such election, however, would apply to all the
Certificateholder's debt instruments acquired on or after the first taxable
year in which the election is first made, and should only be made after
consulting with a tax adviser.
If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
holder of a Certificate, such holder will be permitted to offset such amounts
only against the respective future income, if any, from such Certificate.
Although the tax treatment is uncertain, a holder of a Certificate may be
permitted to deduct a loss to the extent that such holder's respective
remaining basis in such Certificate exceeds the maximum amount of future
payments to which such holder is entitled, assuming no further Principal
Prepayments of the Mortgage Loans are received. Although the matter is not
free from doubt, any such loss might be treated as a capital loss.
Special Tax Attributes of the Offered Certificates
As is described more fully under "Certain Material Federal Income Tax
Consequences" in the Prospectus, the Offered Certificates will represent
qualifying assets under Sections 856(c)(5)(A) and 7701(a)(19)(C)(v) of the
Code, and net interest income attributable to the Offered Certificates will be
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code, to the extent the assets of the
Trust Fund are assets described in such sections. The Offered Certificates
will represent qualifying assets under Section 860G(a)(3) if acquired by a
REMIC within the prescribed time periods of the Code.
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 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.
Final regulations dealing with withholding tax on income paid to
Foreign Investors (as defined herein), backup withholding and related matters
(the "New Withholding Regulations") were issued by the Treasury Department on
October 6, 1997. The New Withholding Regulations will generally be effective
for payments made after December 31, 2000, subject to certain transition
rules. Prospective Certificate Owners are strongly urged to consult their own
tax advisors with respect to the New Withholding Regulations.
Such amounts will be deemed distributed to the affected Certificate
Owner for all purposes of the related Certificates and the Pooling and
Servicing Agreement.
Federal Income Tax Consequences to Foreign Investors
The following information describes the United States federal income
tax treatment of holders that are not United States persons ("Foreign
Investors"). The term "Foreign Investor" means any person other than a citizen
or resident of the United States, a corporation, partnership or other entity
created or organized in or under the laws of the United States or any state
thereof or the District of Columbia (including a partnership that is not
treated as a United States person under any applicable Treasury regulations),
an estate whose income is subject to U.S. federal income tax regardless of its
source of income, or a trust if a court within the United States is able to
exercise primary supervision of the administration of the trust and one or
more United States persons have the authority to control all substantial
decisions of the trust. 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
also not be considered as Foreign Investors.
The Code and Treasury regulations generally subject interest paid to
a Foreign Investor to a withholding tax at a rate of 30% (unless such rate
were changed by an applicable treaty). The withholding tax, however, is
eliminated with respect to certain "portfolio debt investments" issued to
Foreign Investors. Portfolio debt investments include debt instruments issued
in registered form for which the United States payor receives a statement that
the beneficial owner of the instrument is a Foreign Investor. The Offered
Certificates will be issued in registered form; therefore, if the information
required by the Code is furnished (as described below) and no other exceptions
to the withholding tax exemption are applicable, no withholding tax will apply
to the Offered Certificates.
For the Offered Certificates to constitute portfolio debt investments
exempt from the United States withholding tax, the withholding agent must
receive from the Certificate Owner an executed IRS Form W-8 signed under
penalty of perjury by the Certificate Owner stating that the Certificate Owner
is a Foreign Investor and providing such Certificate Owner's name and address.
The statement must be received by the withholding agent in the calendar year
in which the interest payment is made, or in either of the two preceding
calendar years.
In addition, prospective Foreign Investors are strongly urged to
consult their own tax advisors with respect to the New Withholding
Regulations.
A Certificate Owner that is a nonresident alien or foreign
corporation will not be subject to United States federal income tax on gain
realized on the sale, exchange, or redemption of such Offered Certificate,
provided that (i) such gain is not effectively connected with a trade or
business carried on by the Certificate Owner in the United States, (ii) in the
case of a Certificate Owner that is an individual, such Certificate Owner is
not present in the United States for 183 days or more during the taxable year
in which such sale, exchange or redemption occurs and (iii) in the case of
gain representing accrued interest, the conditions described in the
immediately preceding paragraph are satisfied.
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "Certain Material Federal Income
Tax Consequences--REMIC Certificates" in the Prospectus.
STATE TAXES
The Depositor makes no representations regarding the tax consequences
of purchase, ownership or disposition of the Offered Certificates under the
tax laws of any state. Investors considering an investment in the Offered
Certificates should consult their own tax advisors regarding such tax
consequences.
All investors should consult their own tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Offered Certificates.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), prohibits "parties in interest" with respect to an
employee benefit plan subject to ERISA and/or a plan or other arrangement
subject to the excise tax provisions set forth under Section 4975 of the Code
(each of the foregoing, a "Plan") from engaging in certain transactions
involving such Plan and its assets unless a statutory, regulatory or
administrative exemption applies to the transaction. Section 4975 of the Code
imposes certain excise taxes on prohibited transactions involving plans
described under that Section; ERISA authorizes the imposition of civil
penalties for prohibited transactions involving plans not covered under
Section 4975 of the Code. Any Plan fiduciary which proposes to cause a Plan to
acquire any of the Offered Certificates should consult with its counsel with
respect to the potential consequences under ERISA and the Code of the Plan's
acquisition and ownership of such Certificates. See "ERISA Considerations" in
the Prospectus.
Certain employee benefit plans, including governmental plans and
certain church plans, are not subject to ERISA's requirements. Accordingly,
assets of such plans may be invested in the Offered Certificates without
regard to the ERISA considerations described herein and in the Prospectus,
subject to the provisions of other applicable federal and state law. Any such
plan which is qualified and exempt from taxation under Sections 401(a) and
501(a) of the Code may nonetheless be subject to the prohibited transaction
rules set forth in Section 503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's
general fiduciary requirements, including the requirement of investment
prudence and diversification and the requirement that a Plan's investments be
made in accordance with the documents governing the Plan. A fiduciary which
decides to invest the assets of a Plan in the Offered Certificates should
consider, among other factors, the extreme sensitivity of the investments to
the rate of principal payments (including prepayments) on the Mortgage Loans.
The U.S. Department of Labor (the "DOL") has granted to Greenwich
Capital Markets, Inc. an administrative exemption (Prohibited Transaction
Exemption 90-59; Exemption Application No. D-8374) (the "Exemption") from
certain of the prohibited transaction rules of ERISA and the related excise
tax provisions of Section 4975 of the Code with respect to the initial
purchase, the holding and the subsequent resale by Plans of certificates in
pass-through trusts that consist of certain receivables, loans and other
obligations that meet the conditions and requirements of the Exemption. The
Exemption applies to mortgage loans such as the Mortgage Loans in the Trust
Fund.
Among the conditions that must be satisfied for the Exemption to
apply are the following:
(1) the acquisition of the certificates by a Plan is on
terms (including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arm's length transaction
with an unrelated party;
(2) the rights and interest evidenced by the certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the trust fund;
(3) the certificates acquired by the Plan have received a
rating at the time of such acquisition that is one of the three
highest generic rating categories from Standard & Poor's, a division
of The McGraw-Hill Companies ("S&P"), Moody's Investors Service, Inc.
("Moody's"), Duff & Phelps Credit Rating Co. ("DCR") or Fitch
Investors Service, L.P. ("Fitch" and, together with S&P, Moody's and
DCR, the "Exemption Rating Agencies");
(4) the trustee is not 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 as to
which the fiduciary (or its affiliate) is an obligor on the receivables held
in the trust provided that, among other requirements, (i) in the case of an
acquisition in connection with the initial issuance of certificates, at least
fifty percent (50%) of each Class of certificates in which Plans have invested
and at least 50% of the aggregate interest in the Trust 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) a 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 any of the Underwriters, the Trustee, the Trust
Administrator, the Servicer, any insurer, 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").
As amended on July 21, 1997, the Exemption 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 during a pre-funding period ending no later than
90-days or three-months after the closing date, instead of requiring that all
such Obligations be either identified or transferred on or before the closing
date. The relief is available when the following conditions are met:
(1) The ratio of the amount allocated to the
pre-funding account to the total principal amount of the
certificates being offered (the "Pre-Funding Limit") must
not exceed twenty-five percent (25%).
(2) All Obligations transferred after the closing
date (the "Additional Obligations") must meet the same terms
and conditions for eligibility as the original Obligations
used to create the trust, which terms and conditions have
been approved by an Exemption Rating Agency.
(3) The transfer of such Additional Obligations to
the trust during the pre-funding period must not result in
the certificates to be covered by the Exemption receiving a
lower credit rating from an Exemption Rating Agency upon
termination of the pre-funding period than the rating that
was obtained at the time of the initial issuance of the
certificates by the trust.
(4) Solely as a result of the use of pre-funding,
the weighted average annual percentage interest rate (the
"Average Interest Rate") for all of the Obligations in the
trust at the end of the pre-funding period must not be more
than 100 basis points lower than the Average Interest Rate
for the Obligations which were transferred to the trust on
the closing date.
(5) In order to ensure 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 underwriter and the trustee) stating
whether or not the characteristics of the Additional
Obligations conform to the characteristics described in the
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 certain permitted
investments.
(8) The prospectus or prospectus supplement
must describe:
(i) any pre-funding account and/or capitalized
interest account used in connection with a pre-funding
account;
(ii) the duration of the pre-funding period;
(iii) the percentage and/or dollar amount of
the Pre-Funding Limit for the trust; and
(iv) that the amounts remaining in the pre-funding
account at the end of the pre-funding period will be
remitted to certificateholders as repayments of principal.
(9) The 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.
The Underwriters believe that all of the conditions for exemptive
relief the Exemption have been or will be satisfied. Therefore, the
acquisition, holding and transfer of the Offered Certificates would be
eligible for relief under the Exemption, as amended.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of 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 Certificates will not constitute "mortgage related securities"
under the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
Accordingly, many institutions with legal authority to invest in "mortgage
related securities" may not be legally authorized to invest in the Offered
Certificates.
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 Certificates constitute
legal investments for such investors.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and the Greenwich Capital Markets, Inc.
("Greenwich"), an affiliate of the Depositor and PaineWebber Incorporated
("PaineWebber," and together with Greenwich, the "Underwriters"), the
Depositor has agreed to sell to the Underwriters, and the Underwriters have
agreed to purchase from the Depositor, the Offered Certificates. In connection
with the sale of the Offered Certificates, the Underwriters may be deemed to
have received compensation from the Depositor in the form of underwriting
discounts. The Underwriters have severally agreed to purchase from the
Depositor the principal amounts of the Classes of Offered Certificates set
forth in the following table:
<TABLE>
<CAPTION>
Greenwich Capital Markets,
Inc. PaineWebber Incorporated Total
<S> <C> <C> <C> <C>
Class A-1 $76,800,000 $ 19,200,000 $96,000,000
Class A-2 $40,000,000 $ 10,000,000 $50,000,000
Class A-3 $36,000,000 $ 9,000,000 $45,000,000
Class A-4 $40,000,000 $ 10,000,000 $50,000,000
Class A-5 $17,812,800 $ 4,453,200 $22,266,000
Class A-6 $18,400,000 $ 4,600,000 $23,000,000
Class A-7 $30,987,200 $ 7,746,800 $38,734,000
</TABLE>
The Class A-8IO Certificates will be purchased from the Depositor by
Greenwich.
The Depositor has been advised by the Underwriters that they intend
to make a market in the Offered Certificates but have no obligation to do so.
There can be no assurance that a secondary market for the Offered Certificates
will develop or, if it does develop, that it will continue.
The Offered Certificates are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters and
subject to their right to reject orders in whole or in part. It is expected
that delivery of the Offered Certificates will be made in book-entry form only
through the facilities of The Depository Trust Company on or about the Closing
Date.
The Depositor has agreed to indemnify the Underwriters against, or
make contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Offered
Certificates will be passed upon for the Depositor and for the Underwriters by
Brown & Wood LLP, New York, New York, and for the Seller by Morrison &
Forester LLP, Irvine, California.
RATINGS
It is a condition of the issuance of the Offered Certificates that
the Offered Certificates (other than the Class A-8IO Certificates) be rated
AAA and Aaa by S&P and Moody's, respectively (Moody's, together with S&P, the
"Rating Agencies") and that the Class A-8IO Certificates be rated "AAAr" by
S&P and "Aaa" by Moody's. No rating addresses whether Additional Mortgage
Loans will be acquired by the Trust Fund, the amount of any such Mortgage
Loans to be so acquired, or the impact that any such acquisition might have on
the yields of the Offered Certificates.
The ratings on the Offered Certificates address the likelihood of the
receipt by the holders of the Offered Certificates of all distributions on the
Mortgage Loans to which they are entitled. The ratings on the Offered
Certificates also address the structural, legal and issuer-related aspects of
the Offered Certificates, including the nature of the Mortgage Loans. In
general, the ratings on the Offered Certificates address credit risk and not
prepayment risk. The ratings on the Offered Certificates do not represent any
assessment of the likelihood that principal prepayments of the Mortgage Loans
will be made by borrowers or the degree to which the rate of such prepayments
might differ from that originally anticipated. The "r" symbol is appended to a
rating by S&P if those Certificates that S&P believes may experience high
volatility or high variability in expected returns due to non-credit risks.
The absence of an "r" symbol in the ratings of the Offered Certificates should
not be taken as an indication that such Certificates will exhibit no
volatility or variability in total return. As a result, the initial ratings
assigned to the Offered Certificates do not address the possibility that
holders of the Offered Certificates might suffer a lower than anticipated
yield in the event of principal payments on the Offered Certificates resulting
from rapid prepayments of the Mortgage Loans or the application of the Extra
Principal Distribution Amount as described herein, or in the event that the
Trust Fund is terminated prior to the Assumed Final Maturity Dates of the
Offered Certificates. The ratings on the Offered Certificates do not address
the ability of the Trust to acquire Additional Mortgage Loans, any potential
redemption with respect thereto or the effect on yield resulting therefrom.
The Depositor has not engaged any rating agency other than the Rating
Agencies to provide ratings on the Offered Certificates. However, there can be
no assurance as to whether any other rating agency will rate the Offered
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. Any rating on the Certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Offered
Certificates by the Rating Agencies.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to any of the Offered Certificates by the Rating Agencies
are subsequently lowered for any reason, no person or entity is obligated to
provide any additional support or credit enhancement with respect to such
Offered Certificates.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc.
and Subsidiaries as of December 31, 1998 and December 31, 1997 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, 1998
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.
<PAGE>
INDEX OF DEFINED TERMS
Accrual Period..................................................S-60
Actuarial Loans.................................................S-32
Additional Group I Mortgage Loans...............................S-13
Additional Group II Mortgage Loans..............................S-13
Additional Mortgage Loans.......................................S-13
Additional Obligations..........................................S-94
Administrative Fee..............................................S-45
Administrative Fee Rate.........................................S-45
aggregate risks.................................................S-88
Assumed Final Maturity Date.....................................S-71
Available Funds.................................................S-56
Average Interest Rate...........................................S-94
Basic Principal Distribution Amount.............................S-61
beneficial owner................................................S-49
Book-Entry Certificates.........................................S-48
Business Day....................................................S-67
Call Option Date................................................S-61
Capitalized Interest Account....................................S-57
CBE.............................................................S-81
Cedelbank.......................................................S-50
Cedelbank Participants..........................................S-50
Certificate Account.............................................S-56
Certificate Group...............................................S-61
Certificate Insurer.............................................S-85
Certificate Insurer Default.....................................S-61
Certificate Notional Balance....................................S-61
Certificate Owners..............................................S-48
Certificate Principal Balance...................................S-61
Certificateholder...............................................S-49
Certificates....................................................S-47
Class A-6 Priority Distribution Amount..........................S-58
Class A-6 Pro Rata Percentage...................................S-58
Class A-8IO Components..........................................S-48
Class A-8IO-I Component Notional Balance........................S-61
Class A-8IO-II Component Notional Balance.......................S-61
CLTV............................................................S-34
Code............................................................S-89
Collection Account..............................................S-53
Commission......................................................S-87
Company.........................................................S-41
Contributions Tax...............................................S-90
Cooperative.....................................................S-51
Cut-off Date Loan Balance.......................................S-13
DCR.............................................................S-93
Defective Loan..................................................S-44
Definitive Certificate..........................................S-49
Deleted Mortgage Loan...........................................S-44
Delinquency Advance.............................................S-46
Delinquent......................................................S-61
Distribution Date...............................................S-53
DOL.............................................................S-92
DTC......................................................S-48, S-102
DTC Rules.......................................................S-49
DTC Services....................................................S-53
due date........................................................S-46
Due Period......................................................S-61
ERISA...........................................................S-92
Euroclear.......................................................S-51
Euroclear Operator..............................................S-51
Euroclear Participants..........................................S-51
European Depositaries...........................................S-48
exception...........................................S-37, S-39, S-40
Exchange Act....................................................S-87
Exemption.......................................................S-92
Exemption Rating Agencies.......................................S-93
Extra Principal Distribution Amount.............................S-61
FICO score......................................................S-34
Financial Intermediary..........................................S-49
Fitch...........................................................S-93
Foreign Investors...............................................S-91
General Excess Available Amount.................................S-62
Global Securities..............................................S-102
Greenwich.......................................................S-96
Group I Additional Mortgage Loans...............................S-56
Group I Available Funds.........................................S-57
Group I Pre-Funded Amount.......................................S-56
Group I Pre-Funding Account.....................................S-56
Group II Additional Mortgage Loans..............................S-56
Group II Available Funds........................................S-59
Group II Pre-Funded Amount......................................S-56
Group II Pre-Funding Account....................................S-56
Holdings........................................................S-86
HS............................................................. S-37
IML.............................................................S-50
Industry........................................................S-53
Initial Cut-off Date............................................S-13
Initial Group I Mortgage Loans..................................S-13
Initial Group II Mortgage Loans.................................S-13
Initial Mortgage Loans..........................................S-13
Insurance Agreement.............................................S-68
Insurance Proceeds..............................................S-54
Insured Distribution Amount.....................................S-62
Insured Payments................................................S-66
Interest Distribution Amount....................................S-62
Interest Remittance Amount......................................S-62
IRS.............................................................S-90
LIBOR Business Day..............................................S-65
LIBOR Determination Date........................................S-65
Liquidated Loan.................................................S-64
Liquidation Proceeds............................................S-54
Loan Balance....................................................S-62
Loan Group......................................................S-13
Loan Group Balance..............................................S-62
LTV.............................................................S-34
Master REMIC....................................................S-88
Moody's.........................................................S-93
Mortgage Loan Purchase Agreement................................S-45
Mortgage Loans..................................................S-13
Mortgage Notes..................................................S-13
Mortgage Pool...................................................S-13
Mortgaged Properties............................................S-13
Mortgages.......................................................S-13
NCFC............................................................S-41
Net Income from Foreclosure Property............................S-90
Net WAC Cap.....................................................S-62
New Withholding Regulations.....................................S-90
Obligations.....................................................S-94
OC Deficiency Amount............................................S-63
OC Deficit......................................................S-63
OC Release Amount...............................................S-63
OC Stepdown Date................................................S-63
OC Target Amount................................................S-63
Offered Certificates............................................S-47
One-Month LIBOR.................................................S-65
Order...........................................................S-66
Original Certificate Principal Balance..........................S-61
Overcollateralized Amount.......................................S-63
PaineWebber.....................................................S-96
Pass-Through Rate...............................................S-63
Plan............................................................S-92
Policy Payments Account.........................................S-57
Pooling and Servicing Agreement.................................S-42
Pre-Funding Distribution Amount.................................S-64
Pre-Funding Limit...............................................S-94
Pre-Funding Period..............................................S-56
Premium Amount..................................................S-64
Prepayment Assumption...........................................S-71
Prepayment Interest Shortfall...................................S-46
Principal Distribution Amount...................................S-64
Principal Prepayment............................................S-64
Principal Remittance Amount.....................................S-64
Prohibited Transactions Tax.....................................S-89
Purchase Price..................................................S-44
Qualifying Rate.................................................S-33
Rating Agencies.................................................S-97
Realized Loss...................................................S-64
Receipt.........................................................S-67
Received........................................................S-67
Record Date.....................................................S-53
Reference Banks.................................................S-65
Reimbursement Amount............................................S-65
Relevant Depositary.............................................S-48
REMICs...........................................................S-7
Replacement Mortgage Loan.......................................S-44
Reserve Interest Rate...........................................S-65
Residual Certificates...........................................S-47
residual interests...............................................S-7
Restricted Group................................................S-94
S&P.............................................................S-93
Seller....................................................S-13, S-44
Servicer Extension Notice.......................................S-85
Servicer Termination Trigger Event..............................S-84
Servicing Fee...................................................S-46
Servicing Fee Rate..............................................S-46
Shift Percentage................................................S-59
single risks....................................................S-88
SMMEA...........................................................S-95
Subsidiary REMIC................................................S-88
Subsidiary REMIC Regular Interests..............................S-88
Systems.........................................................S-53
Telerate Page 3750..............................................S-65
Terms and Conditions............................................S-51
Trust...........................................................S-43
Trustee's Mortgage File.........................................S-43
U.S. Person....................................................S-105
Underwriters....................................................S-96
Underwriting Guidelines.........................................S-33
Unutilized Funding Amount.......................................S-57
Year 2000 Problems..............................................S-53
Yield Table.....................................................S-81
<PAGE>
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 pass-through 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 Closing 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 (unless, in the case of a partnership, Treasury
regulations provide otherwise) 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. Notwithstanding the preceding sentence, to the extent provided
in Treasury 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 will also be a U.S. Person. This summary
does not deal with all aspects of U.S. Federal income tax withholding that may
be relevant to foreign holders of the Global Securities. Investors are advised
to consult their own tax advisors for specific tax advice concerning their
holding and disposing of the Global Securities.
<PAGE>
PROSPECTUS
Asset Backed Securities
(Issuable in Series)
FINANCIAL ASSET SECURITIES CORP.
Depositor
Consider carefully the risk factors beginningon 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.
MAY 17, 1999
<PAGE>
TABLE OF CONTENTS
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS AND
EACH ACCOMPANYING PROSPECTUS SUPPLEMENT......................................3
RISK FACTORS..................................................................4
THE TRUST FUND...............................................................10
USE OF PROCEEDS..............................................................15
THE DEPOSITOR................................................................15
LOAN PROGRAM.................................................................16
DESCRIPTION OF THE SECURITIES................................................18
CREDIT ENHANCEMENT...........................................................27
YIELD AND PREPAYMENT CONSIDERATIONS..........................................33
THE AGREEMENTS...............................................................35
CERTAIN LEGAL ASPECTS OF THE LOANS...........................................47
CERTAIN MATERIAL FEDERAL INCOME TAX CONSIDERATIONS...........................59
STATE TAX CONSIDERATIONS.....................................................81
ERISA CONSIDERATIONS.........................................................81
LEGAL INVESTMENT.............................................................85
METHOD OF DISTRIBUTION.......................................................86
LEGAL MATTERS................................................................86
FINANCIAL INFORMATION........................................................86
AVAILABLE INFORMATION........................................................87
RATING.......................................................................87
INDEX OF DEFINED TERMS.......................................................87
<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
117 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 20 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 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.
<PAGE>
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 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 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 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;
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
creditor (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
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 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
the 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
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 interests in the
assets of the related Trust Fund, and the Notes of each Series will be secured
by the pledge of the assets of the related Trust Fund. The Trust Fund for each
Series will be held by the Trustee for the benefit of the related
Securityholders. Each Trust Fund will consist of certain assets (the "Trust
Fund Assets") consisting of a pool (each, a "Pool") comprised of Loans or
Private Asset Backed Securities, in each case as specified in the related
Prospectus Supplement, together with payments in respect of such Trust Fund
Assets and certain other accounts, obligations or agreements, in each case as
specified in the related Prospectus Supplement./1/ The Pool will be created on
the first day of the month of the issuance of the related Series of Securities
or such other date specified in the Prospectus Supplement (the "Cut-off
Date"). The Securities will be entitled to payment from the assets of the
related Trust Fund or Funds or other assets pledged for the benefit of the
Securityholders as specified in the related Prospectus Supplement and will not
be entitled to payments in respect of the assets of any other trust fund
established by the Depositor.
________________
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 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. See "Loan Program--Underwriting Standards".
The Depositor will cause the Trust Fund Assets to be assigned to the
Trustee named in the related Prospectus Supplement for the benefit of the
holders of the Securities of the related Series. The Master Servicer named in
the related Prospectus Supplement will service the Trust Fund Assets, either
directly or through other servicing institutions ("Sub-Servicers"), pursuant
to a Pooling and Servicing Agreement among the Depositor, the Master Servicer
and the Trustee with respect to a Series of Certificates, or a servicing
agreement (each, a "Servicing Agreement") between the Trustee and the Servicer
with respect to a Series of Notes, and will receive a fee for such services.
See "Loan Program" and "The Pooling and Servicing Agreement". With respect to
Loans serviced by the Master Servicer through a Sub-Servicer, the Master
Servicer will remain liable for its servicing obligations under the related
Agreement as if the Master Servicer alone were servicing such Loans.
As used herein, "Agreement" means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and with
respect to a Series of Notes, the Indenture and the Servicing Agreement, as
the context requires.
If so specified in the related Prospectus Supplement, a Trust Fund
relating to a Series of Securities may be a business trust formed under the
laws of the state specified in the related Prospectus Supplement pursuant to a
trust agreement (each, a "Trust Agreement") between the Depositor and the
trustee of such Trust Fund.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or
liabilities. No Trust Fund is expected to engage in any activities other than
acquiring, managing and holding of the related Trust Fund Assets and other
assets contemplated herein and in the related Prospectus Supplement and the
proceeds thereof, issuing Securities and making payments and distributions
thereon and certain related activities. No Trust Fund is expected to have any
source of capital other than its assets and any related credit enhancement.
Unless otherwise specified in the related Prospectus Supplement, the
only obligations of the Depositor with respect to a Series of Securities will
be to obtain certain representations and warranties from the Sellers and to
assign to the Trustee for such Series of Securities the Depositor's rights
with respect to such representations and warranties. See "The
Agreements--Assignment of Trust Fund Assets". The obligations of the Master
Servicer with respect to the Loans will consist principally of its contractual
servicing obligations under the related Agreement (including its obligation to
enforce the obligations of the Sub-Servicers or Sellers, or both, as more
fully described herein under "Loan Program--Representations by Sellers;
Repurchases or Substitutions" and "The Agreements--Assignment of the 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.
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 ("balloon
payment"). Principal may include interest that has been
deferred and added to the principal balance of the Loan.
(c) Monthly payments of principal and interest may be fixed
for the life of the loan, may increase over a specified
period of time or may change from period to period. Loans
may include limits on periodic increases or decreases in the
amount of monthly payments and may include maximum or
minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment
fee, which may be fixed for the life of the loan or may
decline over time, and may be prohibited for the life of the
loan or for certain periods ("lockout periods"). Certain
loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a
prepayment fee in connection with any such subsequent
prepayment. Other loans may permit prepayments without
payment of a fee unless the prepayment occurs during
specified time periods. The loans may include "due on sale"
clauses which permit the mortgagee to demand payment of the
entire loan in connection with the sale or certain transfers
of the related Property. Other loans may be assumable by
persons meeting the then applicable underwriting standards
of the Seller.
As more fully described in the related Prospectus Supplement,
interest on each Revolving Credit Line Loan, excluding introduction rates
offered from time to time during promotional periods, is computed and payable
monthly on the average daily outstanding principal balance of such Loan.
Principal amounts on a Revolving Credit Line Loan may be drawn down (up to a
maximum amount as set forth in the related Prospectus Supplement) or repaid
under each Revolving Credit Line Loan from time to time, but may be subject to
a minimum periodic payment. Except to the extent provided in the related
Prospectus Supplement, the Trust Fund will not include any amounts borrowed
under a Revolving Credit Line Loan after the Cut-off Date. The full amount of
a Closed-End Loan is advanced at the inception of the loan and generally is
repayable in equal (or substantially equal) installments of an amount to fully
amortize such loan at its stated maturity. Except to the extent provided in
the related Prospectus Supplement, the original terms to stated maturity of
Closed-End Loan will not exceed 360 months. Under certain circumstances, under
either a Revolving Credit Line Loan or a Closed-End Loan, a borrower may
choose an interest only payment option and is obligated to pay only the amount
of interest which accrues on the loan during the billing cycle. An interest
only payment option may be available for a specified period before the
borrower must begin paying at least the minimum monthly payment of a specified
percentage of the average outstanding balance of the loan.
The aggregate principal balance of Loans secured by Properties that
are owner-occupied will be disclosed in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the sole
basis for a representation that a given percentage of the Loans is secured by
Single Family Property that is owner-occupied will be either (i) the making of
a representation by the borrower at origination of the Loan either that the
underlying Property will be used by the borrower for a period of at least six
months every year or that the borrower intends to use the Property as a
primary residence or (ii) a finding that the address of the underlying
Property is the borrower's mailing address.
The Loans may include fixed-rate, closed-end mortgage loans having
terms to maturity of up to 30 years and secured by first-lien mortgages
originated on Properties containing one to four residential units and no more
than three income producing non-residential units ("Small Mixed-Use
Properties"). At least 50% of the units contained in a Small Mixed-Use
Property will consist of residential units. Income from such non-residential
units will not exceed 40% of the adjusted gross income of the related
borrower. The maximum Loan-to-Value Ratio on Small Mixed-Use Properties will
not exceed 65%. Small Mixed-Use Properties may be owner occupied or investor
properties and the loan purpose may be a refinancing or a purchase.
Home Improvement Contracts. The Trust Fund Assets for a Series may
consist, in whole or part, of Home Improvement 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 loan, regardless of any lesser amount
actually outstanding at the date of origination of the Loan, to (ii) the
Collateral Value of the related Property. Except as otherwise specified in the
related Prospectus Supplement, the "Collateral Value" of the Property, other
than with respect to certain Loans the proceeds of which were used to
refinance an existing mortgage loan (each, a "Refinance Loan"), is the lesser
of (a) the appraised value determined in an appraisal obtained by the
originator at origination of such Loan and (b) the sales price for such
Property. In the case of Refinance Loans, the "Collateral Value" of the
related Property is the appraised value thereof determined in an appraisal
obtained at the time of refinancing.
Private Asset Backed Securities
General. Private Asset Backed Securities may consist of (a)
pass-through certificates or participation certificates evidencing an
undivided interest in a pool of home equity or home improvement loans, or (b)
collateralized mortgage obligations secured by home equity or home improvement
loans. Private Asset Backed Securities may include stripped asset backed
securities representing an undivided interest in all or a part of either the
principal distributions (but not the interest distributions) or the interest
distributions (but not the principal distributions) or in some specified
portion of the principal and interest distributions (but not all of such
distributions) on certain home equity or home improvement loans. Private Asset
Backed Securities will have been issued pursuant to a pooling and servicing
agreement, an indenture or similar agreement (a "PABS Agreement"). The
seller/servicer of the underlying Loans will have entered into the PABS
Agreement with the trustee under such PABS Agreement (the "PABS Trustee"). The
PABS Trustee or its agent, or a custodian, will possess the loans underlying
such Private Asset Backed Security. Loans underlying a Private Asset Backed
Security will be serviced by a servicer (the "PABS Servicer") directly or by
one or more subservicers who may be subject to the supervision of the PABS
Servicer. Except as otherwise specified in the related Prospectus Supplement,
the PABS Servicer will be a FNMA or FHLMC approved servicer and, if FHA Loans
underlie the Private Asset Backed Securities, approved by HUD as an FHA
mortgagee.
The issuer of the Private Asset Backed Securities (the "PABS Issuer")
will be a financial institution or other entity engaged generally in the
business of mortgage lending, a public agency or instrumentality of a state,
local or federal government, or a limited purpose corporation organized for
the purpose of, among other things, establishing trusts and acquiring and
selling housing loans to such trusts and selling beneficial interests in such
trusts. The PABS Issuer shall not be an affiliate of the Depositor. The
obligations of the PABS Issuer will generally be limited to certain
representations and warranties with respect to the assets conveyed by it to
the related trust. Except as otherwise specified in the related Prospectus
Supplement, the PABS Issuer will not have guaranteed any of the assets
conveyed to the related trust or any of the Private Asset Backed Securities
issued under the PABS Agreement. Additionally, although the loans underlying
the Private Asset Backed Securities may be guaranteed by an agency or
instrumentality of the United States, the Private Asset Backed Securities
themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Asset Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Asset Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Asset Backed
Securities by the PABS Trustee or the PABS Servicer. The PABS Issuer or the
PABS Servicer may have the right to repurchase assets underlying the Private
Asset Backed Securities after a certain date or under other circumstances as
specified in the related Prospectus Supplement.
Underlying Loans. The home equity or home improvement loans
underlying the Private Asset Backed Securities may consist of fixed rate,
level payment, fully amortizing loans or graduated payment loans, buydown
loans, adjustable rate loans, or loans having balloon or other special payment
features. Such loans may be secured by single family property, multifamily
property, manufactured homes or by an assignment of the proprietary lease or
occupancy agreement relating to a specific dwelling within a cooperative and
the related shares issued by such cooperative. Except as otherwise specified
in the related Prospectus Supplement, the underlying loans will have the
following characterizations: (i) no loan will have had a Loan-to-Value Ratio
at origination in excess of 95%, (ii) each single family loan secured by a
mortgaged property that had a Loan-to-Value ratio in excess of 80% at
origination will be covered by a primary mortgage insurance policy, (iii) each
loan will have had an original term to stated maturity of not less than 5
years and not more than 40 years, (iv) no loan that was more than 89 days
delinquent as to the payment of principal or interest will have been eligible
for inclusion in the assets under the related PABS Agreement, (v) each loan
(other than a cooperative loan) will be required to be covered by a standard
hazard insurance policy (which may be a blanket policy), and (vi) each loan
(other than a cooperative loan or a contract secured by a manufactured home)
will be covered by a title insurance policy.
Credit Support Relating to Private Asset Backed Securities. Credit
support in the form of reserve funds, subordination of other private
certificates issued under the PABS Agreement, letters of credit, surety bonds,
insurance policies or other types of credit support may be provided with
respect to the loans underlying the Private Asset Backed Securities
themselves.
Rating of Private Asset Backed Securities. The PABS upon their
issuance will have been assigned a rating in one of the four highest rating
categories by at least one nationally recognized statistical rating agency.
Additional Information. The Prospectus Supplement for a Series for
which the Trust Fund includes Private Asset Backed Securities will specify (i)
the aggregate approximate principal amount and type of the Private Asset
Backed Securities to be included in the Trust Fund, (ii) certain
characteristics of the loans which comprise the underlying assets for the
Private Asset Backed Securities including (A) the payment features of such
loans, (B) the approximate aggregate principal balance, if known, of
underlying loans insured or guaranteed by a governmental entity, (C) the
servicing fee or range of servicing fees with respect to the loans, and (D)
the minimum and maximum stated maturities of the underlying loans at
origination, (iii) the maximum original term-to-stated maturity of the Private
Asset Backed Securities, (iv) the weighted average term-to-stated maturity of
the Private Asset Backed Securities, (v) the pass-through or certificate rate
of the Private Asset Backed Securities, (vi) the weighted average pass-through
or certificate rate of the Private Asset Backed Securities, (vii) the PABS
Issuer, the PABS Servicer (if other than the PABS Issuer) and the PABS Trustee
for such Private Asset Backed Securities, (viii) certain characteristics of
credit support, if any, such as reserve funds, insurance policies, surety
bonds, letters of credit or guaranties relating to the loans underlying the
Private Asset Backed Securities or to such Private Asset Backed Securities
themselves, (ix) the term on which the underlying loans for such Private Asset
Backed Securities may, or are required to, be purchased prior to their stated
maturity or the stated maturity of the Private Asset Backed Securities, (x)
the terms on which loans may be substituted for those originally underlying
the Private Asset Backed Securities and (xi) to the extent provided in a
periodic report to the Trustee in its capacity as holder of the PABS, certain
information regarding the status of the credit support, if any, relating to
the PABS.
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 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.
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 Master Servicer will be required under the applicable
Agreement to enforce this obligation for the benefit of the Trustee and the
holders of the Securities, following the practices it would employ in its good
faith business judgment were it the owner of such Loan. This repurchase or
substitution obligation will constitute the sole remedy available to holders
of Securities or the Trustee for a breach of representation by a Seller.
Neither the Depositor nor the Master Servicer (unless the Master
Servicer is the Seller) will be obligated to purchase or substitute a Loan if
a Seller defaults on its obligation to do so, and no assurance can be given
that Sellers will carry out their respective repurchase or substitution
obligations with respect to Loans. However, to the extent that a breach of a
representation and warranty of a Seller may also constitute a breach of a
representation made by the Master Servicer, the Master Servicer may have a
repurchase or substitution obligation as described below under "The
Agreements--Assignment of Trust Fund Assets".
DESCRIPTION OF THE SECURITIES
Each Series of Certificates will be issued pursuant to a pooling and
servicing agreement (a "Pooling and Servicing Agreement") or a Trust Agreement
among the Depositor, the Servicer, if the Series relates to Loans, and the
Trustee. A form of Pooling and Servicing Agreement and Trust Agreement has
been filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. Each Series of Notes will be issued pursuant to an
indenture (the "Indenture") between the related Trust Fund and the entity
named in the related Prospectus Supplement as trustee (the "Trustee") with
respect to such Series. A form of Indenture has been filed as an exhibit to
the Registration Statement of which this Prospectus forms a part. A Series may
consist of both Notes and Certificates. Each Agreement, dated as of the
related Cut-off Date, will be among the Depositor, the Master Servicer and the
Trustee for the benefit of the holders of the Securities of such Series. The
provisions of each Agreement will vary depending upon the nature of the
Securities to be issued thereunder and the nature of the related Trust Fund.
The following summaries describe certain provisions which may appear in each
Agreement. The Prospectus Supplement for a Series of Securities will describe
any provision of the Agreement relating to such Series that mainly differs
from the description thereof contained in this Prospectus. The summaries do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the Agreement for each
Series of Securities and the applicable Prospectus Supplement. The Depositor
will provide a copy of the Agreement (without exhibits) relating to any Series
without charge upon written request of a holder of record of a Security of
such Series addressed to Financial Asset Securities Corp., 600 Steamboat Road,
Greenwich, Connecticut 06830, Attention: Asset Backed Finance Group.
General
Unless otherwise specified in the related Prospectus Supplement, the
Certificates of each Series will be issued in book-entry or fully registered
form, in the authorized denominations specified in the related Prospectus
Supplement, will evidence specified beneficial ownership interests in the
related Trust Fund created pursuant to each Agreement and will not be entitled
to payments in respect of the assets included in any other Trust Fund
established by the Depositor. Unless otherwise specified in the related
Prospectus Supplement, the Notes of each Series will be issued in book-entry
or fully registered form, in the authorized denominations specified in the
related Prospectus Supplement, will be secured by the pledge of the assets of
the related Trust Fund and will not be entitled to payments in respect of the
assets included in any other Trust Fund established by the Depositor. The
Securities will not represent obligations of the Depositor or any affiliate of
the Depositor. Certain of the Loans may be guaranteed or insured as set forth
in the related Prospectus Supplement. Each Trust Fund will consist of, to the
extent provided in the Agreement, (i) the Trust Fund Assets, as from time to
time are subject to the related Agreement (exclusive of any amounts specified
in the related Prospectus Supplement ("Retained Interest")), including all
payments of interest and principal received with respect to the Loans after
the Cut-off Date (to the extent not applied in computing the Cut-off Date
Principal Balance); (ii) such assets as from time to time are required to be
deposited in the related Security Account, as described below under "The
Agreements--Payments on Loans; Deposits to Security Account"; (iii) property
which secured a Loan and which is acquired on behalf of the Securityholders by
foreclosure or deed in lieu of foreclosure and (iv) any insurance policies or
other forms of credit enhancement required to be maintained pursuant to the
related Agreement. If so specified in the related Prospectus Supplement, a
Trust Fund may also include one or more of the following: reinvestment income
on payments received on the Trust Fund Assets, a Reserve Account, a mortgage
pool insurance policy, a Special Hazard Insurance Policy, a Bankruptcy Bond,
one or more letters of credit, a surety bond, guaranties or similar
instruments or other agreements.
Each Series of Securities will be issued in one or more classes. Each
class of Securities of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Trust Fund Assets in the related Trust Fund. A Series of
Securities may include one or more classes that are senior in right to payment
to one or more other classes of Securities of such Series. One or more classes
of Securities of a Series may be entitled to receive distributions of
principal, interest or any combination thereof. Distributions on one or more
classes of a Series of Securities may be made prior to one or more other
classes, after the occurrence of specified events, in accordance with a
schedule or formula, on the basis of collections from designated portions of
the Trust Fund Assets in the related Trust Fund or on a different basis, in
each case as specified in the related Prospectus Supplement. The timing and
amounts of such distributions may vary among classes or over time as specified
in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal
only or interest only) on the related Securities will be made by the Trustee
on each Distribution Date (i.e., monthly or at such other intervals and on the
dates as are specified in the Prospectus Supplement) in proportion to the
percentages specified in the related Prospectus Supplement. Distributions will
be made to the persons in whose names the Securities are registered at the
close of business on the dates specified in the related Prospectus Supplement
(each, a "Record Date"). Distributions will be made in the manner specified in
the Prospectus Supplement to the persons entitled thereto at the address
appearing in the register maintained for holders of Securities (the "Security
Register"); provided, however, that the final distribution in retirement of
the Securities will be made only upon presentation and surrender of the
Securities at the office or agency of the Trustee or other person specified in
the notice to Securityholders of such final distribution.
The Securities will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Securities of any Series but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding of a class of Securities
entitled only to a specified percentage of payments of either interest or
principal or a notional amount of other interest or principal on the related
Loans or a class of Securities entitled to receive payments of interest and
principal on the Loans only after payments to other classes or after the
occurrence of certain specified events by or on behalf of any employee benefit
plan or other retirement arrangement (including individual retirement accounts
and annuities, Keogh plans and collective investment funds in which such
plans, accounts or arrangements are invested) subject to provisions of ERISA
or the Code may result in prohibited transactions within the meaning of ERISA
and the Code. See "ERISA Considerations". Unless otherwise specified in the
related Prospectus Supplement, the transfer of Securities of such a class will
not be registered unless the transferee (i) represents that it is not, and is
not purchasing on behalf of, any such plan, account or arrangement or (ii)
provides an opinion of counsel satisfactory to the Trustee and the Depositor
that the purchase of Securities of such a class by or on behalf of such plan,
account or arrangement is permissible under applicable law and will not
subject the Trustee, the Master Servicer or the Depositor to any obligation or
liability in addition to those undertaken in the Agreements.
As to each Series, an election may be made to treat the related Trust
Fund or designated portions thereof as a "real estate mortgage investment
conduit" or "REMIC" as defined in the Code. The related Prospectus Supplement
will specify whether a REMIC election is to be made. Alternatively, the
Agreement for a Series may provide that a REMIC election may be made at the
discretion of the Depositor or the Master Servicer and may only be made if
certain conditions are satisfied. As to any such Series, the terms and
provisions applicable to the making of a REMIC election, as well as any
material federal income tax consequences to Securityholders not otherwise
described herein, will be set forth in the related Prospectus Supplement. If
such an election is made with respect to a Series, one of the classes will be
designated as evidencing the sole class of "residual interests" in the related
REMIC, as defined in the Code. All other classes of Securities in such a
Series will constitute "regular interests" in the related REMIC, as defined in
the Code. As to each Series with respect to which a REMIC election is to be
made, the Master Servicer or a holder of the related residual certificate will
be obligated to take all actions required in order to comply with applicable
laws and regulations and will be obligated to pay any prohibited transaction
taxes. The Master Servicer, to the extent set forth in the related Prospectus
Supplement, will be entitled to reimbursement for any such payment from the
assets of the Trust Fund or from any holder of the related residual
certificate.
Distributions on Securities
General. In general, the method of determining the amount of
distributions on a particular Series of Securities will depend on the type of
credit support, if any, that is used with respect to such Series. See "Credit
Enhancement" 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.
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 (as defined below), Support Servicers or the
Trustee that were deposited into the Security Account, and
amounts representing reimbursement for certain other losses
and expenses incurred by the Master Servicer or the
Depositor and described below;
(f) that portion of each collection of interest
on a particular Loan in such Trust Fund which represents
servicing compensation payable to the Master Servicer or
Retained Interest which is to be retained from such
collection or is permitted to be retained from related
Insurance Proceeds, Liquidation Proceeds or proceeds of
Loans purchased pursuant to the Agreement;
(ii) the amount of any advance made by the Master Servicer,
Sub Servicer, Support Servicer or Trustee as described under
"--Advances" below and deposited by it in the Security
Account;
(iii) if applicable, amounts withdrawn from a Reserve
Account;
(iv) if applicable, amounts provided under a letter of
credit, insurance policy, surety bond or other third-party
guaranties; and
(v) if applicable, the amount of prepayment interest
shortfall.
Distributions of Interest. Unless otherwise specified in the related
Prospectus Supplement, interest will accrue on the aggregate Security
Principal Balance (or, in the case of Securities (i) entitled only to
distributions allocable to interest, the aggregate notional principal balance
or (ii) which, under certain circumstances, allow for the accrual of interest
otherwise scheduled for payment to remain unpaid until the occurrence of
certain events specified in the related Prospectus Supplement) of each class
of Securities entitled to interest from the date, at the Pass-Through Rate
(which may be a fixed rate or rate adjustable as specified in such Prospectus
Supplement) and for the periods specified in such Prospectus Supplement. To
the extent funds are available therefor, interest accrued during each such
specified period on each class of Securities entitled to interest (other than
a class of Securities that provides for interest that accrues, but is not
currently payable, referred to hereafter as "Accrual Securities") will be
distributable on the Distribution Dates specified in the related Prospectus
Supplement until the aggregate Security Principal Balance of the Securities of
such class has been distributed in full or, in the case of Securities entitled
only to distributions allocable to interest, until the aggregate notional
principal balance of such Securities is reduced to zero or for the period of
time designated in the related Prospectus Supplement. The original Security
Principal Balance of each Security will equal the aggregate distributions
allocable to principal to which such Security is entitled. Unless otherwise
specified in the related Prospectus Supplement, distributions allocable to
interest on each Security that is not entitled to distributions allocable to
principal will be calculated based on the notional principal balance of such
Security. The notional principal balance of a Security will not evidence an
interest in or entitlement to distributions allocable to principal but will be
used solely for convenience in expressing the calculation of interest and for
certain other purposes.
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending two
or more days prior to a Distribution Date, the effective yield to
Securityholders will be reduced from the yield that would otherwise be
obtainable if interest payable on the Security were to accrue through the day
immediately preceding each Distribution Date, and the effective yield (at par)
to Securityholders will be less than the indicated coupon rate.
With respect to any class of Accrual Securities, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid
on a given Distribution Date will be added to the aggregate Security Principal
Balance of such class of Securities on that Distribution Date. Distributions
of interest on any class of Accrual Securities will commence only after the
occurrence of the events specified in the related Prospectus Supplement. Prior
to such time, the beneficial ownership interest of such class of Accrual
Securities in the Trust Fund, as reflected in the aggregate Security Principal
Balance of such class of Accrual Securities, will increase on each
Distribution Date by the amount of interest that accrued on such class of
Accrual Securities during the preceding interest accrual period but that was
not required to be distributed to such class on such Distribution Date. Any
such class of Accrual Securities will thereafter accrue interest on its
outstanding Security Principal Balance as so adjusted.
Distributions of Principal. The related Prospectus Supplement will
specify the method by which the amount of principal to be distributed on the
Securities on each Distribution Date will be calculated and the manner in
which such amount will be allocated among the classes of Securities entitled
to distributions of principal. The aggregate Security Principal Balance of any
class of Securities entitled to distributions of principal generally will be
the aggregate original Security Principal Balance of such class of Securities
specified in such Prospectus Supplement, reduced by all distributions reported
to the holders of such Securities as allocable to principal and, (i) in the
case of Accrual Securities, increased by all interest accrued but not then
distributable on such Accrual Securities and (ii) in the case of adjustable
rate Securities, subject to the effect of negative amortization, if
applicable.
If so provided in the related Prospectus Supplement, one or more
classes of Securities will be entitled to receive all or a disproportionate
percentage of the payments of principal which are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the month of such payments
("Principal Prepayments") in the percentages and under the circumstances or
for the periods specified in such Prospectus Supplement. Any such allocation
of Principal Prepayments to such class or classes of Securityholders will have
the effect of accelerating the amortization of such Securities while
increasing the interests evidenced by other Securities in the Trust Fund.
Increasing the interests of the other Securities relative to that of certain
Securities allocated by the principal prepayments is intended to preserve the
availability of the subordination provided by such other Securities. See
"Credit Enhancement--Subordination".
Unscheduled Distributions. The Securities will be subject to receipt
of distributions before the next scheduled Distribution Date under the
circumstances and in the manner described below and in such Prospectus
Supplement. If applicable, the Trustee will be required to make such
unscheduled distributions on the day and in the amount specified in the
related Prospectus Supplement if, due to substantial payments of principal
(including Principal Prepayments) on the Trust Fund Assets, the Trustee or the
Master Servicer determines that the funds available or anticipated to be
available from the Security Account and, if applicable, any Reserve Account,
may be insufficient to make required distributions on the Securities on such
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, the amount of any such unscheduled distribution that is allocable
to principal will not exceed the amount that would otherwise have been
required to be distributed as principal on the Securities on the next
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, the unscheduled distributions will include interest at the
applicable Pass-Through Rate (if any) on the amount of the unscheduled
distribution allocable to principal for the period and to the date specified
in such Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
Securities would have been made on the next Distribution Date, and with
respect to Securities of the same class, unscheduled distributions of
principal will be made on the same basis as such distributions would have been
made on the next Distribution Date on a pro rata basis. Notice of any
unscheduled distribution will be given by the Trustee prior to the date of
such distribution.
Advances
To the extent provided in the related Prospectus Supplement, the
Master Servicer will be required to advance on or before each Distribution
Date (from its own funds, funds advanced by Sub-Servicers or Support Servicers
or funds held in the Security Account for future distributions to the holders
of such Securities), an amount equal to the aggregate of payments of interest
and/or principal that were delinquent on the related Determination Date and
were not advanced by any Sub-Servicer, subject to the Master Servicer's
determination that such advances will be recoverable out of late payments by
borrowers, Liquidation Proceeds, Insurance Proceeds or otherwise. In addition,
to the extent provided in the related Prospectus Supplement, a cash account
may be established to provide for Advances to be made in the event of certain
Trust Fund Assets payment defaults or collection shortfalls.
In making Advances, the Master Servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to holders of the
Securities, rather than to guarantee or insure against losses. If Advances are
made by the Master Servicer from cash being held for future distribution to
Securityholders, the Master Servicer will replace such funds on or before any
future Distribution Date to the extent that funds in the applicable Security
Account on such Distribution Date would be less than the amount required to be
available for distributions to Securityholders on such date. Any Master
Servicer funds advanced will be reimbursable to the Master Servicer out of
recoveries on the specific Loans with respect to which such Advances were made
(e.g., late payments made by the related borrower, any related Insurance
Proceeds, Liquidation Proceeds or proceeds of any Loan purchased by a
Sub-Servicer or a Seller under the circumstances described hereinabove).
Advances by the Master Servicer (and any advances by a Sub-Servicer or a
Support Servicer) also will be reimbursable to the Master Servicer (or
Sub-Servicer or a Support Servicer) from cash otherwise distributable to
Securityholders (including the holders of Senior Securities) to the extent
that the Master Servicer determines that any such Advances previously made are
not ultimately recoverable as described above. To the extent provided in the
related Prospectus Supplement, the Master Servicer also will be obligated to
make Advances, to the extent recoverable out of Insurance Proceeds,
Liquidation Proceeds or otherwise, in respect of certain taxes and insurance
premiums not paid by borrowers on a timely basis. Funds so advanced are
reimbursable to the Master Servicer to the extent permitted by the Agreement.
The obligations of the Master Servicer to make advances may be supported by a
cash advance reserve fund, a surety bond or other arrangement, in each case as
described in such Prospectus Supplement.
The Master Servicer or Sub-Servicer may enter into an agreement (a
"Support Agreement") with a support servicer (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 "Description of the
Securities--Distributions on Securities" herein.
Compensating Interest
If so specified in the related Prospectus Supplement, the Master
Servicer will be required to remit to the Trustee, with respect to each Loan
in the related Trust Fund as to which a principal prepayment in full or a
principal payment which is in excess of the scheduled monthly payment and is
not intended to cure a delinquency was received during any Due Period, an
amount, from and to the extent of amounts otherwise payable to the Master
Servicer as servicing compensation, equal to the excess, if any, of (a) 30
days' interest on the principal balance of the related Loan at the Loan Rate
net of the per annum rate at which the Master Servicer's servicing fee
accrues, over (b) the amount of interest actually received on such Loan during
such Due Period, net of the Master Servicer's servicing fee.
Reports to Securityholders
Prior to or concurrently with each distribution on a Distribution
Date, the Master Servicer or the Trustee will furnish to each Securityholder
of record of the related Series a statement setting forth, to the extent
applicable to such Series of Securities, among other things:
(i) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any Principal
Prepayments and any applicable prepayment penalties included
therein;
(ii) the amount of such distribution allocable to
interest;
(iii) the amount of any Advance;
(iv) the aggregate amount (a) otherwise allocable to the
Subordinated Securityholders on such Distribution Date, and
(b) withdrawn from the Reserve Fund, if any, that is
included in the amounts distributed to the Senior
Securityholders;
(v) the outstanding principal balance or notional principal
balance of such class after giving effect to the
distribution of principal on such Distribution Date;
(vi) the percentage of principal payments on the Loans
(excluding prepayments), if any, which such class will be
entitled to receive on the following Distribution Date;
(vii) the percentage of Principal Prepayments on the Loans,
if any, which such class will be entitled to receive on the
following Distribution Date;
(viii) the related amount of the servicing compensation
retained or withdrawn from the Security Account by the
Master Servicer, and the amount of additional servicing
compensation received by the Master Servicer attributable to
penalties, fees, excess Liquidation Proceeds and other
similar charges and items;
(ix) the number and aggregate principal balances of Loans
(A) delinquent (exclusive of Loans in foreclosure) (1) 31 to
60 days, (2) 61 to 90 days and (3) 91 or more days and (B)
in foreclosure and delinquent (1) 31 to 60 days, (2) 61 to
90 days and (3) 91 or more days, as of the close of business
on the last day of the calendar month preceding such
Distribution Date;
(x) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure;
(xi) if a class is entitled only to a specified portion of
payments of interest on the Loans in the related Pool, the
Pass-Through Rate, if adjusted from the date of the last
statement, of the Loans expected to be applicable to the
next distribution to such class;
(xii) if applicable, the amount remaining in any Reserve
Account at the close of business on the Distribution Date;
(xiii) the Pass-Through Rate as of the day prior to the
immediately preceding Distribution Date;and
(xiv) any amounts remaining under letters of credit, pool
policies or other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a
dollar amount per single Security of the relevant class having the Percentage
Interest specified in the related Prospectus Supplement. The report to
Securityholders for any Series of Securities may include additional or other
information of a similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Securityholder of record at any time during such calendar year a report (a) as
to the aggregate of amounts reported pursuant to (i) and (ii) above for such
calendar year or, in the event such person was a Securityholder of record
during a portion of such calendar year, for the applicable portion of such
year and (b) such other customary information as may be deemed necessary or
desirable for Securityholders to prepare their tax returns.
Book-Entry Registration of Securities
As described in the Prospectus Supplement, if not issued in fully
registered form, each class of Securities will be registered as book-entry
certificates (the "Book-Entry Securities"). Persons acquiring beneficial
ownership interests in the Securities ("Security Owners") will hold their
Securities through the Depository Trust Company ("DTC") in the United States,
or Cedel Bank ("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 Chase Manhattan Bank 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. Unless and until Definitive
Securities are issued, Security Owners who are not Participants may transfer
ownership of Securities only through Participants and indirect participants by
instructing such Participants and indirect participants to transfer
Securities, by book-entry transfer, through DTC for the account of the
purchasers of such Securities, which account is maintained with their
respective Participants. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of Securities will be executed through DTC
and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the Participants and indirect participants will make
debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Security Owners.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in
such securities settled during such processing will be reported to the
relevant Euroclear or CEDEL Participants on such business day. Cash received
in CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant (as defined herein) or Euroclear Participant (as defined herein)
to a DTC Participant will be received with value on the DTC settlement date
but will be available in the relevant CEDEL or Euroclear cash account only as
of the business day following settlement in DTC.
Transfers between Participants will occur in accordance with DTC
rules. Transfers between CEDEL Participants and Euroclear Participants will
occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes
in accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or
indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities
and cash. Transactions may be settled in any of 32 currencies, including
United States dollars. Euroclear includes various other services, including
securities lending and borrowing and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan, under contract with Euroclear Clearance Systems
S.C., a Belgian cooperative corporation (the "Cooperative"). All operations
are conducted by Morgan, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
Morgan is the Belgian branch of a New York banking corporation which
is a member bank of the Federal Reserve System. As such, it is regulated and
examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan are
governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions
govern transfers of securities and cash within Euroclear, withdrawals of
securities and cash from Euroclear, and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and Conditions
only on behalf of Euroclear Participants, and has no record of or relationship
with persons holding through Euroclear Participants.
Under a book-entry format, beneficial owners of the Book-Entry
Securities may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect
to Securities held through CEDEL or Euroclear will be credited to the cash
accounts of CEDEL Participants or Euroclear Participants in accordance with
the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. Such distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "Certain
Material Federal Income Tax Considerations--Tax Treatment of Foreign
Investors" and "--Tax Consequences to Holders of 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 Book-Entry
Securities. In addition, issuance of the Book-Entry Securities in book-entry
form may reduce the liquidity of such Securities in the secondary market since
certain potential investors may be unwilling to purchase Securities for which
they cannot obtain physical certificates.
Monthly and annual reports on the Trust will be provided to Cede, as
nominee of DTC, and may be made available by Cede to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Securities of such beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Securities are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Securities under the applicable Agreement only at
the direction of one or more Financial Intermediaries to whose DTC accounts
the Book-Entry Securities are credited, to the extent that such actions are
taken on behalf of Financial Intermediaries whose holdings include such
Book-Entry Securities. CEDEL or the Euroclear Operator, as the case may be,
will take any other action permitted to be taken by a Securityholder under the
Agreement on behalf of a CEDEL Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the ability
of the Relevant Depositary to effect such actions on its behalf through DTC.
DTC may take actions, at the direction of the related Participants, with
respect to some Securities which conflict with actions taken with respect to
other Securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee will recognize the holders of such Definitive Securities as
Securityholders under the applicable Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued at
any time.
None of the Servicer, the Depositor or the Trustee will have any
responsibility for any aspect of the records relating, to or payments made on
account of beneficial ownership interests of the Book-Entry Securities held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
CREDIT ENHANCEMENT
General
Credit enhancement may be provided with respect to one or more
classes of a Series of Securities or with respect to the Trust Fund Assets in
the related Trust Fund. Credit enhancement may be in the form of a limited
financial guaranty policy issued by an entity named in the related Prospectus
Supplement, the subordination of one or more classes of the Securities of such
Series, the establishment of one or more Reserve Accounts, the use of a
cross-support feature, use of a mortgage pool insurance policy, FHA Insurance,
VA Guarantee, bankruptcy bond, special hazard insurance policy, surety bond,
letter of credit, guaranteed investment contract or another method of credit
enhancement described in the related Prospectus Supplement, or any combination
of the foregoing. Unless otherwise specified in the related Prospectus
Supplement, credit enhancement will not provide protection against all risks
of loss and will not guarantee repayment of the entire principal balance of
the Securities and interest thereon. If losses occur which exceed the amount
covered be credit enhancement or which are not covered by the credit
enhancement, Securityholders will bear their allocable share of deficiencies.
Subordination
Protection afforded to holders of one or more classes of Securities
of a Series by means of the subordination feature may be accomplished by the
preferential right of holders of one or more other classes of such Series (the
"Senior Securities") to distributions in respect of scheduled principal,
Principal Prepayments, interest or any combination thereof that otherwise
would have been payable to holders of Subordinated Securities under the
circumstances and to the extent specified in the related Prospectus
Supplement. Protection may also be afforded to the holders of Senior
Securities of a Series by: (i) reducing the ownership interest of the related
Subordinated Securities; (ii) a combination of the immediately preceding
sentence and clause (i) above; or (iii) as otherwise described in the related
Prospectus Supplement. Delays in receipt of scheduled payments on the Loans
and losses on defaulted Loans may be borne first by the various classes of
Subordinated Securities and thereafter by the various classes of Senior
Securities, in each case under the circumstances and subject to the
limitations specified in such related Prospectus Supplement. The aggregate
distributions in respect of delinquent payments on the Loans over the lives of
the Securities or at any time, the aggregate losses in respect of defaulted
Loans which must be borne by the Subordinated Securities by virtue of
subordination and the amount of the distributions otherwise distributable to
the Subordinated Securityholders that will be distributable to Senior
Securityholders on any Distribution Date may be limited as specified in the
related Prospectus Supplement. If aggregate distributions in respect of
delinquent payments on the Loans or aggregate losses in respect of such Loans
were to exceed an amount specified in the related Prospectus Supplement,
holders of Senior Securities would experience losses on the Securities.
In addition to or in lieu of the foregoing, if so specified in the
related Prospectus Supplement, all or any portion of distributions otherwise
payable to holders of Subordinated Securities on any Distribution Date may
instead be deposited into one or more Reserve Accounts established with the
Trustee or distributed to holders of Senior Securities. Such deposits may be
made on each Distribution Date, for specified periods or until the balance in
the Reserve Account has reached a specified amount and, following payments
from the Reserve Account to holders of Senior Securities or otherwise,
thereafter to the extent necessary to restore the balance in the Reserve
Account to required levels, in each case as specified in the related
Prospectus Supplement. Amounts on deposit in the Reserve Account may be
released to the holders of certain classes of Securities at the times and
under the circumstances specified in such Prospectus Supplement.
Various classes of Senior Securities and Subordinated Securities may
themselves be subordinate in their right to receive certain distributions to
other classes of Senior and Subordinated Securities, respectively, through a
cross support mechanism or otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the related Prospectus
Supplement. As between classes of Subordinated Securities, payments to holders
of Senior Securities on account of delinquencies or losses and payments to any
Reserve Account will be allocated as specified in the related Prospectus
Supplement.
Special Hazard Insurance Policies
A separate special hazard insurance policy (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.
The Master Servicer may deposit cash, an irrevocable letter of credit
or any other instrument acceptable to each Rating Agency rating the Securities
of the related Series in a special trust account to provide protection in lieu
of or in addition to that provided by a Special Hazard Insurance Policy. The
amount of any Special Hazard Insurance Policy or of the deposit to the special
trust account relating to such Securities in lieu thereof may be reduced so
long as any such reduction will not result in a downgrading of the rating of
such Securities by any such Rating Agency.
Bankruptcy Bonds
A bankruptcy bond ("Bankruptcy Bond") for proceedings under the
federal Bankruptcy Code may be issued by an insurer named in such Prospectus
Supplement. Each Bankruptcy Bond will cover certain losses resulting from a
reduction by a bankruptcy court of scheduled payments of principal and
interest on a Loan or a reduction by such court of the principal amount of a
Loan and will cover certain unpaid interest on the amount of such a principal
reduction from the date of the filing of a bankruptcy petition. The required
amount of coverage under each Bankruptcy Bond will be set forth in the related
Prospectus Supplement. The Master Servicer may deposit cash, an irrevocable
letter of credit or any other instrument acceptable to each Rating Agency
rating the Securities of the related Series in a special trust account to
provide protection in lieu of or in addition to that provided by a Bankruptcy
Bond. Coverage under a Bankruptcy Bond may be cancelled or reduced by the
Master Servicer if such cancellation or reduction would not adversely affect
the then current rating or ratings of the related Securities. See "Certain
Legal Aspects of the Loans--Anti-Deficiency Legislation and Other Limitations
on Lenders".
Reserve Accounts
Credit support with respect to a Series of Securities may be provided
by the establishment and maintenance with the Trustee for such Series of
Securities, in trust, of one or more Reserve Accounts for such Series. The
related Prospectus Supplement will specify whether or not any such Reserve
Accounts will be included in the Trust Fund for such Series.
The Reserve Account for a Series will be funded (i) by the deposit
therein of cash, United States Treasury securities, instruments evidencing
ownership of principal or interest payments thereon, letters of credit, demand
notes, certificates of deposit or a combination thereof in the aggregate
amount specified in the related Prospectus Supplement, (ii) by the deposit
therein from time to time of certain amounts, as specified in the related
Prospectus Supplement to which the Subordinate Securityholders, if any, would
otherwise be entitled or (iii) in such other manner as may be specified in the
related Prospectus Supplement.
Any amounts on deposit in the Reserve Account and the proceeds of any
other instrument upon maturity will be held in cash or will be invested in
Permitted Investments which may include obligations of the United States and
certain agencies thereof, certificates of deposit, certain commercial paper,
time deposits and bankers acceptances sold by eligible commercial banks and
certain repurchase agreements of United States government securities with
eligible commercial banks. If a letter of credit is deposited with the
Trustee, such letter of credit will be irrevocable. Any instrument deposited
therein will name the Trustee, in its capacity as trustee for the holders of
the Securities, as beneficiary and will be issued by an entity acceptable to
each Rating Agency that rates the Securities. Additional information with
respect to such instruments deposited in the Reserve Accounts will be set
forth in the related Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited
will be available for withdrawal from the Reserve Account for distribution to
the holders of Securities for the purposes, in the manner and at the times
specified in the related Prospectus Supplement.
Pool Insurance Policies
A separate pool insurance policy ("Pool Insurance Policy") may be
obtained for the Pool and issued by the insurer (the "Pool Insurer") named in
the related Prospectus Supplement. Each Pool Insurance Policy will, subject to
the limitations described below, cover loss by reason of default in payment on
Loans in the Pool in an amount equal to a percentage specified in such
Prospectus Supplement of the aggregate principal balance of such Loans on the
Cut-off Date which are not covered as to their entire outstanding principal
balances by Primary Mortgage Insurance Policies. As more fully described
below, the Master Servicer will present claims thereunder to the Pool Insurer
on behalf of itself, the Trustee and the holders of the Securities. The Pool
Insurance Policies, however, are not blanket policies against loss, since
claims thereunder may only be made respecting particular defaulted Loans and
only upon satisfaction of certain conditions precedent described below. Unless
otherwise specified in the related Prospectus Supplement, the Pool Insurance
Policies will not cover losses due to a failure to pay or denial of a claim
under a Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will provide that no claims may be validly presented
unless (i) any required Primary Mortgage Insurance Policy is in effect for the
defaulted Loan and a claim thereunder has been submitted and settled; (ii)
hazard insurance on the related Property has been kept in force and real
estate taxes and other protection and preservation expenses have been paid;
(iii) if there has been physical loss or damage to the Property, it has been
restored to its physical condition (reasonable wear and tear excepted) at the
time of issuance of the policy; and (iv) the insured has acquired good and
merchantable title to the Property free and clear of liens except certain
permitted encumbrances. Upon satisfaction of these conditions, the Pool
Insurer will have the option either (a) to purchase the property securing the
defaulted Loan at a price equal to the principal balance thereof plus accrued
and unpaid interest at the Loan Rate to the date of purchase and certain
expenses incurred by the Master Servicer on behalf of the Trustee and
Securityholders, or (b) to pay the amount by which the sum of the principal
balance of the defaulted Loan plus accrued and unpaid interest at the Loan
Rate to the date of payment of the claim and the aforementioned expenses
exceeds the proceeds received from an approved sale of the Property, in either
case net of certain amounts paid or assumed to have been paid under the
related Primary Mortgage Insurance Policy. If any Property securing a
defaulted Loan is damaged and proceeds, if any, from the related hazard
insurance policy or the applicable Special Hazard Insurance Policy are
insufficient to restore the damaged Property to a condition sufficient to
permit recovery under the Pool Insurance Policy, the Master Servicer will not
be required to expend its own funds to restore the damaged Property unless it
determines that (i) such restoration will increase the proceeds to
securityholders on liquidation of the Loan after reimbursement of the Master
Servicer for its expenses and (ii) such expenses will be recoverable by it
through proceeds of the sale of the Property or proceeds of the related Pool
Insurance Policy or any related Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will not insure (and many Primary Mortgage Insurance
Policies do not insure) against loss sustained by reason of a default arising
from, among other things, (i) fraud or negligence in the origination or
servicing of a Loan, including misrepresentation by the borrower, the
originator or persons involved in the origination thereof, or (ii) failure to
construct a Property in accordance with plans and specifications. A failure of
coverage attributable to one of the foregoing events might result in a breach
of the related Seller's representations described above, and, in such events
might give rise to an obligation on the part of such Seller to purchase the
defaulted Loan if the breach cannot be cured by such Seller. No Pool Insurance
Policy will cover (and many Primary Mortgage Insurance Policies do not cover)
a claim in respect of a defaulted Loan occurring when the servicer of such
Loan, at the time of default or thereafter, was not approved by the applicable
insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Pool Insurance Policy will be reduced
over the life of the related Securities by the aggregate dollar amount of
claims paid less the aggregate of the net amounts realized by the Pool Insurer
upon disposition of all foreclosed properties. The amount of claims paid may
include certain expenses incurred by the Master Servicer as well as accrued
interest on delinquent Loans to the date of payment of the claim. Accordingly,
if aggregate net claims paid under any Pool Insurance Policy reach the
original policy limit, coverage under that Pool Insurance Policy will be
exhausted and any further losses will be borne by the Securityholders.
FHA Insurance; VA Guarantees
Loans designated in the related Prospectus Supplement as insured by
the FHA will be insured by the FHA as authorized under the United States
Housing Act of 1934, as amended. In addition to the Title I Program of the FHA
(see "Certain Legal Aspects of the Loans -- The Title I Program" herein),
certain Loans will be insured under various FHA programs which generally limit
the principal amount and interest rates of the mortgage loans insured.
The insurance premiums for Loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development ("HUD") or
by the Master Servicer or any Sub-Servicer and are paid to the FHA. The
regulations governing FHA single-family mortgage insurance programs provide
that insurance benefits are payable either upon foreclosure (or other
acquisition of possession) and conveyance of the mortgaged premises to the
United States of America or upon assignment of the defaulted Loan to the
United States of America. With respect to a defaulted FHA-insured Loan, the
Master Servicer or any Sub-Servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the Master Servicer
or any Sub-Servicer or HUD, that default was caused by circumstances beyond
the mortgagor's control, the Master Servicer or any Sub-Servicer is expected
to make an effort to avoid foreclosure by entering, if feasible, into one of a
number of available forms of forbearance plans with the mortgagor. Such plans
may involve the reduction or suspension of regular mortgage payments for a
specified period, with such payments to be made upon or before the maturity
date of the mortgage, or the recasting of payments due under the mortgage up
to or, other than Loans originated under the Title I Program of the FHA,
beyond the maturity date. In addition, when a default caused by such
circumstances is accompanied by certain other criteria, HUD may provide relief
by making payments to the Master Servicer or any Sub-Servicer in partial or
full satisfaction of amounts due under the Loan (which payments are to be
repaid by the mortgagor to HUD) or by accepting assignment of the loan from
the Master Servicer or any Sub-Servicer. With certain exceptions, at least
three full monthly installments must be due and unpaid under the Loan, and HUD
must have rejected any request for relief from the mortgagor before the Master
Servicer or any Sub-Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. The Master Servicer or any Sub-Servicer of each
FHA-insured Single Family Loan will be obligated to purchase any such
debenture issued in satisfaction of such Loan upon default for an amount equal
to the principal amount of any such debenture.
Other than in relation to the Title I Program of the FHA, the amount
of insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted Loan adjusted to reimburse the Master
Servicer or Sub-Servicer for certain costs and expenses and to deduct certain
amounts received or retained by the Master Servicer or Sub-Servicer after
default. When entitlement to insurance benefits results from foreclosure (or
other acquisition of possession) and conveyance to HUD, the Master Servicer or
Sub-Servicer is compensated for no more than two-thirds of its foreclosure
costs, and is compensated for interest accrued and unpaid prior to such date
but in general only to the extent it was allowed pursuant to a forbearance
plan approved by HUD. When entitlement to insurance benefits results from
assignment of the Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Loan, bears
interest from a date 30 days after the borrower's first uncorrected failure to
perform any obligation to make any payment due under the mortgage and, upon
assignment, from the date of assignment to the date of payment of the claim,
in each case at the same interest rate as the applicable HUD debenture
interest rate as described above.
Loans designated in the related Prospectus Supplement as guaranteed
by the VA will be partially guaranteed by the VA under the Serviceman's
Readjustment Act of 1944, as amended (a "VA Guaranty Policy"). The
Serviceman's Readjustment Act of 1944, as amended, permits a veteran (or in
certain instances the spouse of a veteran) to obtain a mortgage loan guarantee
by the VA covering mortgage financing of the purchase of a one- to four-family
dwelling unit at interest rates permitted by the VA. The program has no
mortgage loan limits, requires no down payment from the purchaser and permits
the guarantee of mortgage loans of up to 30 years' duration. However, no Loan
guaranteed by the VA will have an original principal amount greater than five
times the partial VA guarantee for such Loan.
The maximum guarantee that may be issued by the VA under a VA
guaranteed mortgage loan depends upon the original principal amount of the
mortgage loan, as further described in 38 United States Code Section 1803(a),
as amended. As of November 1, 1998, 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
$50,750. The liability on the guarantee is reduced or increased pro rata with
any reduction or increase in the amount of indebtedness, but in no event will
the amount payable on the guarantee exceed the amount of the original
guarantee. The VA may, at its option and without regard to the guarantee, make
full payment to a mortgage holder of unsatisfied indebtedness on a mortgage
upon its assignment to the VA.
With respect to a defaulted VA guaranteed Loan, the Master Servicer
or Sub-Servicer is, absent exceptional circumstances, authorized to announce
its intention to foreclose only when the default has continued for three
months. Generally, a claim for the guarantee is submitted after liquidation of
the Property.
The amount payable under the guarantee will be the percentage of the
VA-insured Loan originally guaranteed applied to indebtedness outstanding as
of the applicable date of computation specified in the VA regulations.
Payments under the guarantee will be equal to the unpaid principal amount of
the Loan, interest accrued on the unpaid balance of the Loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that such amounts have not been recovered through
liquidation of the Property. The amount payable under the guarantee may in no
event exceed the amount of the original guarantee.
Cross-Support
The beneficial ownership of separate groups of assets included in a
Trust Fund may be evidenced by separate classes of the related Series of
Securities. In such case, credit support may be provided by a cross-support
feature which requires that distributions be made with respect to Securities
evidencing a beneficial ownership interest in, or secured by, other asset
groups within the same Trust Fund. The related Prospectus Supplement for a
Series which includes a cross-support feature will describe the manner and
conditions for applying such cross-support feature.
The coverage provided by one or more forms of credit support may
apply concurrently to two or more related Trust Funds. If applicable, the
related Prospectus Supplement will identify the Trust Funds to which such
credit support relates and the manner of determining the amount of the
coverage provided thereby and of the application of such coverage to the
identified Trust Funds.
Other Insurance, Surety Bonds, Guaranties, Letters of Credit and Similar
Instruments or Agreements
A Trust Fund may also include insurance, guaranties, surety bonds,
letters of credit or similar arrangements for the purpose of (i) maintaining
timely payments or providing additional protection against losses on the
assets included in such Trust Fund, (ii) paying administrative expenses or
(iii) establishing a minimum reinvestment rate on the payments made in respect
of such assets or principal payment rate on such assets. Such arrangements may
include agreements under which Securityholders are entitled to receive amounts
deposited in various accounts held by the Trustee upon the terms specified in
such Prospectus Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Securities
will be affected primarily by the amount and timing of principal payments
received on or in respect of the Trust Fund Assets included in the related
Trust Fund. With respect to a Trust Fund which includes Private Asset Backed
Securities, the possible effects of the amount and timing of principal
payments received with respect to the underlying mortgage loans will be
described in the related Prospectus Supplement. The original terms to maturity
of the Loans in a given Pool will vary depending upon the type of Loans
included therein. Each Prospectus Supplement will contain information with
respect to the type and maturities of the Loans in the related Pool. Unless
otherwise specified in the related Prospectus Supplement, Loans may be prepaid
without penalty in full or in part at any time. The prepayment experience on
the Loans in a Pool will affect the life of the related Series of Securities.
The rate of prepayment on the Loans cannot be predicted. Home equity
loans and home improvement contracts have been originated in significant
volume only during the past few years and the Depositor is not aware of any
publicly available studies or statistics on the rate of prepayment of such
loans. Generally, home equity loans and home improvement contracts are not
viewed by borrowers as permanent financing. Accordingly, the Loans may
experience a higher rate of prepayment than traditional first mortgage loans.
On the other hand, because home equity loans such as the Revolving Credit Line
Loans generally are not fully amortizing, the absence of voluntary borrower
prepayments could cause rates of principal payments lower than, or similar to,
those of traditional fully-amortizing first mortgages. The prepayment
experience of the related Trust Fund may be affected by a wide variety of
factors, including general economic conditions, prevailing interest rate
levels, the availability of alternative financing and homeowner mobility and
the frequency and amount of any future draws on any Revolving Credit Line
Loans. Other factors that might be expected to affect the prepayment rate of a
pool of home equity mortgage loans or home improvement contracts include the
amounts of, and interest rates on, the underlying senior mortgage loans, and
the use of first mortgage loans as long-term financing for home purchase and
subordinate mortgage loans as shorter-term financing for a variety of
purposes, including home improvement, education expenses and purchases of
consumer durables such as automobiles. Accordingly, the Loans may experience a
higher rate of prepayment than traditional fixed-rate mortgage loans. In
addition, any future limitations on the right of borrowers to deduct interest
payments on home equity loans for federal income tax purposes may further
increase the rate of prepayments of the Loans. The enforcement of a
"due-on-sale" provision (as described below) will have the same effect as a
prepayment of the related Loan. See "Certain Legal Aspects of the
Loans--Due-on-Sale Clauses" 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.
Unless otherwise specified in the related Prospectus Supplement, the
Loans will contain due-on-sale provisions permitting the mortgagee to
accelerate the maturity of the loan upon sale or certain transfers by the
borrower. Loans insured by the FHA, and Single Family Loans partially
guaranteed by the VA, are assumable with the consent of the FHA and the VA,
respectively. Thus, the rate of prepayments on such Loans may be lower than
that of conventional Loans bearing comparable interest rates. Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer generally
will enforce any due-on-sale or due-on-encumbrance clause, to the extent it
has knowledge of the conveyance or further encumbrance or the proposed
conveyance or proposed further encumbrance of the Property and reasonably
believes that it is entitled to do so under applicable law; provided, however,
that the Master Servicer will not take any enforcement action that would
impair or threaten to impair any recovery under any related insurance policy.
See "The Agreements--Collection Procedures" and "Certain Legal Aspects of the
Loans" for a description of certain provisions of each Agreement and certain
legal developments that may affect the prepayment experience on the Loans.
The rate of prepayments with respect to conventional mortgage loans
has fluctuated significantly in recent years. If prevailing rates fall
significantly below the Loan Rates borne by the Loans, such Loans may be
subject to higher prepayment rates than if prevailing interest rates remain at
or above such Loan Rates. Conversely, if prevailing interest rates rise
appreciably above the Loan Rates borne by the Loans, such Loans may experience
a lower prepayment rate than if prevailing rates remain at or below such Loan
Rates. However, there can be no assurance that such will be the case.
When a full prepayment is made on a Loan, the borrower is charged
interest on the principal amount of the Loan so prepaid only for the number of
days in the month actually elapsed up to the date of the prepayment, rather
than for a full month. Unless the Master Servicer remits amounts otherwise
payable to it as servicing compensation, see "Description of the
Securities--Compensating Interest", the effect of prepayments in full will be
to reduce the amount of interest passed through in the following month to
holders of Securities because interest on the principal amount of any Loan so
prepaid will be paid only to the date of prepayment. Partial prepayments in a
given month may be applied to the outstanding principal balances of the Loans
so prepaid on the first day of the month of receipt or the month following
receipt. In the latter case, partial prepayments will not reduce the amount of
interest passed through in such month. Unless otherwise specified in the
related Prospectus Supplement, neither full nor partial prepayments will be
passed through until the month following receipt.
Even assuming that the Properties provide adequate security for the
Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Loans and corresponding delays in the receipt of
related proceeds by Securityholders could occur. An action to foreclose on a
Property securing a Loan is regulated by state statutes and rules and is
subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a property. In the event of a
default by a borrower, these restrictions among other things, may impede the
ability of the Master Servicer to foreclose on or sell the Property or to
obtain liquidation proceeds sufficient to repay all amounts due on the related
Loan. In addition, the Master Servicer will be entitled to deduct from related
liquidation proceeds all expenses reasonably incurred in attempting to recover
amounts due on defaulted Loans and not yet repaid, including payments to
senior lienholders, legal fees and costs of legal action, real estate taxes
and maintenance and preservation expenses.
Liquidation expenses with respect to defaulted mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time
of default. Therefore, assuming that a servicer took the same steps in
realizing upon a defaulted mortgage loan having a small remaining principal
balance as it would in the case of a defaulted mortgage loan having a large
remaining principal balance, the amount realized after expenses of liquidation
would be smaller as a percentage of the remaining principal balance of the
small mortgage loan than would be the case with the other defaulted mortgage
loan having a large remaining principal balance.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of certain
originators and servicers of Loans. In addition, most have other laws, public
policy and general principles of equity relating to the protection of
consumers, unfair and deceptive practices and practices which may apply to the
origination, servicing and collection of the Loans. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Master Servicer to collect all or part of the principal of or
interest on the Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Master Servicer to damages
and administrative sanctions.
If the rate at which interest is passed through to the holders of
Securities of a Series is calculated on a Loan-by-Loan basis, disproportionate
principal prepayments among Loans with different Loan Rates will affect the
yield on such Securities. In most cases, the effective yield to
Securityholders will be lower than the yield otherwise produced by the
applicable Pass-Through Rate and purchase price, because while interest will
accrue on each Loan from the first day of the month (unless otherwise
specified in the related Prospectus Supplement), the distribution of such
interest will not be made earlier than the month following the month of
accrual.
Under certain circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or any person specified in the related
Prospectus Supplement may have the option to purchase the assets of a Trust
Fund thereby effecting earlier retirement of the related Series of Securities.
See "The Agreements--Termination; Optional Termination".
Factors other than those identified herein and in the related
Prospectus Supplement could significantly affect principal prepayments at any
time and over the lives of the Securities. The relative contribution of the
various factors affecting prepayment may also vary from time to time. There
can be no assurance as to the rate of payment of principal of the Trust Fund
Assets at any time or over the lives of the Securities.
The Prospectus Supplement relating to a Series of Securities will
discuss in greater detail the effect of the rate and timing of principal
payments (including prepayments), delinquencies and losses on the yield,
weighted average lives and maturities of such Securities.
THE AGREEMENTS
Set forth below is a summary of certain provisions of each Agreement
which are not described elsewhere in this Prospectus. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of each Agreement. Where particular provisions or
terms used in the Agreements are referred to, such provisions or terms are as
specified in the Agreements. Except as otherwise specified, the Agreement
described herein contemplates a Trust Fund comprised of Loans. The provisions
of an Agreement with respect to a Trust Fund which consists of or includes
Private Asset Backed Securities may contain provisions similar to those
described herein but will be more fully described in the related Prospectus
Supplement.
Assignment of the Trust Fund Assets
Assignment of the Loans. At the time of issuance of the Securities of
a Series, the Depositor will cause the Loans comprising the related Trust Fund
to be assigned to the Trustee, together with all principal and interest
received by or on behalf of the Depositor on or with respect to such Loans
after the Cut-off Date, other than principal and interest due on or before the
Cut-off Date and other than any Retained Interest specified in the related
Prospectus Supplement. The Trustee will, concurrently with such assignment,
deliver the Securities to the Depositor in exchange for the Loans. Each Loan
will be identified in a schedule appearing as an exhibit to the related
Agreement. Such schedule will include information as to the outstanding
principal balance of each Loan after application of payments due on or before
the Cut-off Date, as well as information regarding the Loan Rate or APR, the
current scheduled monthly payment of principal and interest, the maturity of
the Loan, the Combined Loan-to-Value Ratios at origination and certain other
information.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will as to each Home Improvement Contract, deliver or cause to be
delivered to the Trustee the original Home Improvement Contract and copies of
documents and instruments related to each Home Improvement Contract and, other
than in the case of unsecured Home Improvement Contracts, the security
interest in the Property securing such Home Improvement Contract. In order to
give notice of the right, title and interest of Securityholders to the Home
Improvement Contracts, the Depositor will cause a UCC-1 financing statement to
be executed by the Depositor or the Seller identifying the Trustee as the
secured party and identifying all Home Improvement Contracts as collateral.
Unless otherwise specified in the related Prospectus Supplement, the Home
Improvement Contracts will not be stamped or otherwise marked to reflect their
assignment to the Trustee. Therefore, if, through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
Home Improvement Contracts without notice of such assignment, the interest of
Securityholders in the Home Improvement Contracts could be defeated. See
"Certain Legal Aspects of the Loans--The Home Improvement Contracts" 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 was delivered
to such recording office), (iii) an assignment of the Mortgage to the Trustee,
which assignment will be in recordable form in the case of a Mortgage
assignment, and (iv) such other security documents, including those relating
to any senior interests in the Property, as may be specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, the Depositor will promptly cause the assignments of the related
Loans to be recorded in the appropriate public office for real property
records, except in states in which, in the opinion of counsel acceptable to
the Trustee, such recording is not required to protect the Trustee's interest
in such Loans against the claim of any subsequent transferee or any successor
to or creditor of the Depositor or the originator of such Loans.
The Trustee (or the custodian hereinafter referred to) will review
such Loan documents within the time period specified in the related Prospectus
Supplement after receipt thereof, and the Trustee will hold such documents in
trust for the benefit of the Securityholders. Unless otherwise specified in
the related Prospectus Supplement, if any such document is found to be missing
or defective in any material respect, the Trustee (or such custodian) will
notify the Master Servicer and the Depositor, and the Master Servicer will
notify the related Seller. If the Seller cannot cure the omission or defect
within a specified number of days after receipt of such notice (or such other
period as may be specified in the related Prospectus Supplement), the Seller
will be obligated either (i) to purchase the related Loan from the Trust at
the Purchase Price or (ii) to remove such Loan from the Trust Fund and
substitute in its place one or more other Loans. There can be no assurance
that a Seller will fulfill this purchase or substitution obligation. Although
the Master Servicer may be obligated to enforce such obligation to the extent
described above under "Loan Program--Representations by Sellers; Repurchases",
neither the Master Servicer nor the Depositor will be obligated to purchase or
replace such Loan if the Seller defaults on its obligation, unless such breach
also constitutes a breach of the representations or warranties of the Master
Servicer or the Depositor, as the case may be. Unless otherwise specified in
the related Prospectus Supplement, this purchase obligation constitutes the
sole remedy available to the Securityholders or the Trustee for omission of,
or a material defect in, a constituent document.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review
the documents relating to the Loans as agent of the Trustee.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Agreement. Upon a breach of any such representation of
the Master Servicer which materially and adversely affects the interests of
the Securityholders in a Loan, the Master Servicer will be obligated either to
cure the breach in all material respects or to purchase or replace the Loan at
the Purchase Price. Unless otherwise specified in the related Prospectus
Supplement, this obligation to cure, purchase or substitute constitutes the
sole remedy available to the Securityholders or the Trustee for such a breach
of representation by the Master Servicer.
Assignment of Private Asset Backed Securities. The Depositor will
cause Private Asset Backed Securities to be registered in the name of the
Trustee. The Trustee (or the custodian) will have possession of any
certificated Private Asset Backed Securities. Unless otherwise specified in
the related Prospectus Supplement, the Trustee will not be in possession of or
be assignee of record of any underlying assets for a Private Asset Backed
Security. See "The Trust Fund--Private Asset Backed Securities" herein. Each
Private Asset Backed Security will be identified in a schedule appearing as an
exhibit to the related Agreement which will specify the original principal
amount, outstanding principal balance as of the Cut-off Date, annual
pass-through rate or interest rate and maturity date and certain other
pertinent information for each Private Asset Backed Security conveyed to the
Trustee.
Notwithstanding the foregoing provisions, with respect to a Trust
Fund for which a REMIC election is to be made, no purchase or substitution of
a Loan will be made if such purchase or substitution would result in a
prohibited transaction tax under the Code.
Payments on Loans; Deposits to Security Account
Each Sub-Servicer servicing a Loan pursuant to a Sub-Servicing
Agreement (as defined below under "--Sub-Servicing of Loans") will establish
and maintain an account (the "Sub-Servicing Account") which meets the
following requirements and is otherwise acceptable to the Master Servicer. A
Sub-Servicing Account must be established with a Federal Home Loan Bank or
with a depository institution (including the Sub-Servicer itself) whose
accounts are insured by either the Bank Insurance Fund (the "BIF") of the FDIC
or the Savings Association Insurance Fund (as successor to the Federal Savings
and Loan Insurance Corporation ("SAIF")) of the 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 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;
(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 such exercise is
permitted by law and would not adversely affect insurance coverage; attempting
to cure delinquencies; supervising foreclosures; inspecting and managing
Properties under certain circumstances; maintaining accounting records
relating to the Loans; and, to the extent specified in the related Prospectus
Supplement, maintaining additional insurance policies or credit support
instruments and filing and settling claims thereunder. A Sub-Servicer will
also be obligated to make advances in respect of delinquent installments of
interest and/or principal on Loans, as described more fully above under
"--Payments on Loans; Deposits to Security Account", and in respect of certain
taxes and insurance premiums not paid on a timely basis by mortgagors or
obligors.
As compensation for its servicing duties, each Sub-Servicer will be
entitled to a monthly servicing fee (to the extent the scheduled payment on
the related Loan has been collected) in the amount set forth in the related
Prospectus Supplement. Each Sub-Servicer is also entitled to collect and
retain, as part of its servicing compensation, any prepayment or late charges
provided in the Mortgage Note or related instruments. Each Sub-Servicer will
be reimbursed by the Master Servicer for certain expenditures which it makes,
generally to the same extent the Master Servicer would be reimbursed under the
Agreement. The Master Servicer may purchase the servicing of Loans if the
Sub-Servicer elects to release the servicing of such Loans to the Master
Servicer. See "--Servicing and Other Compensation and Payment of Expenses".
Each Sub-Servicer may be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Sub-Servicer in its servicing
capacity. Each Sub-Servicer will be required to maintain a fidelity bond and
an errors and omissions policy with respect to its officers, employees and
other persons acting on its behalf or on behalf of the Master Servicer.
Each Sub-Servicer will be required to service each Loan pursuant to
the terms of the Sub-Servicing Agreement for the entire term of such Loan,
unless the Sub-Servicing Agreement is earlier terminated by the Master
Servicer or unless servicing is released to the Master Servicer. The Master
Servicer may terminate a Sub-Servicing Agreement without cause, upon written
notice to the Sub-Servicer in the manner specified in such Sub-Servicing
Agreement.
The Master Servicer may agree with a Sub-Servicer to amend a
Sub-Servicing Agreement or, upon termination of the Sub-Servicing Agreement,
the Master Servicer may act as servicer of the related Loans or enter into new
Sub-Servicing Agreements with other Sub-Servicers. If the Master Servicer acts
as servicer, it will not assume liability for the representations and
warranties of the Sub-Servicer which it replaces. Each Sub-Servicer must be a
Seller or meet the standards for becoming a Seller or have such servicing
experience as to be otherwise satisfactory to the Master Servicer and the
Depositor. The Master Servicer will make reasonable efforts to have the new
Sub-Servicer assume liability for the representations and warranties of the
terminated Sub-Servicer, but no assurance can be given that such an assumption
will occur. In the event of such an assumption, the Master Servicer may in the
exercise of its business judgment release the terminated Sub-Servicer from
liability in respect of such representations and warranties. Any amendments to
a Sub-Servicing Agreement or new Sub-Servicing Agreements may contain
provisions different from those which are in effect in the original
Sub-Servicing Agreement. However, each Agreement will provide that any such
amendment or new agreement may not be inconsistent with or violate such
Agreement.
Collection Procedures
The Master Servicer, directly or through one or more Sub-Servicers,
will make reasonable efforts to collect all payments called for under the
Loans and will, consistent with each Agreement and any Pool Insurance Policy,
Primary Mortgage Insurance Policy, FHA Insurance, VA Guaranty Policy and
Bankruptcy Bond or alternative arrangements, follow such collection procedures
as are customary with respect to loans that are comparable to the Loans.
Consistent with the above, the Master Servicer may, in its discretion, (i)
waive any assumption fee, late payment or other charge in connection with a
Loan and (ii) to the extent not inconsistent with the coverage of such Loan by
a Pool Insurance Policy, Primary Mortgage Insurance Policy, FHA Insurance, VA
Guaranty or Bankruptcy Bond or alternative arrangements, if applicable,
arrange with a borrower a schedule for the liquidation of delinquencies
running for no more than 125 days after the applicable due date for each
payment. Both the Sub-Servicer and the Master Servicer may be obligated to
make Advances during any period of such an arrangement.
Except as otherwise specified in the related Prospectus Supplement,
in any case in which property securing a Loan has been, or is about to be,
conveyed by the mortgagor or obligor, the Master Servicer will, to the extent
it has knowledge of such conveyance or proposed conveyance, exercise or cause
to be exercised its rights to accelerate the maturity of such Loan under any
due-on-sale clause applicable thereto, but only if the exercise of such rights
is permitted by applicable law. If these conditions are not met or if the
Master Servicer reasonably believes it is unable under applicable law to
enforce such due-on-sale clause, or the Master Servicer will enter into or
cause to be entered into an assumption and modification agreement with the
person to whom such property has been or is about to be conveyed, pursuant to
which such person becomes liable for repayment of the Loan and, to the extent
permitted by applicable law, the mortgagor remains liable thereon. Any fee
collected by or on behalf of the Master Servicer for entering into an
assumption agreement will be retained by or on behalf of the Master Servicer
as additional servicing compensation. See "Certain Legal Aspects of the
Loans--Due-on-Sale Clauses". In connection with any such assumption, the terms
of the related Loan may not be changed.
Hazard Insurance
Except as otherwise specified in the related Prospectus Supplement,
the Master Servicer will require the mortgagor or obligor on each Loan to
maintain a hazard insurance policy providing for no less than the coverage of
the standard form of fire insurance policy with extended coverage customary
for the type of Property in the state in which such Property is located. All
amounts collected by the Master Servicer under any hazard policy (except for
amounts to be applied to the restoration or repair of the Property or released
to the mortgagor or obligor in accordance with the Master Servicer's normal
servicing procedures) will be deposited in the related Security Account. In
the event that the Master Servicer maintains a blanket policy insuring against
hazard losses on all the Loans comprising part of a Trust Fund, it will
conclusively be deemed to have satisfied its obligation relating to the
maintenance of hazard insurance. Such blanket policy may contain a deductible
clause, in which case the Master Servicer will be required to deposit from its
own funds into the related Security Account the amounts which would have been
deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements securing a Loan
by fire, lightning, explosion, smoke, windstorm and hail, riot, strike and
civil commotion, subject to the conditions and exclusions particularized in
each policy. Although the policies relating to the Loans may have been
underwritten by different insurers under different state laws in accordance
with different applicable forms and therefore may not contain identical terms
and conditions, the basic terms thereof are dictated by respective state laws,
and most such policies typically do not cover any physical damage resulting
from the following: war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mud flows), nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list
is merely indicative of certain kinds of uninsured risks and is not intended
to be all inclusive. If the Property securing a Loan is located in a federally
designated special flood area at the time of origination, the Master Servicer
will require the mortgagor or obligor to obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Loans
typically contain a clause which in effect requires the insured at all time to
carry insurance of a specified percentage of the full replacement value of the
insured property in order to recover the full amount of any partial loss. If
the insured's coverage falls below this specified percentage, then the
insurer's liability in the event of partial loss will not exceed the larger of
(i) the actual cash value (generally defined as replacement cost at the time
and place of loss, less physical depreciation) of the improvements damaged or
destroyed or (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements. Since the amount of hazard insurance the Master Servicer may
cause to be maintained on the improvements securing the Loans declines as the
principal balances owing thereon decrease, and since improved real estate
generally has appreciated in value over time in the past, the effect of this
requirement in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damaged property. If specified in
the related Prospectus Supplement, a special hazard insurance policy will be
obtained to insure against certain of the uninsured risks described above. See
"Credit Enhancement--Special Hazard Insurance Policies".
If the Property securing a defaulted Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged Property, the Master Servicer is not required to expend its own funds
to restore the damaged Property unless it determines (i) that such restoration
will increase the proceeds to Securityholders on liquidation of the Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
If recovery on a defaulted Loan under any related Insurance Policy is
not available for the reasons set forth in the preceding paragraph, or if the
defaulted Loan is not covered by an Insurance Policy, the Master Servicer will
be obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Loan. If the proceeds of any liquidation of the Property securing the
defaulted Loan are less than the principal balance of such Loan plus interest
accrued thereon that is payable to Securityholders, the Trust Fund will
realize a loss in the amount of such difference plus the aggregate of expenses
incurred by the Master Servicer in connection with such proceedings and which
are reimbursable under the Agreement. In the unlikely event that any such
proceedings result in a total recovery which is, after reimbursement to the
Master Servicer of its expenses, in excess of the principal balance of such
Loan plus interest accrued thereon that is payable to Securityholders, the
Master Servicer will be entitled to withdraw or retain from the Security
Account amounts representing its normal servicing compensation with respect to
such Loan and, unless otherwise specified in the related Prospectus
Supplement, amounts representing the balance of such excess, exclusive of any
amount required by law to be forwarded to the related borrower, as additional
servicing compensation.
Unless otherwise specified in the related Prospectus Supplement, if
the Master Servicer or its designee recovers Insurance Proceeds which, when
added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the Master Servicer, exceed the principal balance of
such Loan plus interest accrued thereon that is payable to Securityholders,
the Master Servicer will be entitled to withdraw or retain from the Security
Account amounts representing its normal servicing compensation with respect to
such Loan. In the event that the Master Servicer has expended its own funds to
restore the damaged Property and such funds have not been reimbursed under the
related hazard insurance policy, it will be entitled to withdraw from the
Security Account out of related Liquidation Proceeds or Insurance Proceeds in
an amount equal to such expenses incurred by it, in which event the Trust Fund
may realize a loss up to the amount so charged. Since Insurance Proceeds
cannot exceed deficiency claims and certain expenses incurred by the Master
Servicer, no such payment or recovery will result in a recovery to the Trust
Fund which exceeds the principal balance of the defaulted Loan together with
accrued interest thereon. See "Credit Enhancement".
Realization upon Defaulted Loans
Primary Mortgage Insurance Policies. The Master Servicer will
maintain or cause each Sub-Servicer to maintain, as the case may be, in full
force and effect, to the extent specified in the related Prospectus
Supplement, a Primary Mortgage Insurance Policy with regard to each Loan for
which such coverage is required. The Master Servicer will not cancel or refuse
to renew any such Primary Mortgage Insurance Policy in effect at the time of
the initial issuance of a Series of Securities that is required to be kept in
force under the applicable Agreement unless the replacement Primary Mortgage
Insurance Policy for such cancelled or nonrenewed policy is maintained with an
insurer whose claims-paying ability is sufficient to maintain the current
rating of the classes of Securities of such Series that have been rated.
Although the terms and conditions of primary mortgage insurance vary,
the amount of a claim for benefits under a Primary Mortgage Insurance Policy
covering a Loan will consist of the insured percentage of the unpaid principal
amount of the covered Loan and accrued and unpaid interest thereon and
reimbursement of certain expenses, less (i) all rents or other payments
collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to the Property, (ii)
hazard insurance proceeds in excess of the amount required to restore the
Property and which have not been applied to the payment of the Loan, (iii)
amounts expended but not approved by the issuer of the related Primary
Mortgage Insurance Policy (the "Primary Insurer"), (iv) claim payments
previously made by the Primary Insurer and (v) unpaid premiums.
Primary Mortgage Insurance Policies reimburse certain losses
sustained by reason of defaults in payments by borrowers. Primary Mortgage
Insurance Policies will not insure against, and exclude from coverage, a loss
sustained by reason of a default arising from or involving certain matters,
including (i) fraud or negligence in origination or servicing of the Loans,
including misrepresentation by the originator, borrower or other persons
involved in the origination of the Loans; (ii) failure to construct the
Property subject to the Loan in accordance with specified plans; (iii)
physical damage to the Property; and (iv) the related Master Servicer or
Sub-servicer not being approved as a servicer by the Primary Insurer.
Recoveries Under a Primary Mortgage Insurance Policy. As conditions
precedent to the filing of or payment of a claim under a Primary Mortgage
Insurance Policy covering a Loan, the insured will be required to (i) advance
or discharge (a) all hazard insurance policy premiums and (b) as necessary and
approved in advance by the Primary Insurer, (1) real estate property taxes,
(2) all expenses required to maintain the related Property in at least as good
a condition as existed at the effective date of such Primary Mortgage
Insurance Policy, ordinary wear and tear excepted, (3) Property sales
expenses, (4) any outstanding liens (as defined in such Primary Mortgage
Insurance Policy) on the Property and (5) foreclosure costs, including court
costs and reasonable attorneys' fees; (ii) in the event of any physical loss
or damage to the Property, to have the Property restored and repaired to at
least as good a condition as existed at the effective date of such Primary
Mortgage Insurance Policy, ordinary wear and tear excepted; and (iii) tender
to the Primary Insurer good and merchantable title to and possession of the
Property.
In those cases in which a Loan is serviced by a Sub-Servicer, the
Sub-Servicer, on behalf of itself, the Trustee and Securityholders, will
present claims to the Primary Insurer, and all collection thereunder will be
deposited in the Sub-Servicing Account. In all other cases, the Master
Servicer, on behalf of itself, the Trustee and the Securityholders, will
present claims to the insurer under each Primary Mortgage Insurance Policy,
and will take such reasonable steps as are necessary to receive payment or to
permit recovery thereunder with respect to defaulted Loans. As set forth
above, all collections by or on behalf of the Master Servicer under any
Primary Mortgage Insurance Policy and, when the Property has not been
restored, the hazard insurance policy, are to be deposited in the Security
Account, subject to withdrawal as heretofore described.
If the Property securing a defaulted Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged Property to a condition sufficient to permit recovery under the
related Primary Mortgage Insurance Policy, if any, the Master Servicer is not
required to expend its own funds to restore the damaged Property unless it
determines (i) that such restoration will increase the proceeds to
Securityholders on liquidation of the Loan after reimbursement of the Master
Servicer for its expenses and (ii) that such expenses will be recoverable by
it from related Insurance Proceeds or Liquidation Proceeds.
If recovery on a defaulted Loan under any related Primary Mortgage
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Loan is not covered by a Primary Mortgage
Insurance Policy, the Master Servicer will be obligated to follow or cause to
be followed such normal practices and procedures as it deems necessary or
advisable to realize upon the defaulted Loan. If the proceeds of any
liquidation of the Property securing the defaulted Loan are less than the
principal balance of such Loan plus interest accrued thereon that is payable
to Securityholders, the Trust Fund will realize a loss in the amount of such
difference plus the aggregate of expenses incurred by the Master Servicer in
connection with such proceedings and which are reimbursable under the
Agreement. In the unlikely event that any such proceedings result in a total
recovery which is, after reimbursement to the Master Servicer of its expenses,
in excess of the principal balance of such Loan plus interest accrued thereon
that is payable to Securityholders, the Master Servicer will be entitled to
withdraw or retain from the Security Account amounts representing its normal
servicing compensation with respect to such Loan and, except as otherwise
specified in the Prospectus Supplement, amounts representing the balance of
such excess, exclusive of any amount required by law to be forwarded to the
related borrower, as additional servicing compensation.
Servicing and Other Compensation and Payment of Expenses
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer's primary servicing compensation with respect to a Series of
Securities will come from the monthly payment to it, out of each interest
payment on a Loan, of an amount equal to the percentage per annum specified in
the related Prospectus Supplement of the outstanding principal balance
thereof. Since the Master Servicer's primary compensation is a percentage of
the outstanding principal balance of each Loan, such amounts will decrease as
the Loans amortize. In addition to primary compensation, the Master Servicer
or the Sub-Servicers may be entitled to retain all assumption fees and late
payment charges, to the extent collected from borrowers, and, if so provided
in the related Prospectus Supplement, any prepayment penalties and any
interest or other income which may be earned on funds held in the Security
Account or any Sub-Servicing Account. Unless otherwise specified in the
related Prospectus Supplement, any Sub-Servicer will receive a portion of the
Master Servicer's primary compensation as its sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, the Master
Servicer will, unless otherwise specified in the related Prospectus
Supplement, pay from its servicing compensation certain expenses incurred in
connection with its servicing of the Loans, including, without limitation,
payment of any premium for any insurance policy, guaranty, surety or other
form of credit enhancement as specified in the related Prospectus Supplement,
payment of the fees and disbursements of the Trustee and independent
accountants, payment of expenses incurred in connection with distributions and
reports to Securityholders, and payment of any other expenses described in the
related Prospectus Supplement.
Evidence as to Compliance
Each Agreement will provide that on or before a specified date in
each year, a firm of independent public accountants will furnish a statement
to the Trustee to the effect that, on the basis of the examination by such
firm conducted substantially in compliance with the Uniform Single Audit
Program for Mortgage Bankers or the Audit Program for Mortgages serviced for
FHLMC, the servicing by or on behalf of the Master Servicer of mortgage loans
or private asset backed securities, or under pooling and servicing agreements
substantially similar to each other (including the related Agreement) was
conducted in compliance with such agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, the Audit
Program for Mortgages serviced for FHLMC, or the Uniform Single Audit Program
for Mortgage Bankers, it is required to report. In rendering its statement
such firm may rely, as to matters relating to the direct servicing of Loans or
Private Asset Backed Securities by Sub-Servicers, upon comparable statements
for examinations conducted substantially in compliance with the Uniform Single
Audit Program for Mortgage Bankers or the Audit Program for Mortgages serviced
for FHLMC (rendered within one year of such statement) of firms of independent
public accountants with respect to the related Sub-Servicer.
Each Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of
officers of the Master Servicer may be obtained by Securityholders of the
related Series without charge upon written request to the Master Servicer at
the address set forth in the related Prospectus Supplement.
Certain Matters Regarding the Master Servicer and the Depositor
The Master Servicer under each Agreement will be named in the related
Prospectus Supplement. The entity serving as Master Servicer may have normal
business relationships with the Depositor or the Depositor's affiliates.
Each Agreement will provide that the Master Servicer may not resign
from its obligations and duties under the Agreement except upon a
determination that its duties thereunder are no longer permissible under
applicable law. The Master Servicer may, however, be removed from its
obligations and duties as set forth in the Agreement. No such resignation will
become effective until the Trustee or a successor servicer has assumed the
Master Servicer's obligations and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer,
the Depositor nor any director, officer, employee, or agent of the Master
Servicer or the Depositor will be under any liability to the related Trust
Fund or Securityholders for any action taken or for refraining from the taking
of any action in good faith pursuant to the Agreement, or for errors in
judgment; provided, however, that neither the Master Servicer, the Depositor
nor any such person will be protected against any liability which would
otherwise be imposed by reason of wilful misfeasance or gross negligence in
the performance of duties thereunder or by reasons of reckless disregard of
obligations and duties thereunder. To the extent provided in the related
Agreement, the Master Servicer, the Depositor and any director, officer,
employee or agent of the Master Servicer or the Depositor may be entitled to
indemnification by the related Trust Fund and may be held harmless against any
loss, liability or expense incurred in connection with any legal action
relating to the Agreement or the Securities, other than any loss, liability or
expense related to any specific Loan or Loans (except any such loss, liability
or expense otherwise reimbursable pursuant to the Agreement) and any loss,
liability or expense incurred by reason of willful misfeasance or gross
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. In addition, each Agreement
will provide that neither the Master Servicer nor the Depositor will be under
any obligation to appear in, prosecute or defend any legal action which is not
incidental to its respective responsibilities under the Agreement and which in
its opinion may involve it in any expense or liability. The Master Servicer or
the Depositor may, however, in its discretion undertake any such action which
it may deem necessary or desirable with respect to the Agreement and the
rights and duties of the parties thereto and the interests of the
Securityholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the Trust Fund and the Master Servicer or the Depositor, as the
case may be, will be entitled to be reimbursed therefor out of funds otherwise
distributable to Securityholders.
Except as otherwise specified in the related Prospectus Supplement,
any person into which the Master Servicer may be merged or consolidated, or
any person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Agreement.
Events of Default; Rights upon Event of Default
Pooling and Servicing Agreement; Servicing Agreement. Except as
otherwise specified in the related Prospectus Supplement, Events of Default
under each Agreement will consist of (i) any failure by the Master Servicer to
distribute or cause to be distributed to Securityholders of any class any
required payment (other than an Advance) which continues unremedied for five
business days after the giving of written notice of such failure to the Master
Servicer by the Trustee or the Depositor, or to the Master Servicer, the
Depositor and the Trustee by the holders of Securities of such class
evidencing not less than 25% of the aggregate Percentage Interests evidenced
by such class; (ii) any failure by the Master Servicer to make an Advance as
required under the Agreement, unless cured as specified therein; (iii) any
failure by the Master Servicer duly to observe or perform in any material
respect any of its other covenants or agreements in the Agreement which
continues unremedied for thirty days after the giving of written notice of
such failure to the Master Servicer by the Trustee or the Depositor, or to the
Master Servicer, the Depositor and the Trustee by the holders of Securities of
any class evidencing not less than 25% of the aggregate Percentage Interests
constituting such class; and (iv) certain events of insolvency, readjustment
of debt, marshalling of assets and liabilities or similar proceeding and
certain actions by or on behalf of the Master Servicer indicating its
insolvency, reorganization or inability to pay its obligations.
If specified in the related Prospectus Supplement, the Agreement will
permit the Trustee to sell the Trust Fund Assets and the other assets of the
Trust Fund in the event that payments in respect thereto are insufficient to
make payments required in the Agreement. The assets of the Trust Fund will be
sold only under the circumstances and in the manner specified in the related
Prospectus Supplement.
So long as an Event of Default under an Agreement remains unremedied,
the Depositor or the Trustee may, and at the direction of holders of
Securities of any class evidencing not less than 51% of the aggregate
Percentage Interests constituting such class and under such other
circumstances as may be specified in such Agreement, the Trustee shall,
terminate all of its rights and obligations of the Master Servicer under the
Agreement relating to such Trust Fund and in and to the Trust Fund Assets,
whereupon the Trustee will succeed to all of the responsibilities, duties and
liabilities of the Master Servicer under the Agreement, including, if
specified in the related Prospectus Supplement, the obligation to make
advances, and will be entitled to similar compensation arrangements. In the
event that the Trustee is unwilling or unable so to act, it may appoint, or
petition a court of competent jurisdiction for the appointment of, a mortgage
loan servicing institution with a net worth of a least $10,000,000 to act as
successor to the Master Servicer under the Agreement. Pending such
appointment, the Trustee is obligated to act in such capacity. The Trustee and
any such successor may agree upon the servicing compensation to be paid, which
in no event may be greater than the compensation payable to the Master
Servicer under the Agreement.
No Securityholder, solely by virtue of such holder's status as a
Securityholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Securities of any class of such Series evidencing not less than 25% of the
aggregate Percentage Interests constituting such class have made written
request upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity, and
the Trustee for 60 days has neglected or refused to institute any such
proceeding.
Indenture. Except as otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for five (5) days or more in the payment of any
principal of or interest on any Note of such Series; (ii) failure to perform
any other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of thirty (30) days after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iii) any representation or warranty made by the Depositor or the Trust Fund
in the Indenture or in any certificate or other writing delivered pursuant
thereto or in connection therewith with respect to or affecting such Series
having been incorrect in a material respect as of the time made, and such
breach is not cured within thirty (30) days after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iv) certain events of bankruptcy, insolvency, receivership or liquidation of
the Depositor or the Trust Fund; or (v) any other Event of Default provided
with respect to Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, either the Trustee or the holders
of a majority of the then aggregate outstanding amount of the Notes of such
Series may declare the principal amount (or, if the Notes of that Series have
a Pass-Through Rate of 0%, such portion of the principal amount as may be
specified in the terms of that Series, as provided in the related Prospectus
Supplement) of all the Notes of such Series to be due and payable immediately.
Such declaration may, under certain circumstances, be rescinded and annulled
by the holders of more than 50% of the Percentage Interests of the Notes of
such Series.
If, following an Event of Default with respect to any Series of
Notes, the Notes of such Series have been declared to be due and payable, the
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such Series and to
continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of such Series
as they would have become due if there had not been such a declaration. In
addition, the Trustee may not sell or otherwise liquidate the collateral
securing the Notes of a Series following an Event of Default, unless (a) the
holders of 100% of the Percentage Interests of the Notes of such Series
consent to such sale, (b) the proceeds of such sale or liquidation are
sufficient to pay in full the principal of and accrued interest, due and
unpaid, on the outstanding Notes of such Series at the date of such sale or
(c) the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the
Trustee obtains the consent of the holders of 66-2/3% of the Percentage
Interests of each Class of Notes of such Series.
Except as otherwise specified in the related Prospectus Supplement,
in the event the principal of the Notes of a Series is declared due and
payable, as described above, the holders of any such Notes issued at a
discount from par may be entitled to receive no more than an amount equal to
the unpaid principal amount thereof less the amount of such discount which is
unamortized.
Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default shall occur and be continuing with
respect to a Series of Notes, the Trustee shall be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of Notes of such Series, unless such holders
offered to the Trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying
with such request or direction. Subject to such provisions for indemnification
and certain limitations contained in the Indenture, the holders of a majority
of the then aggregate outstanding amount of the Notes of such Series shall
have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee with respect to the Notes of such Series, and
the holders of a majority of the then aggregate outstanding amount of the
Notes of such Series may, in certain cases, waive any default with respect
thereto, except a default in the payment of principal or interest or a default
in respect of a covenant or provision of the Indenture that cannot be modified
without the waiver or consent of all the holders of the outstanding Notes of
such Series affected thereby.
Amendment
Except as otherwise specified in the related Prospectus Supplement,
each Agreement may be amended by the Depositor, the Master Servicer and the
Trustee, without the consent of any of the Securityholders, (i) to cure any
ambiguity; (ii) to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein; or (iii) to make
any other revisions with respect to matters or questions arising under the
Agreement which are not inconsistent with the provisions thereof, provided
that such action will not adversely affect in any material respect the
interests of any Securityholder. In addition, to the extent provided in the
related Agreement, an Agreement may be amended without the consent of any of
the Securityholders, to change the manner in which the Security Account is
maintained, provided that any such change does not adversely affect the then
current rating on the class or classes of Securities of such Series that have
been rated. In addition, if a REMIC election is made with respect to a Trust
Fund, the related Agreement may be amended to modify, eliminate or add to any
of its provisions to such extent as may be necessary to maintain the
qualification of the related Trust Fund as a REMIC, provided that the Trustee
has received an opinion of counsel to the effect that such action is necessary
or helpful to maintain such qualification. Except as otherwise specified in
the related Prospectus Supplement, each Agreement may also be amended by the
Depositor, the Master Servicer and the Trustee with consent of holders of
Securities of such Series evidencing not less than 66% of the aggregate
Percentage Interests of each class affected thereby for the purpose of adding
any provisions to or changing in an manner or eliminating any of the
provisions of the Agreement or of modifying in any manner the rights of the
holders of the related Securities; provided, however, that no such amendment
may (i) reduce in any manner the amount of or delay the timing of, payments
received on Loans which are required to be distributed on any Security without
the consent of the holder of such Security, or (ii) reduce the aforesaid
percentage of Securities of any class of holders which are required to consent
to any such amendment without the consent of the holders of all Securities of
such class covered by such Agreement then outstanding. If a REMIC election is
made with respect to a Trust Fund, the Trustee will not be entitled to consent
to an amendment to the related Agreement without having first received an
opinion of counsel to the effect that such amendment will not cause such Trust
Fund to fail to qualify as a REMIC.
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" below), from
the related Trust Fund of all of the remaining Trust Fund Assets and all
property acquired in respect of such Trust Fund Assets.
Unless otherwise specified by the related Prospectus Supplement, any
such purchase of Trust Fund Assets and property acquired in respect of Trust
Fund Assets evidenced by a Series of Securities will be made at the option of
the Master Servicer or, if applicable, such holder of the REMIC residual
interest, at a price, and in accordance with the procedures, specified in the
related Prospectus Supplement. The exercise of such right will effect early
retirement of the Securities of that Series, but the right of the Master
Servicer or, if applicable, such holder of the REMIC residual interest, to so
purchase is subject to the principal balance of the related Trust Fund Assets
being less than the percentage specified in the related Prospectus Supplement
of the aggregate principal balance of the Trust Fund Assets at the Cut-off
Date for the Series. The foregoing is subject to the provision that if a REMIC
election is made with respect to a Trust Fund, any repurchase pursuant to
clause (ii) above will be made only in connection with a "qualified
liquidation" of the REMIC within the meaning of Section 860F(g)(4) of the
Code.
Indenture. The Indenture will be discharged with respect to a Series
of Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes
of such Series or, with certain limitations, upon deposit with the Trustee of
funds sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture
will provide that, if so specified with respect to the Notes of any Series,
the related Trust Fund will be discharged from any and all obligations in
respect of the Notes of such Series (except for certain obligations relating
to temporary Notes and exchange of Notes, to register the transfer of or
exchange Notes of such Series, to replace stolen, lost or mutilated Notes of
such Series, to maintain paying agencies and to hold monies for payment in
trust) upon the deposit with the Trustee, in trust, of money and/or direct
obligations of or obligations guaranteed by the United States of America which
through the payment of interest and principal in respect thereof in accordance
with their terms will provide money in an amount sufficient to pay the
principal of and each installment of interest on the Notes of such Series on
the last scheduled Distribution Date for such Notes and any installment of
interest on such Notes in accordance with the terms of the Indenture and the
Notes of such Series. In the event of any such defeasance and discharge of
Notes of such Series, holders of Notes of such Series would be able to look
only to such money and/or direct obligations for payment of principal and
interest, if any, on their Notes until maturity.
The Trustee
The Trustee under each Agreement will be named in the applicable
Prospectus Supplement. The commercial bank or trust company serving as Trustee
may have normal banking relationships with the Depositor, the Master Servicer
and any of their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the Loans. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Loans is situated. The summaries are qualified in their
entirety by reference to the applicable federal laws and the appropriate laws
of the states in which Loans may be originated.
General
The Loans for a Series may be secured by deeds of trust, mortgages,
security deeds or deeds to secure debt, depending upon the prevailing practice
in the state in which the property subject to the loan is located. A mortgage
creates a lien upon the real property encumbered by the mortgage, which lien
is generally not prior to the lien for real estate taxes and assessments.
Priority between mortgages depends on their terms and generally on the order
of recording with a state or county office. There are two parties to a
mortgage, the mortgagor, who is the borrower and owner of the mortgaged
property, and the mortgagee, who is the lender. Under the mortgage instrument,
the mortgagor delivers to the mortgagee a note or bond and the mortgage.
Although a deed of trust is similar to a mortgage, a deed of trust formally
has three parties, the borrower-property owner called the trustor (similar to
a mortgagor), a lender (similar to a mortgagee) called the beneficiary, and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the obligation. A
security deed and a deed to secure debt are special types of deeds which
indicate on their face that they are granted to secure an underlying debt. By
executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until such time as the underlying debt is repaid. The trustee's
authority under a deed of trust, the mortgagee's authority under a mortgage
and the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of
the beneficiary.
Foreclosure/Repossession
Foreclosure of a deed of trust is generally accomplished by a
non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In addition to
any notice requirements contained in a deed of trust, in some states, the
trustee must record a notice of default and send a copy to the
borrower-trustor, to any person who has recorded a request for a copy of any
notice of default and notice of sale, to any successor in interest to the
borrower-trustor, to the beneficiary of any junior deed of trust and to
certain other persons. In general, the borrower, or any other person having a
junior encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender.
After the reinstatement period has expired without the default having been
cured, the borrower or junior lienholder no longer has the right to reinstate
the loan and must pay the loan in full to prevent the scheduled foreclosure
sale. If the deed of trust is not reinstated, a notice of sale must be posted
in a public place and, in most states, published for a specific period of time
in one or more newspapers. In addition, some state laws require that a copy of
the notice of sale be posted on the property and sent to all parties having an
interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial
action. The action is initiated by the service of legal pleadings upon all
parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings are often not contested by any of
the parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to
conduct the sale of the property. In some states, mortgages may also be
foreclosed by advertisement, pursuant to a power of sale provided in the
mortgage.
Although foreclosure sales are typically public sales, frequently no
third party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and
a requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding
under the loan, accrued and unpaid interest and the expenses of foreclosure in
which event the mortgagor's debt will be extinguished or the lender may
purchase for a lesser amount in order to preserve its right against a borrower
to seek a deficiency judgment in states where such judgment is available.
Thereafter, subject to the right of the borrower in some states to remain in
possession during the redemption period, the lender will assume the burden of
ownership, including obtaining hazard insurance and making such repairs at its
own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending
upon market conditions, the ultimate proceeds of the sale of the property may
not equal the lender's investment in the property. Any loss may be reduced by
the receipt of any mortgage guaranty insurance proceeds.
Courts have imposed general equitable principles upon foreclosure,
which are generally designed to mitigate the legal consequences to the
borrower of the borrower's defaults under the loan documents. Some courts have
been faced with the issue of whether federal or state constitutional
provisions reflecting due process concerns for fair notice require that
borrowers under deeds of trust receive notice longer than that prescribed by
statute. For the most part, these cases have upheld the notice provisions as
being reasonable or have found that the sale by a trustee under a deed of
trust does not 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 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.
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 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 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. Germain Act does "encourage" lenders
to permit assumption of loans at the original rate of interest or at some
other rate less than the average of the original rate and the market rate.
As to loans secured by an owner-occupied residence, the Garn-St.
Germain Act sets forth nine specific instances in which a mortgagee covered by
the Act may not exercise its rights under a due-on-sale clause,
notwithstanding the fact that a transfer of the property may have occurred.
The inability to enforce a due-on-sale clause may result in transfer of the
related Property to an uncreditworthy person, which could increase the
likelihood of default or may result in a mortgage bearing an interest rate
below the current market rate being assumed by a new home buyer, which may
affect the average life of the Loans and the number of Loans which may extend
to maturity.
In addition, under federal bankruptcy law, due-on-sale clauses may
not be enforceable in bankruptcy proceedings and may, under certain
circumstances, be eliminated in any modified mortgage resulting from such
bankruptcy proceeding.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may
contain provisions obligating the borrower to pay a late charge if payments
are not timely made, and in some circumstances may provide for prepayment fees
or penalties if the obligation is paid prior to maturity. In certain states,
there are or may be specific limitations upon the late charges which a lender
may collect from a borrower for delinquent payments. Certain states also limit
the amounts that a lender may collect from a borrower as an additional charge
if the loan is prepaid. Late charges and prepayment fees are typically
retained by servicers as additional servicing compensation.
Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his
defaults under the loan documents. Examples of judicial remedies that have
been fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes of the borrower's
default and the likelihood that the borrower will be able to reinstate the
loan. In some cases, courts have substituted their judgment for the lender's
judgment and have required that lenders reinstate loans or recast payment
schedules in order to accommodate borrowers who are suffering from temporary
financial disability. In other cases, courts have limited the right of a
lender to realize upon his security if the default under the security
agreement is not monetary, such as the borrower's failure to adequately
maintain the property or the borrower's execution of secondary financing
affecting the property. Finally, some courts have been faced with the issue of
whether or not federal or state constitutional provisions reflecting due
process concerns for adequate notice require that borrowers under security
agreements receive notices in addition to the statutorily-prescribed minimums.
For the most part, these cases have upheld the notice provisions as being
reasonable or have found that, in some cases involving the sale by a trustee
under a deed of trust or by a mortgagee under a mortgage having a power of
sale, there is insufficient state action to afford constitutional protections
to the borrower.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V") provides that state
usury limitations shall not apply to certain types of residential first
mortgage loans originated by certain lenders after March 31, 1980. The Office
of Thrift Supervision, as successor to the Federal Home Loan Bank Board, is
authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V. The statute authorized the states to
reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision which expressly rejects an application of the federal
law. Fifteen states adopted such a law prior to the April 1, 1993 deadline. In
addition, even where Title V is not so rejected, any state is authorized by
the law to adopt a provision limiting discount points or other charges on
mortgage loans covered by Title V. Certain states have taken action to
reimpose interest rate limits and/or to limit discount points or other
charges.
The Home Improvement Contracts
General. The Home Improvement Contracts, other than those Home
Improvement Contracts that are unsecured or secured by mortgages on real
estate (such Home Improvement Contracts are hereinafter referred to in this
section as "contracts") generally are "chattel paper" or constitute "purchase
money security interests" each as defined in the Uniform Commercial Code (the
"UCC"). Pursuant to the UCC, the sale of chattel paper is treated in a manner
similar to perfection of a security interest in chattel paper. Under the
related Agreement, the Depositor will transfer physical possession of the
contracts to the Trustee or a designated custodian or may retain possession of
the contracts as custodian for the Trustee. In addition, the Depositor will
make an appropriate filing of a UCC-1 financing statement in the appropriate
states to give notice of the Trustee's ownership of the contracts. Unless
otherwise specified in the related Prospectus Supplement, the contracts will
not be stamped or otherwise marked to reflect their assignment from the
Depositor to the Trustee. Therefore, if through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
contracts without notice of such assignment, the Trustee's interest in the
contracts could be defeated.
Security Interests in Home Improvements. The contracts that are
secured by the Home Improvements financed thereby grant to the originator of
such contracts a purchase money security interest in such Home Improvements to
secure all or part of the purchase price of such Home Improvements and related
services. A financing statement generally is not required to be filed to
perfect a purchase money security interest in consumer goods. Such purchase
money security interests are assignable. In general, a purchase money security
interest grants to the holder a security interest that has priority over a
conflicting security interest in the same collateral and the proceeds of such
collateral. However, to the extent that the collateral subject to a purchase
money security interest becomes a fixture, in order for the related purchase
money security interest to take priority over a conflicting interest in the
fixture, the holder's interest in such Home Improvement must generally be
perfected by a timely fixture filing. In general, a security interest does not
exist under the UCC in ordinary building material incorporated into an
improvement on land. Home Improvement Contracts that finance lumber, bricks,
other types of ordinary building material or other goods that are deemed to
lose such characterization upon incorporation of such materials into the
related property, will not be secured by a purchase money security interest in
the Home Improvement being financed.
Enforcement of Security Interest in Home Improvements. So long as the
Home Improvement has not become subject to the real estate law, a creditor can
repossess a Home Improvement securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the
peace) or, in the absence of voluntary surrender and the ability to repossess
without breach of the peace, by judicial process. The holder of a contract
must give the debtor a number of days' notice, which varies from 10 to 30 days
depending on the state, prior to commencement of any repossession. The UCC and
consumer protection laws in most states place restrictions on repossession
sales, including requiring prior notice to the debtor and commercial
reasonableness in effecting such a sale. The law in most states also requires
that the debtor be given notice of any sale prior to resale of the unit that
the debtor may redeem at or before such resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments, and in many cases
the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
Consumer Protection Laws. The so-called "Holder-in-Due Course" rule
of the Federal Trade Commission is intended to defeat the ability of the
transferor of a consumer credit contract which is the seller of goods which
gave rise to the transaction (and certain related lenders and assignees) to
transfer such contract free of notice of claims by the debtor thereunder. The
effect of this rule is to subject the assignee of such a contract to all
claims and defenses which the debtor could assert against the seller of goods.
Liability under this rule is limited to amounts paid under a contract;
however, the obligor also may be able to assert the rule to set off remaining
amounts due as a defense against a claim brought by the Trustee against such
obligor. Numerous other federal and state consumer protection laws impose
requirements applicable to the origination and lending pursuant to the
contracts, including the Truth in Lending Act, the Federal Trade Commission
Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the Equal
Credit Opportunity Act, the Fair Debt Collection Practices Act and the Uniform
Consumer Credit Code. In the case of some of these laws, the failure to comply
with their provisions may affect the enforceability of the related contract.
Applicability of Usury Laws. Title V provides that, subject to the
following conditions, state usury limitations shall not apply to any contract
which is secured by a first lien on certain kinds of consumer goods. The
contracts would be covered if they satisfy certain conditions, among other
things, governing the terms of any prepayments, late charges and deferral fees
and requiring a 30-day notice period prior to instituting any action leading
to repossession of the related unit.
Title V authorized any state to reimpose limitations on interest
rates and finance charges by adopting before April 1, 1983 a law or
constitutional provision which expressly rejects application of the federal
law. Fifteen states adopted such a law prior to the April 1, 1983 deadline. In
addition, even where Title V was not so rejected, any state is authorized by
the law to adopt a provision limiting discount points or other charges on
loans covered by Title V.
Installment Contracts
The Loans may also consist of installment contracts. Under an
installment contract ("Installment Contract") the seller (hereinafter referred
to in this section as the "lender") retains legal title to the property and
enters into an agreement with the purchaser hereinafter referred to in this
section as the "borrower") for the payment of the purchase price, plus
interest, over the term of such contract. Only after full performance by the
borrower of the contract is the lender obligated to convey title to the
property to the purchaser. As with mortgage or deed of trust financing, during
the effective period of the Installment Contract, the borrower is generally
responsible for maintaining the property in good condition and for paying real
estate taxes, assessments and hazard insurance premiums associated with the
property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his
or her right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The lender in
such a situation does not have to foreclose in order to obtain title to the
property, although in some cases a quiet title action is in order if the
borrower has filed the Installment Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Contracts from the harsh consequences of
forfeiture. Under such statutes, a judicial or nonjudicial foreclosure may be
required, the lender may be required to give notice of default and the
borrower may be granted some grace period during which the Installment
Contract may be reinstated upon full payment of the default amount and the
borrower may have a post-foreclosure statutory redemption right. In other
states, courts in equity may permit a borrower with significant investment in
the property under an Installment Contract for the sale of real estate to
share in the proceeds of sale of the property after the indebtedness is repaid
or may otherwise refuse to enforce the forfeiture clause. Nevertheless,
generally speaking, the lender's procedures for obtaining possession and clear
title under an Installment Contract in a given state are simpler and less
time-consuming and costly than are the procedures for foreclosing and
obtaining clear title to a property subject to one or more liens.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act"), a borrower who enters military
service after the origination of such borrower's Loan (including a borrower
who is a member of the National Guard or is in reserve status at the time of
the origination of the Loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that such interest rate limitation
could have an effect, for an indeterminate period of time, on the ability of
the Master Servicer to collect full amounts of interest on certain of the
Loans. Any shortfall in interest collections resulting from the application of
the Relief Act could result in losses to the Securityholders. The Relief Act
also imposes limitations which would impair the ability of the Master Servicer
to foreclose on an affected Loan during the borrower's period of active duty
status. Moreover, the Relief Act permits the extension of a Loan's maturity
and the re-adjustment of its payment schedule beyond the completion of
military service. Thus, in the event that such a Loan goes into default, there
may be delays and losses occasioned by the inability to realize upon the
Property in a timely fashion.
Junior Mortgages; Rights of Senior Mortgagees
To the extent that the Loans comprising the Trust Fund for a Series
are secured by mortgages which are junior to other mortgages held by other
lenders or institutional investors, the rights of the Trust Fund (and
therefore the Securityholders), as mortgagee under any such junior mortgage,
are subordinate to those of any mortgagee under any senior mortgage. The
senior mortgagee has the right to receive hazard insurance and condemnation
proceeds and to cause the property securing the Loan to be sold upon default
of the mortgagor, thereby extinguishing the junior mortgagee's lien unless the
junior mortgagee asserts its subordinate interest in the property in
foreclosure litigation and, possibly, satisfies the defaulted senior mortgage.
A junior mortgagee may satisfy a defaulted senior loan in full and, in some
states, may cure such default and bring the senior loan current, in either
event adding the amounts expended to the balance due on the junior loan. In
most states, absent a provision in the mortgage or deed of trust, no notice of
default is required to be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with
condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the mortgage, in such order as the mortgagee may
determine. Thus, in the event improvements on the property are damaged or
destroyed by fire or other casualty, or in the event the property is taken by
condemnation, the mortgagee or beneficiary under underlying senior mortgages
will have the prior right to collect any insurance proceeds payable under a
hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the senior
mortgages. Proceeds in excess of the amount of senior mortgage indebtedness,
in most cases, may be applied to the indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon
a failure of the mortgagor to perform any of these obligations, the mortgagee
is given the right under certain mortgages to perform the obligation itself,
at its election, with the mortgagor agreeing to reimburse the mortgagee for
any sums expended by the mortgagee on behalf of the mortgagor. All sums so
expended by the mortgagee become part of the indebtedness secured by the
mortgage.
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make Revolving Credit Line Loans typically
contains a "future advance" clause, which provides, in essence, that
additional amounts advanced to or on behalf of the borrower by the beneficiary
or lender are to be secured by the deed of trust or mortgage. Any amounts so
advanced after the Cut-off Date with respect to any mortgage will not be
included in the Trust Fund. The priority of the lien securing any advance made
under the clause may depend in most states on whether the deed of trust or
mortgage is called and recorded as a credit line deed of trust or mortgage. If
the beneficiary or lender advances additional amounts, the advance is entitled
to receive the same priority as amounts initially advanced under the trust
deed or mortgage, notwithstanding the fact that there may be junior trust
deeds or mortgages and other liens which intervene between the date of
recording of the trust deed or mortgage and the date of the future advance,
and notwithstanding that the beneficiary or lender had actual knowledge of
such intervening junior trust deeds or mortgages and other liens at the time
of the advance. In most states, the trust deed or mortgage lien securing
mortgage loans of the type which includes home equity credit lines applies
retroactively to the date of the original recording of the trust deed or
mortgage, provided that the total amount of advances under the home equity
credit line does not exceed the maximum specified principal amount of the
recorded trust deed or mortgage, except as to advances made after receipt by
the lender of a written notice of lien from a judgment lien creditor of the
trustor.
The Title I Program
General. Certain of the Loans contained in a Trust Fund may be loans
insured under the FHA Title I Credit Insurance program created pursuant to
Sections 1 and 2(a) of the National Housing Act of 1934 (the "Title I
Program"). Under the Title I Program, the FHA is authorized and empowered to
insure qualified lending institutions against losses on eligible loans. The
Title I Program operates as a coinsurance program in which the FHA insures up
to 90% of certain losses incurred on an individual insured loan, including the
unpaid principal balance of the loan, but only to the extent of the insurance
coverage available in the lender's FHA insurance coverage reserve account. The
owner of the loan bears the uninsured loss on each loan.
The types of loans which are eligible for insurance by the FHA under
the Title I Program include property improvement loans ("Property Improvement
Loans" or "Title I Loans"). A Property Improvement Loan or Title I Loan means
a loan made to finance actions or items that substantially protect or improve
the basic livability or utility of a property and includes single family
improvement loans.
There are two basic methods of lending or originating such loans
which include a "direct loan" or a "dealer loan". With respect to a direct
loan, the borrower makes application directly to a lender without any
assistance from a dealer, which application may be filled out by the borrower
or by a person acting at the direction of the borrower who does not have a
financial interest in the loan transaction, and the lender may disburse the
loan proceeds solely to the borrower or jointly to the borrower and other
parties to the transaction. With respect to a dealer loan, the dealer, who has
a direct or indirect financial interest in the loan transaction, assists the
borrower in preparing the loan application or otherwise assists the borrower
in obtaining the loan from the lender. The lender may disburse proceeds solely
to the dealer or the borrower or jointly to the borrower and the dealer or
other parties to the transaction. With respect to a dealer Title I Loan, a
dealer may include a seller, a contractor or supplier of goods or services.
Loans insured under the Title I Program are required to have fixed
interest rates and generally provide for equal installment payments due
weekly, biweekly, semi-monthly or monthly, except that a loan may be payable
quarterly or semi-annually where a borrower has an irregular flow of income.
The first or last payments (or both) may vary in amount but may not exceed
150% of the regular installment payment, and the first payment may be due no
later than two months from the date of the loan. The note must contain a
provision permitting full or partial prepayment of the loan. The interest rate
must be negotiated and agreed to by the borrower and the lender and must be
fixed for the term of the loan and recited in the note. Interest on an insured
loan must accrue from the date of the loan and be calculated according to the
actuarial method. The lender must assure that the note and all other documents
evidencing the loan are in compliance with applicable federal, state and local
laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence
and diligence to determine whether the borrower and any co-maker is solvent
and an acceptable credit risk, with a reasonable ability to make payments on
the loan obligation. The lender's credit application and review must determine
whether the borrower's income will be adequate to meet the periodic payments
required by the loan, as well as the borrower's other housing and recurring
expenses, which determination must be made in accordance with the
expense-to-income ratios published by the Secretary of HUD unless the lender
determines and documents in the loan file the existence of compensating
factors concerning the borrower's creditworthiness which support approval of
the loan.
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the
time of approval by the lending institution (as is typically the case with
other federal loan programs). If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the FHA.
In such case, provided that the validity of any lien on the property has not
been impaired, the insurance of the loan under the Title I Program will not be
affected unless such material misstatements of fact or misuse of loan proceeds
was caused by (or was knowingly sanctioned by) the lender or its employees.
Requirements for Title I Loans. The maximum principal amount for
Title I Loans must not exceed the actual cost of the project plus any
applicable fees and charges allowed under the Title I Program; provided that
such maximum amount does not exceed $25,000 (or the current applicable amount)
for a single family property improvement loan. Generally, the term of a Title
I Loan may not be less than six months nor greater than 20 years and 32 days.
A borrower may obtain multiple Title I Loans with respect to multiple
properties, and a borrower may obtain more than one Title I Loan with respect
to a single property, in each case as long as the total outstanding balance of
all Title I Loans in the same property does not exceed the maximum loan amount
for the type of Title I Loan thereon having the highest permissible loan
amount.
Borrower eligibility for a Title I Loan requires that the borrower
have at least a one-half interest in either fee simple title to the real
property, a lease thereof for a term expiring at least six months after the
final maturity of the Title I Loan or a recorded land installment contract for
the purchase of the real property. In the case of a Title I Loan with a total
principal balance in excess of $15,000, if the property is not occupied by the
owner, the borrower must have equity in the property being improved at least
equal to the principal amount of the loan, as demonstrated by a current
appraisal. Any Title I Loan in excess of $7,500 must be secured by a recorded
lien on the improved property which is evidenced by a mortgage or deed of
trust executed by the borrower and all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend such list of items and activities. With respect to any dealer Title I
Loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan, the lender
is required to obtain, promptly upon completion of the improvements but not
later than 6 months after disbursement of the loan proceeds with one 6 month
extension if necessary, a completion certificate, signed by the borrower. The
lender is required to conduct an on-site inspection on any Title I Loan where
the principal obligation is $7,500 or more, and on any direct Title I Loan
where the borrower fails to submit a completion certificate.
FHA Insurance Coverage. Under the Title I Program, the FHA
establishes an insurance coverage reserve account for each lender which has
been granted a Title I contract of insurance. The amount of insurance coverage
in this account is a maximum of 10% of the amount disbursed, advanced or
expended by the lender in originating or purchasing eligible loans registered
with the FHA for Title I insurance, with certain adjustments. The balance in
the insurance coverage reserve account is the maximum amount of insurance
claims the FHA is required to pay to the Title I lender. Loans to be insured
under the Title I Program will be registered for insurance by the FHA and the
insurance coverage attributable to such loans will be included in the
insurance coverage reserve account for the originating or purchasing lender
following the receipt and acknowledgment by the FHA of a loan report on the
prescribed form pursuant to the Title I regulations. For each eligible loan
reported and acknowledged for insurance, the FHA charges a fee (the
"Premium"). For loans having a maturity of 25 months or less, the FHA bills
the lender for the entire Premium in an amount equal to the product of 0.50%
of the original loan amount and the loan term. For home improvement loans with
a maturity greater than 25 months, each year that a loan is outstanding the
FHA bills the lender for a Premium in an amount equal to 0.50% of the original
loan amount. If a loan is prepaid during the year, the FHA will not refund or
abate the Premium paid for such year.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect
to loans insured under the lender's contract of insurance by (i) the amount of
the FHA insurance claims approved for payment relating to such insured loans
and (ii) the amount of insurance coverage attributable to insured loans sold
by the lender, and such insurance coverage may be reduced for any FHA
insurance claims rejected by the FHA. The balance of the lender's FHA
insurance coverage reserve account will be further adjusted as required under
Title I or by the FHA, and the insurance coverage therein may be earmarked
with respect to each or any eligible loans insured thereunder, if a
determination is made by the Secretary of HUD that it is in its interest to do
so. Originations and acquisitions of new eligible loans will continue to
increase a lender's insurance coverage reserve account balance by 10% of the
amount disbursed, advanced or expended in originating or acquiring such
eligible loans registered with the FHA for insurance under the Title I
Program. The Secretary of HUD may transfer insurance coverage between
insurance coverage reserve accounts with earmarking with respect to a
particular insured loan or group of insured loans when a determination is made
that it is in the Secretary's interest to do so.
The lender may transfer (except as collateral in a bona fide
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an
insured loan is transferred with recourse or with a guaranty or repurchase
agreement, the FHA, upon receipt of written notification of the transfer of
such loan in accordance with the Title I regulations, will transfer from the
transferor's insurance coverage reserve account to the transferee's insurance
coverage reserve account an amount, if available, equal to 10% of the actual
purchase price or the net unpaid principal balance of such loan (whichever is
less). However, under the Title I Program not more than $5,000 in insurance
coverage shall be transferred to or from a lender's insurance coverage reserve
account during any October 1 to September 30 period without the prior approval
of the Secretary of HUD. Amounts which may be recovered by the Secretary of
HUD after payment of an insurance claim are not added to the amount of
insurance coverage in the related lender's insurance coverage reserve account.
Claims Procedures Under Title I. Under the Title I Program the lender
may accelerate an insured loan following a default on such loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the
lender may either (a) proceed against the property under any security
instrument, or (b) make a claim under the lender's contract of insurance. If
the lender chooses to proceed against the property under a security instrument
(or if it accepts a voluntary conveyance or surrender of the property), the
lender may file an insurance claim only with the prior approval of the
Secretary of HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation
of the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims, where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any Title I Loan must be
filed with the FHA no later than 9 months after the date of default of such
loan. Concurrently with filing the insurance claim, the lender shall assign to
the United States of America the lender's entire interest in the loan note (or
a judgment in lien of the note), in any security held and in any claim filed
in any legal proceedings. If, at the time the note is assigned to the United
States, the Secretary has reason to believe that the note is not valid or
enforceable against the borrower, the FHA may deny the claim and reassign the
note to the lender. If either such defect is discovered after the FHA has paid
a claim, the FHA may require the lender to repurchase the paid claim and to
accept a reassignment of the loan note. If the lender subsequently obtains a
valid and enforceable judgment against the borrower, the lender may resubmit a
new insurance claim with an assignment of the judgment. Although the FHA may
contest any insurance claim and make a demand for repurchase of the loan at
any time up to two years from the date the claim was certified for payment and
may do so thereafter in the event of fraud or misrepresentation on the part of
the lender, the FHA has expressed an intention to limit the period of time
within which it will take such action to one year from the date the claim was
certified for payment.
Under the Title I Program the amount of an FHA insurance claim
payment, when made, is equal to the Claimable Amount, up to the amount of
insurance coverage in the lender's insurance coverage reserve account. For the
purposes hereof, the "Claimable Amount" means an amount equal to 90% of the
sum of: (a) the unpaid loan obligation (net unpaid principal and the
uncollected interest earned to the date of default) with adjustments thereto
if the lender has proceeded against property securing such loan; (b) the
interest on the unpaid amount of the loan obligation from the date of default
to the date of the claim's initial submission for payment plus 15 calendar
days (but not to exceed 9 months from the date of default), calculated at the
rate of 7% per annum; (c) the uncollected court costs; (d) the attorney's fees
not to exceed $500; and (e) the expenses for recording the assignment of the
security to the United States.
The Secretary of HUD may deny a claim for insurance in whole or in
part for any violations of the regulations governing the Title I Program;
however, the Secretary of HUD may waive such violations if it determines that
enforcement of the regulations would impose an injustice upon a lender which
has substantially complied with the regulations in good faith.
Other Legal Considerations
The Loans are also subject to federal laws, including: (i) Regulation
Z, which requires certain disclosures to the borrowers regarding the terms of
the Loans; (ii) the Equal Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public assistance
or the exercise of any right under the Consumer Credit Protection Act, in the
extension of credit; and (iii) the Fair Credit Reporting Act, which regulates
the use and reporting of information related to the borrower's credit
experience. Violations of certain provisions of these federal laws may limit
the ability of the Sellers to collect all or part of the principal of or
interest on the Loans and in addition could subject the Sellers to damages and
administrative enforcement.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
General
The following is a summary of certain anticipated material federal
income tax consequences of the purchase, ownership, and disposition of the
Securities and is based on the opinion of Brown & Wood LLP, special counsel to
the Depositor (in such capacity, "Tax Counsel"). The summary is based upon the
provisions of the Code, the regulations promulgated thereunder, including,
where applicable, proposed regulations, and the judicial and administrative
rulings and decisions now in effect, all of which are subject to change or
possible differing interpretations. The statutory provisions, regulations, and
interpretations on which this interpretation is based are subject to change,
and such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal
income taxation that may affect particular investors in light of their
individual circumstances. This summary focuses primarily upon investors who
will hold Securities as "capital assets" (generally, property held for
investment) within the meaning of section 1221 of the Code. Prospective
investors may wish to consult their own tax advisers concerning the federal,
state, local and any other tax consequences as relates specifically to such
investors in connection with the purchase, ownership and disposition of the
Securities.
The federal income tax consequences to holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a 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, or a
trust with respect to which (i) a court within the United States is able to
exercise primary supervision over the administration of the trust and (ii) one
or more U.S. persons have 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 excess of the stated
redemption price at maturity of a Debt Security over its issue price. In the
opinion of Tax Counsel, a holder of a Debt Security must include such OID in
gross income as ordinary interest income as it accrues under a method taking
into account an economic accrual of the discount. In general, OID must be
included in income in advance of the receipt of the cash representing that
income. The amount of OID on a Debt Security will be considered to be zero if
it is less than a de minimis amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash
on or prior to the Closing Date, the issue price for such class will be
treated as the fair market value of such class on the Closing Date. The issue
price of a Debt Security also includes the amount paid by an initial Debt
Security holder for accrued interest that relates to a period prior to the
issue date of the Debt Security. The stated redemption price at maturity of a
Debt Security includes the original principal amount of the Debt Security, but
generally will not include distributions of interest if such distributions
constitute "qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as
described below) provided that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Debt
Security. The OID Regulations state that interest payments are unconditionally
payable only if a late payment or nonpayment is expected to be penalized or
reasonable remedies exist to compel payment. Certain Debt Securities may
provide for default remedies in the event of late payment or nonpayment of
interest. In the opinion of Tax Counsel, the interest on such Debt Securities
will be unconditionally payable and constitute qualified stated interest, not
OID. However, absent clarification of the OID Regulations, where Debt
Securities do not provide for default remedies, the interest payments will be
included in the Debt Security's stated redemption price at maturity and taxed
as OID. Interest is payable at a single fixed rate only if the rate
appropriately takes into account the length of the interval between payments.
Distributions of interest on Debt Securities with respect to which deferred
interest will accrue, will not constitute qualified stated interest payments,
in which case the stated redemption price at maturity of such Debt Securities
includes all distributions of interest as well as principal thereon. Where the
interval between the issue date and the first Distribution Date on a Debt
Security is either longer or shorter than the interval between subsequent
Distribution Dates, all or part of the interest foregone, in the case of the
longer interval, and all of the additional interest, in the case of the
shorter interval, will be included in the stated redemption price at maturity
and tested under the de minimis rule described below. In the case of a Debt
Security with a long first period which has non-de minimis OID, all stated
interest in excess of interest payable at the effective interest rate for the
long first period will be included in the stated redemption price at maturity
and the Debt Security will generally have OID. Holders of Debt Securities
should consult their own tax advisors to determine the issue price and stated
redemption price at maturity of a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered
to be zero if such OID is less than 0.25% of the stated redemption price at
maturity of the Debt Security multiplied by the weighted average maturity of
the Debt Security. For this purpose, the weighted average maturity of the Debt
Security is computed as the sum of the amounts determined by multiplying the
number of full years (i.e., rounding down partial years) from the issue date
until each distribution in reduction of stated redemption price at maturity is
scheduled to be made by a fraction, the numerator of which is the amount of
each distribution included in the stated redemption price at maturity of the
Debt Security and the denominator of which is the stated redemption price at
maturity of the Debt Security. Holders generally must report de minimis OID
pro rata as principal payments are received, and such income will be capital
gain if the Debt Security is held as a capital asset. However, accrual method
holders may elect to accrue all de minimis OID as well as market discount
under a constant interest method.
Debt Securities may provide for interest based on a qualified
variable rate. Under the OID Regulations, interest is treated as payable at a
qualified variable rate and not as contingent interest if, generally, (i) such
interest is unconditionally payable at least annually, (ii) the issue price of
the debt instrument does not exceed the total noncontingent principal payments
and (iii) interest is based on a "qualified floating rate," an "objective
rate," or a combination of "qualified floating rates" that do not operate in a
manner that significantly accelerates or defers interest payments on such Debt
Security. In the case of Compound Interest Securities, certain Interest
Weighted Securities, and certain of the other Debt Securities, none of the
payments under the instrument will be considered qualified stated interest,
and thus the aggregate amount of all payments will be included in the stated
redemption price.
The Internal Revenue Service (the "IRS") issued regulations (the
"Contingent Regulations") governing the calculation of OID on instruments
having contingent interest payments. The Contingent Regulations represent the
only guidance regarding the views of the IRS with respect to contingent
interest instruments and specifically do not apply for purposes of calculating
OID on debt instruments subject to section 1272(a)(6) of the Code, such as the
Debt Securities. 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 section 1272(a)(6) of the Code 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 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 reduced 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 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 holder during the taxable year
such election is made and thereafter, in which case the interest deferral rule
will not apply.
Premium. In the opinion of Tax Counsel, a holder who purchases a Debt
Security (other than an Interest Weighted Security to the extent described
above) at a cost greater than its stated redemption price at maturity,
generally will be considered to have purchased the Security at a premium,
which it may elect to amortize as an offset to interest income on such
Security (and not as a separate deduction item) on a constant yield method.
The legislative history of the 1986 Act indicates that premium is to be
accrued in the same manner as market discount. Accordingly, it appears that
the accrual of premium on a class of Pay-Through Securities will be calculated
using the prepayment assumption used in pricing such class. If a holder makes
an election to amortize premium on a Debt Security, such election will apply
to all taxable debt instruments (including all REMIC regular interests and all
pass-through certificates representing ownership interests in a trust holding
debt obligations) held by the holder at the beginning of the taxable year in
which the election is made, and to all taxable debt instruments acquired
thereafter by such holder, and will be irrevocable without the consent of the
IRS. Purchasers who pay a premium for the Securities should consult their tax
advisers regarding the election to amortize premium and the application of
recently finalized regulations under Section 171 issued December 30, 1997.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt Security to elect to accrue all
interest, discount (including de minimis market or original issue discount)
and premium in income as interest, based on a constant yield method for Debt
Securities acquired on or after April 4, 1994. If such an election were to be
made with respect to a Debt Security with market discount, the holder of the
Debt Security would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such holder of the Debt Security acquires during the year
of the election or thereafter. Similarly, a holder of a Debt Security that
makes this election for a Debt Security that is acquired at a premium will be
deemed to have made an election to amortize bond premium with respect to all
debt instruments having amortizable bond premium that such holder owns or
acquires. The election to accrue interest, discount and premium on a constant
yield method with respect to a Debt Security is irrevocable.
Taxation of the REMIC and its Holders
General. In the opinion of Tax Counsel, if a REMIC election is made
with respect to a Series of Securities, then the arrangement by which the
Securities of that Series are issued will be treated as a REMIC as long as all
of the provisions of the applicable Agreement are complied with and the
statutory and regulatory requirements are satisfied. Securities will be
designated as "Regular Interests" or "Residual Interests" in a REMIC, as
specified in the related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement,
if a REMIC election is made with respect to a Series of Securities, in the
opinion of Tax Counsel (i) Securities held by a domestic building and loan
association will constitute "a regular or a residual interest in a REMIC"
within the meaning of 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) 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 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.
Residual Interest Securities
In the opinion of Tax Counsel, the holder of a Certificate
representing a residual interest (a "Residual Interest Security") will take
into account the "daily portion" of the taxable income or net loss of the
REMIC for each day during the taxable year on which such holder held the
Residual Interest Security. The daily portion is determined by allocating to
each day in any calendar quarter its ratable portion of the taxable income or
net loss of the REMIC for such quarter, and by allocating that amount among
the holders (on such day) of the Residual Interest Securities in proportion to
their respective holdings on such day.
In the opinion of Tax Counsel, the holder of a Residual Interest
Security must report its proportionate share of the taxable income of the
REMIC whether or not it receives cash distributions from the REMIC
attributable to such income or loss. The reporting of taxable income without
corresponding distributions could occur, for example, in certain REMIC issues
in which the loans held by the REMIC were issued or acquired at a discount,
since mortgage prepayments cause recognition of discount income, while the
corresponding portion of the prepayment could be used in whole or in part to
make principal payments on REMIC Regular Interests issued without any discount
or at an insubstantial discount (if this occurs, it is likely that cash
distributions will exceed taxable income in later years). Taxable income may
also be greater in earlier years of certain REMIC issues as a result of the
fact that interest expense deductions, as a percentage of outstanding
principal on REMIC Regular Interest Securities, will typically increase over
time as lower yielding Securities are paid, whereas interest income with
respect to loans will generally remain constant over time as a percentage of
loan principal.
In any event, because the holder of a residual interest is taxed on
the net income of the REMIC, the taxable income derived from a Residual
Interest Security in a given taxable year will not be equal to the taxable
income associated with investment in a corporate bond or stripped instrument
having similar cash flow characteristics and pretax yield. Therefore, the
after-tax yield on the Residual Interest Security may be less than that of
such a bond or instrument.
Limitation on Losses. In the opinion of Tax Counsel, the amount of
the REMIC's net loss that a holder may take into account currently is limited
to the holder's adjusted basis at the end of the calendar quarter in which
such loss arises. A holder's basis in a Residual Interest Security will
initially equal such holder's purchase price, and will subsequently be
increased by the amount of the REMIC's taxable income allocated to the holder,
and decreased (but not below zero) by the amount of distributions made and the
amount of the REMIC's net loss allocated to the holder. Any disallowed loss
may be carried forward indefinitely, but may be used only to offset income of
the REMIC generated by the same REMIC. The ability of holders of Residual
Interest Securities to deduct net losses may be subject to additional
limitations under the Code, as to which such holders should consult their tax
advisers.
Distributions. In the opinion of Tax Counsel, distributions on a
Residual Interest Security (whether at their scheduled times or as a result of
prepayments) will generally not result in any additional taxable income or
loss to a holder of a Residual Interest Security. If the amount of such
payment exceeds a holder's adjusted basis in the Residual Interest Security,
however, the holder will recognize gain (treated as gain from the sale of the
Residual Interest Security) to the extent of such excess.
Sale or Exchange. In the opinion of Tax Counsel, a holder of a
Residual Interest Security will recognize gain or loss on the sale or exchange
of a Residual Interest Security equal to the difference, if any, between the
amount realized and such holder's adjusted basis in the Residual Interest
Security at the time of such sale or exchange. Except to the extent provided
in regulations, which have not yet been issued, any loss upon disposition of a
Residual Interest Security will be disallowed if the selling holder acquires
any residual interest in a REMIC or similar mortgage pool within six months
before or after such disposition.
Excess Inclusions. In the opinion of Tax Counsel, the portion of the
REMIC taxable income of a holder of a Residual Interest Security consisting of
"excess inclusion" income may not be offset by other deductions or losses,
including net operating losses, on such holder's federal income tax return.
Further, if the holder of a Residual Interest Security is an organization
subject to the tax on unrelated business income imposed by 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 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.
Mark to Market Rules. Prospective purchasers of a REMIC Residual
Interest Security should be aware that the IRS recently finalized regulations
(the "Mark-to-Market Regulations") which provide that a REMIC Residual
Interest Security acquired after January 3, 1995 cannot be marked-to-market.
Prospective purchasers of a REMIC Residual Interest Security should consult
their tax advisors regarding the possible application of the Mark-to-Market
Regulations.
Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS in
a unified administrative proceeding.
Tax Status as a Grantor Trust
General. As further specified in the related Prospectus Supplement,
if a REMIC election is not made and the Trust Fund is not structured as a
partnership, then, in the opinion of Tax Counsel, the Trust Fund relating to a
Series of Securities will be classified for federal income tax purposes as a
grantor trust under subpart E, part 1 of subchapter J of the Code and not as
an association taxable as a corporation (the Securities of such Series,
"Pass-Through Securities"). In some Series there will be no separation of the
principal and interest payments on the Loans. In such circumstances, a holder
will be considered to have purchased a pro rata undivided interest in each of
the Loans. In other cases ("Stripped Securities"), sale of the Securities will
produce a separation in the ownership of all or a portion of the principal
payments from all or a portion of the interest payments on the Loans.
In the opinion of Tax Counsel, each holder must report on its federal
income tax return its share of the gross income derived from the Loans (not
reduced by the amount payable as fees to the Trustee and the Servicer and
similar fees (collectively, the "Servicing Fee")), at the same time and in the
same manner as such items would have been reported under the Holder's tax
accounting method had it held its interest in the Loans directly, received
directly its share of the amounts received with respect to the Loans, and paid
directly its share of the Servicing Fees. In the case of Pass-Through
Securities other than Stripped Securities, such income will consist of a pro
rata share of all of the income derived from all of the Loans and, in the case
of Stripped Securities, such income will consist of a pro rata share of the
income derived from each stripped bond or stripped coupon in which the holder
owns an interest. The holder of a Security will generally be entitled to
deduct such Servicing Fees under section 162 or section 212 of the Code to the
extent that such Servicing Fees represent "reasonable" compensation for the
services rendered by the Trustee and the Servicer (or third parties that are
compensated for the performance of services). In the case of a noncorporate
holder, however, Servicing Fees (to the extent not otherwise disallowed, e.g.,
because they exceed reasonable compensation) will be deductible in computing
such holder's regular tax liability only to the extent that such fees, when
added to other miscellaneous itemized deductions, exceed 2% of adjusted gross
income and may not be deductible to any extent in computing such holder's
alternative minimum tax liability. In addition, for taxable years beginning
after December 31, 1990, the amount of itemized deductions otherwise allowable
for the taxable year for an individual whose adjusted gross income exceeds the
applicable amount (which amount will be adjusted for inflation in taxable
years beginning after 1990) will be reduced by the lesser of (i) 3% of the
excess of adjusted gross income over the applicable amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for such taxable year.
Discount or Premium on Pass-Through Securities. In the opinion of Tax
Counsel, the holder's purchase price of a Pass-Through Security is to be
allocated among the Loans in proportion to their fair market values,
determined as of the time of purchase of the Securities. In the typical case,
the Trustee (to the extent necessary to fulfill its reporting obligations)
will treat each Loan as having a fair market value proportional to the share
of the aggregate principal balances of all of the Loans that it represents,
since the Securities, unless otherwise specified in the related Prospectus
Supplement, will have a relatively uniform interest rate and other common
characteristics. To the extent that the portion of the purchase price of a
Pass-Through Security allocated to a Loan (other than to a right to receive
any accrued interest thereon and any undistributed principal payments) is less
than or greater than the portion of the principal balance of the Loan
allocable to the Security, the interest in the Loan allocable to the
Pass-Through Security will be deemed to have been acquired at a discount or
premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess of
a prescribed de minimis amount or a Stripped Security, a holder of a Security
will be required to report as interest income in each taxable year its share
of the amount of OID that accrues during that year in the manner described
above. OID with respect to a Loan could arise, for example, by virtue of the
financing of points by the originator of the Loan, or by virtue of the
charging of points by the originator of the Loan in an amount greater than a
statutory de minimis exception, in circumstances under which the points are
not currently deductible pursuant to applicable Code provisions. Any market
discount or premium on a Loan will be includible in income, generally in the
manner described above, except that in the case of Pass-Through Securities,
market discount is calculated with respect to the Loans underlying the
Certificate, rather than with respect to the Security. A holder that acquires
an interest in a Loan originated after July 18, 1984 with more than a de
minimis amount of market discount (generally, the excess of the principal
amount of the Loan over the purchaser's allocable purchase price) will be
required to include accrued market discount in income in the manner set forth
above. See "--Taxation of Debt Securities; Market Discount" and "--Premium"
above.
In the case of market discount on a Pass-Through Security
attributable to Loans originated on or before July 18, 1984, the holder
generally will be required to allocate the portion of such discount that is
allocable to a loan among the principal payments on the Loan and to include
the discount allocable to each principal payment in ordinary income at the
time such principal payment is made. Such treatment would generally result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described in the preceding
paragraph.
Stripped Securities. A Stripped Security may represent a right to
receive only a portion of the interest payments on the Loans, a right to
receive only principal payments on the Loans, or a right to receive certain
payments of both interest and principal. Certain Stripped Securities ("Ratio
Strip Securities") may represent a right to receive differing percentages of
both the interest and principal on each Loan. Pursuant to section 1286 of the
Code, the separation of ownership of the right to receive some or all of the
interest payments on an obligation from ownership of the right to receive some
or all of the principal payments results in the creation of "stripped bonds"
with respect to principal payments and "stripped coupons" with respect to
interest payments. Section 1286 of the Code applies the OID rules to stripped
bonds and stripped coupons. For purposes of computing original issue discount,
a stripped bond or a stripped coupon is treated as a debt instrument issued on
the date that such stripped interest is purchased with an issue price equal to
its purchase price or, if more than one stripped interest is purchased, the
ratable share of the purchase price allocable to such stripped interest.
Servicing fees in excess of reasonable servicing fees ("excess
servicing") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (i.e., 1% interest on the Loan
principal balance) or the Securities are initially sold with a de minimis
discount (assuming no prepayment assumption is required), any non-de minimis
discount arising from a subsequent transfer of the Securities should be
treated as market discount. The IRS appears to require that reasonable
servicing fees be calculated on a Loan by Loan basis, which could result in
some Loans being treated as having more than 100 basis points of interest
stripped off.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and original issue discount rules are to apply
to Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the "Cash Flow Bond Method"), a
prepayment assumption is used and periodic recalculations are made which take
into account with respect to each accrual period the effect of prepayments
during such period. However, the 1986 Act does not, absent Treasury
regulations, appear specifically to cover instruments such as the Stripped
Securities which technically represent ownership interests in the underlying
Loans, rather than being debt instruments "secured by" those loans.
Nevertheless, it is believed that the Cash Flow Bond Method is a reasonable
method of reporting income for such Securities, and it is expected that OID
will be reported on that basis unless otherwise specified in the related
Prospectus Supplement. In applying the calculation to Pass-Through Securities,
the Trustee will treat all payments to be received by a holder with respect to
the underlying Loans as payments on a single installment obligation. The IRS
could, however, assert that original issue discount must be calculated
separately for each Loan underlying a Security.
Under certain circumstances, if the Loans prepay at a rate faster
than the Prepayment Assumption, the use of the Cash Flow Bond Method may
accelerate a holder's recognition of income. If, however, the Loans prepay at
a rate slower than the Prepayment Assumption, in some circumstances the use of
this method may decelerate a holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted
Security, the Trustee intends, absent contrary authority, to report income to
Security holders as OID, in the manner described above for Interest Weighted
Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations
of the applicable Code provisions. Among other possibilities, the Internal
Revenue Service could contend that (i) in certain Series, each non-Interest
Weighted Security is composed of an unstripped undivided ownership interest in
Loans and an installment obligation consisting of stripped principal payments;
(ii) the non-Interest Weighted Securities are subject to the contingent
payment provisions of the Proposed Regulations; or (iii) each Interest
Weighted Stripped Security is composed of an unstripped undivided ownership
interest in Loans and an installment obligation consisting of stripped
interest payments.
Given the variety of alternatives for treatment of the Stripped
Securities and the different federal income tax consequences that result from
each alternative, potential purchasers are urged to consult their own tax
advisers regarding the proper treatment of the Securities for federal income
tax purposes.
Character as Qualifying Loans. In the case of Stripped Securities,
there is no specific legal authority existing regarding whether the character
of the Securities, for federal income tax purposes, will be the same as the
Loans. The IRS could take the position that the Loans character is not carried
over to the Securities in such circumstances. Pass-Through Securities will be,
and, although the matter is not free from doubt, Stripped Securities should be
considered to represent "real estate assets" within the meaning of section
856(c)(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, 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 the amount
that would have been includible in the holder's income if the yield on such
Regular Interest Security had equaled 110% of the applicable federal rate as
of the beginning of such holder's holding period, over the amount of ordinary
income actually recognized by the holder with respect to such Regular Interest
Security.
Miscellaneous Tax Aspects
Backup Withholding. Subject to the discussion below with respect to
Trust Funds as to which a partnership election is made, a holder, other than a
holder of a REMIC Residual Security, may, under certain circumstances, be
subject to "backup withholding" at a rate of 31% with respect to distributions
or the proceeds of a sale of certificates to or through brokers that represent
interest or original issue discount on the Securities. This withholding
generally applies if the holder of a Security (i) fails to furnish the Trustee
with its taxpayer identification number ("TIN"); (ii) furnishes the Trustee an
incorrect TIN; (iii) fails to report properly interest, dividends or other
"reportable payments" as defined in the Code; or (iv) under certain
circumstances, fails to provide the Trustee or such holder's securities broker
with a certified statement, signed under penalty of perjury, that the TIN
provided is its correct number and that the holder is not subject to backup
withholding. Backup withholding will not apply, however, with respect to
certain payments made to holders, including payments to certain exempt
recipients (such as exempt organizations) and to certain Nonresidents (as
defined below). Holders should consult their tax advisers as to their
qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
The Trustee will report to the holders and to the Servicer for each
calendar year the amount of any "reportable payments" during such year and the
amount of tax withheld, if any, with respect to payments on the Securities.
New Withholding Regulations
The Treasury Department has issued 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, 2000, 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, (ii) the recipient is a controlled
foreign corporation to which the issuer is a related person) and will be
exempt from federal income tax, or (iii) the recipient is a bank receiving
interest described in section 881(c)(3)(A) of the Code. Upon receipt of
appropriate ownership statements, the issuer normally will be relieved of
obligations to withhold tax from such interest payments. These provisions
supersede the generally applicable provisions of United States law that would
otherwise require the issuer to withhold at a 30% rate (unless such rate were
reduced or eliminated by an applicable tax treaty) on, among other things,
interest and other fixed or determinable, annual or periodic income paid to
Nonresidents. Holders of Pass-Through Securities and Stripped Securities,
including Ratio Strip Securities, however, may be subject to withholding to
the extent that the Loans were originated on or before July 18, 1984.
Interest and OID of holders who are foreign persons are not subject
to withholding if they are effectively connected with a United States business
conducted by the holder. They will, however, generally be subject to the
regular United States income tax.
Payments to holders of Residual Interest Securities who are foreign
persons will generally be treated as interest for purposes of the 30% (or
lower treaty rate) United States withholding tax. Holders should assume that
such income does not qualify for exemption from United States withholding tax
as "portfolio interest." It is clear that, to the extent that a payment
represents a portion of REMIC taxable income that constitutes excess inclusion
income, a holder of a Residual Interest Security will not be entitled to an
exemption from or reduction of the 30% (or lower treaty rate) withholding tax
rule. If the payments are subject to United States withholding tax, they
generally will be taken into account for withholding tax purposes only when
paid or distributed (or when the Residual Interest Security is disposed of).
The Treasury has statutory authority, however, to promulgate regulations which
would require such amounts to be taken into account at an earlier time in
order to prevent the avoidance of tax. Such regulations could, for example,
require withholding prior to the distribution of cash in the case of Residual
Interest Securities that do not have significant value. Under the REMIC
Regulations, if a Residual Interest Security has tax avoidance potential, a
transfer of a Residual Interest Security to a Nonresident will be disregarded
for all Federal tax purposes. A Residual Interest Security has tax avoidance
potential unless, at the time of the transfer the transferor reasonably
expects that the REMIC will distribute to the transferee residual interest
holder amounts that will equal at least 30% of each excess inclusion, and that
such amounts will be distributed at or after the time at which the excess
inclusions accrue and not later than the calendar year following the calendar
year of accrual. If a Nonresident transfers a Residual Interest Security to a
United States person, and if the transfer has the effect of allowing the
transferor to avoid tax on accrued excess inclusions, then the transfer is
disregarded and the transferor continues to be treated as the owner of the
Residual Interest Security for purposes of the withholding tax provisions of
the Code. See "--Residential 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 available to
make payments on the Notes and distributions on the Certificates, and
Certificateholders could be liable for any such tax that is unpaid by the
Trust Fund.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The Trust Fund will agree,
and the Noteholders will agree by their purchase of Notes, to treat the Notes
as debt for federal income tax purposes. In such a circumstance, Tax Counsel
is, except as otherwise provided in the related Prospectus Supplement, of the
opinion that the Notes will be classified as debt for federal income tax
purposes. The discussion below assumes this characterization of the Notes is
correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that
the interest formula for the Notes meets the requirements for "qualified
stated interest" under the OID regulations, and that any OID on the Notes
(i.e., any excess of the principal amount of the Notes over their issue price)
does not exceed a de minimis amount (i.e., 0.25% of their principal amount
multiplied by the number of full years included in their term), all within the
meaning of the OID regulations. If these conditions are not satisfied with
respect to any given series of Notes, additional tax considerations with
respect to such Notes will be disclosed in the applicable Prospectus
Supplement.
Interest Income on the Notes. Based on the above assumptions, except
as discussed in the following paragraph, in the opinion of Tax Counsel, the
Notes will not be considered issued with OID. The stated interest thereon will
be taxable to a Noteholder as ordinary interest income when received or
accrued in accordance with such Noteholder's method of tax accounting. Under
the OID regulations, a holder of a Note issued with a de minimis amount of OID
must include such OID in income, on a pro rata basis, as principal payments
are made on the Note. It is believed that any prepayment premium paid as a
result of a mandatory redemption will be taxable as contingent interest when
it becomes fixed and unconditionally payable. A purchaser who buys a Note for
more or less than its principal amount will generally be subject,
respectively, to the premium amortization or market discount rules of the
Code.
A holder of a Note that has a fixed maturity date of not more than
one year from the issue date of such Note (a "Short-Term Note") may be subject
to special rules. An accrual basis holder of a Short-Term Note (and certain
cash method holders, including regulated investment companies, as set forth in
section 1281 of the Code) generally would be required to report interest
income as interest accrues on a straight-line basis over the term of each
interest period. Other cash basis holders of a Short-Term Note would, in
general, be required to report interest income as interest is paid (or, if
earlier, upon the taxable disposition of the Short-Term Note). However, a cash
basis holder of a Short-Term Note reporting interest income as it is paid may
be required to defer a portion of any interest expense otherwise deductible on
indebtedness incurred to purchase or carry the Short-Term Note until the
taxable disposition of the Short-Term Note. A cash basis taxpayer may elect
under Section 1281 of the Code to accrue interest income on all nongovernment
debt obligations with a term of one year or less, in which case the taxpayer
would include interest on the Short-Term Note in income as it accrues, but
would not be subject to the interest expense deferral rule referred to in the
preceding sentence. Certain special rules apply if a Short-Term Note is
purchased for more or less than its principal amount.
Sale or Other Disposition. In the opinion of Tax Counsel, if a
Noteholder sells a Note, the holder will recognize gain or loss in an amount
equal to the difference between the amount realized on the sale and the
holder's adjusted tax basis in the Note. The adjusted tax basis of a Note to a
particular Noteholder will equal the holder's cost for the Note, increased by
any market discount, acquisition discount, OID and gain previously included by
such Noteholder in income with respect to the Note and decreased by the amount
of bond premium (if any) previously amortized and by the amount of principal
payments previously received by such Noteholder with respect to such Note. Any
such gain or loss will be capital gain or loss if the Note was held as a
capital asset, except for gain representing accrued interest and accrued
market discount not previously included in income. Capital losses generally
may be used only to offset capital gains.
Foreign Holders. In the opinion of Tax Counsel, interest payments
made (or accrued) to a Noteholder who is a nonresident alien, foreign
corporation or other non-United States person (a "foreign person") generally
will be considered "portfolio interest", and generally will not be subject to
United States federal income tax and withholding tax, if the interest is not
effectively connected with the conduct of a trade or business within the
United States by the foreign person and the foreign person (i) is not actually
or constructively a "10 percent shareholder" of the Trust or the Seller
(including a holder of 10% of the outstanding Certificates) or a "controlled
foreign corporation" with respect to which the Trust or the Seller is a
"related person" within the meaning of the Code and (ii) provides the Owner
Trustee or other person who is otherwise required to withhold U.S. tax with
respect to the Notes with an appropriate statement (on Form W-8 or a similar
form), signed under penalties of perjury, certifying that the beneficial owner
of the Note is a foreign person and providing the foreign person's name and
address. If a Note is held through a securities clearing organization or
certain other financial institutions, the organization or institution may
provide the relevant signed statement to the withholding agent; in that case,
however, the signed statement must be accompanied by a Form W-8 or substitute
form provided by the foreign person that owns the Note. If such interest is
not portfolio interest, then it will be subject to United States federal
income and withholding tax at a rate of 30 percent, unless reduced or
eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or
other taxable disposition of a Note by a foreign person will be exempt from
United States federal income and withholding tax, provided that (i) such gain
is not effectively connected with the conduct of a trade or business in the
United States by the foreign person and (ii) in the case of an individual
foreign person, the foreign person is not present in the United States for 183
days or more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt
holder such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's
name, address, correct federal taxpayer identification number and a statement
that the holder is not subject to backup withholding. Should a nonexempt
Noteholder fail to provide the required certification, the Trust Fund will be
required to withhold 31 percent of the amount otherwise payable to the holder,
and remit the withheld amount to the IRS as a credit against the holder's
federal income tax liability.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of Tax Counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for federal income tax purposes, the Notes might
be treated as equity interests in the Trust Fund. If so treated, the Trust
Fund might be treated as a publicly traded partnership that would not be
taxable as a corporation because it would meet certain qualifying income
tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including pension
funds) would be "unrelated business taxable income", income to foreign holders
generally would be subject to U.S. tax and U.S. tax return filing and
withholding requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of the Trust Fund's
expenses.
Tax Consequences to Holders of the Certificates
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase
of Certificates, to treat the Trust Fund as a partnership for purposes of
federal and state income tax, franchise tax and any other tax measured in
whole or in part by income, with the assets of the partnership being the
assets held by the Trust Fund, the partners of the partnership being the
Certificateholders, and the Notes being debt of the partnership. However, the
proper characterization of the arrangement involving the Trust Fund, the
Certificates, the Notes, the Trust Fund and the Servicer is not clear because
there is no authority on transactions closely comparable to that contemplated
herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series
of Securities includes a single class of Certificates. If these conditions are
not satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. If the Trust Fund is a partnership, in the
opinion of Tax Counsel, the Trust Fund will not be subject to federal income
tax. Rather, in the opinion of Tax Counsel, each Certificateholder will be
required to separately take into account such holder's allocated share of
income, gains, losses, deductions and credits of the Trust Fund. The Trust
Fund's income will consist primarily of interest and finance charges earned on
the Loans (including appropriate adjustments for market discount, OID and bond
premium) and any gain upon collection or disposition of Loans. The Trust
Fund's deductions will consist primarily of interest accruing with respect to
the Notes, servicing and other fees, and losses or deductions upon collection
or disposition of Loans.
In the opinion of Tax Counsel, the tax items of a partnership are
allocable to the partners in accordance with the Code, Treasury regulations
and the partnership agreement (here, the Trust Agreement and related
documents). The Trust Agreement will provide, in general, that the
Certificateholders will be allocated taxable income of the Trust Fund for each
month equal to the sum of (i) the interest that accrues on the Certificates in
accordance with their terms for such month, including interest accruing at the
Pass-Through Rate for such month and interest on amounts previously due on the
Certificates but not yet distributed; (ii) any Trust Fund income attributable
to discount on the Loans that corresponds to any excess of the principal
amount of the Certificates over their initial issue price (iii) prepayment
premium payable to the Certificateholders for such month; and (iv) any other
amounts of income payable to the Certificateholders for such month. Such
allocation will be reduced by any amortization by the Trust Fund of premium on
Loans that corresponds to any excess of the issue price of Certificates over
their principal amount. All remaining taxable income of the Trust Fund will be
allocated to the Depositor. Based on the economic arrangement of the parties,
in the opinion of Tax Counsel, this approach for allocating Trust Fund income
should be permissible under applicable Treasury regulations, although no
assurance can be given that the IRS would not require a greater amount of
income to be allocated to Certificateholders. Moreover, in the opinion of Tax
Counsel, even under the foregoing method of allocation, Certificateholders may
be allocated income equal to the entire Pass-Through Rate plus the other items
described above even though the Trust Fund might not have sufficient cash to
make current cash distributions of such amount. Thus, cash basis holders will
in effect be required to report income from the Certificates on the accrual
basis and Certificateholders may become liable for taxes on Trust Fund income
even if they have not received cash from the Trust Fund to pay such taxes. In
addition, because tax allocations and tax reporting will be done on a uniform
basis for all Certificateholders but Certificateholders may be purchasing
Certificates at different times and at different prices, Certificateholders
may be required to report on their tax returns taxable income that is greater
or less than the amount reported to them by the Trust Fund.
In the opinion of Tax Counsel, all of the taxable income allocated to
a Certificateholder that is a pension, profit sharing or employee benefit plan
or other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
In the opinion of Tax Counsel, an individual taxpayer's share of
expenses of the Trust Fund (including fees to the Servicer but not interest
expense) would be miscellaneous itemized deductions. Such deductions might be
disallowed to the individual in whole or in part and might result in such
holder being taxed on an amount of income that exceeds the amount of cash
actually distributed to such holder over the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to
income and allocations to Certificateholders on an aggregate basis. If the IRS
were to require that such calculations be made separately for each Loan, the
Trust Fund might be required to incur additional expense but it is believed
that there would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued
with OID, and, therefore, the Trust should not have OID income. However, the
purchase price paid by the Trust Fund for the Loans may be greater or less
than the remaining principal balance of the Loans at the time of purchase. If
so, in the opinion of Tax Counsel, the Loan will have been acquired at a
premium or discount, as the case may be. (As indicated above, the Trust Fund
will make this calculation on an aggregate basis, but might be required to
recompute it on a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium,
the Trust Fund will elect to include any such discount in income currently as
it accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. Pursuant to final Treasury regulations
issued May 9, 1997 under section 708 of the Code a sale or exchange of 50
percent or more of the capital and profits in the issuer entity within a
12-month tax period would cause a deemed contribution of assets of the issuer
entity (the "old partnership") to a new partnership (the "new partnership") in
exchange for interest in the new partnership. Such interests would be deemed
distributed to the partners of the old partnership in liquidation thereof,
which would not constitute a sale or exchange.
Disposition of Certificates. Generally, in the opinion of Tax
Counsel, capital gain or loss will be recognized on a sale of Certificates in
an amount equal to the difference between the amount realized and the seller's
tax basis in the Certificates sold. A Certificateholder's tax basis in a
Certificate will generally equal the holder's cost increased by the holder's
share of Trust Fund income (includible in income) and decreased by any
distributions received with respect to such Certificate. In addition, both the
tax basis in the Certificates and the amount realized on a sale of a
Certificate would include the holder's share of the Notes and other
liabilities of the Trust Fund. A holder acquiring Certificates at different
prices may be required to maintain a single aggregate adjusted tax basis in
such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the
Certificates sold (rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate).
Any gain on the sale of a Certificate attributable to the holder's
share of unrecognized accrued market discount on the Receivables would
generally be treated as ordinary income to the holder and would give rise to
special tax reporting requirements. The Trust Fund does not expect to have any
other assets that would give rise to such special reporting requirements.
Thus, to avoid those special reporting requirements, the Trust Fund will elect
to include market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount
of income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise
to a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the
Trust Fund's taxable income and losses will be determined monthly and the tax
items for a particular calendar month will be apportioned among the
Certificateholders in proportion to the principal amount of Certificates owned
by them as of the close of the last day of such month. As a result, a holder
purchasing Certificates may be allocated tax items (which will affect its tax
liability and tax basis) attributable to periods before the actual
transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or
losses of the Trust Fund might be reallocated among the Certificateholders.
The Trust Fund's method of allocation between transferors and transferees may
be revised to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder
had. The tax basis of the Trust Fund's assets will not be adjusted to reflect
that higher (or lower) basis unless the Trust Fund were to file an election
under section 754 of the Code. In order to avoid the administrative
complexities that would be involved in keeping accurate accounting records, as
well as potentially onerous information reporting requirements, the Trust Fund
will not make such election. As a result, Certificateholders might be
allocated a greater or lesser amount of Trust Fund income than would be
appropriate based on their own purchase price for Certificates.
Administrative Matters. The Owner Trustee is required to keep or have
kept complete and accurate books of the Trust Fund. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and
the fiscal year of the Trust will be the calendar year. The Trustee will file
a partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Trust Fund and will report each Certificateholder's allocable
share of items of Trust Fund income and expense to holders and the IRS on
Schedule K-1. The Trust Fund will provide the Schedule K-l information to
nominees that fail to provide the Trust Fund with the information statement
described below and such nominees will be required to forward such information
to the beneficial owners of the Certificates. Generally, holders must file tax
returns that are consistent with the information return filed by the Trust
Fund or be subject to penalties unless the holder notifies the IRS of all such
inconsistencies.
Under section 6031 of the Code, any person that holds Certificates as
a nominee at any time during a calendar year is required to furnish the Trust
Fund with a statement containing certain information on the nominee, the
beneficial owners and the Certificates so held. Such information includes (i)
the name, address and taxpayer identification number of the nominee and (ii)
as to each beneficial owner (x) the name, address and identification number of
such person, (y) whether such person is a United States person, a tax-exempt
entity or a foreign government, an international organization, or any wholly
owned agency or instrumentality of either of the foregoing, and (z) certain
information on Certificates that were held, bought or sold on behalf of such
person throughout the year. In addition, brokers and financial institutions
that hold Certificates through a nominee are required to furnish directly to
the Trust Fund information as to themselves and their ownership of
Certificates. A clearing agency registered under section 17A of the 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
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, 2000, subject to certain transition
rules. Prospective investors are urged to consult their own tax advisors
regarding the New Regulations.
FASIT Securities
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory
vehicle for the issuance of mortgage-backed and asset-backed securities.
Although the FASIT provisions of the Code became effective on September 1,
1997, no Treasury regulations or other administrative guidance has been issued
with respect to those provisions. Accordingly, definitive guidance cannot be
provided with respect to many aspects of the tax treatment of FASIT
Securityholders. Investors also should note that the FASIT discussions
contained herein constitutes only a summary of the federal income tax
consequences to holders of FASIT Securities. With respect to each Series of
FASIT Securities, the related Prospectus Supplement will provide a detailed
discussion regarding the federal income tax consequences associated with the
particular transaction.
FASIT Securities will be classified as either FASIT Regular
Securities, which generally will be treated as debt for federal income tax
purposes, or FASIT Ownership Securities, which generally are not treated as
debt for such purposes, but rather as representing rights and responsibilities
with respect to the taxable income or loss of the related Series. The
Prospectus Supplement for each Series of Securities will indicate whether one
or more FASIT elections will be made for that Series and which Securities of
such Series will be designated as Regular Securities, and which, if any, will
be designated as Ownership Securities.
Qualification as a FASIT. The Trust Fund underlying a Series (or one
or more designated pools of assets held in the Trust Fund) will qualify under
the Code as a FASIT in which the FASIT Regular Securities and the FASIT
Ownership Securities will constitute the "regular interests" and the
"ownership interests," respectively, if (i) a FASIT election is in effect,
(ii) certain tests concerning (A) the composition of the FASIT's assets and
(B) the nature of the Securityholders' interest in the FASIT are met on a
continuing basis, and (iii) the Trust Fund is not a regulated company as
defined in section 851(a) of the Code.
Asset Composition. In order for a Trust Fund (on one or more
designated pools of assets held by a Trust Fund) to be eligible for FASIT
status, substantially all of the assets of the Trust Fund (or the designated
pool) must consist of "permitted assets" as of the close of the third month
beginning after the closing date and at all times thereafter (the "FASIT
Qualification Test"). Permitted assets include (i) cash or cash equivalents,
(ii) debt instruments with fixed terms that would qualify as REMIC regular
interests if issued by a REMIC (generally, instruments that provide for
interest at a fixed rate, a qualifying variable rate, or a qualifying
interest-only ("IO") type rate, (iii) foreclosure property, (iv) certain
hedging instruments (generally, interest and currency rate swaps and credit
enhancement contracts) that are reasonably required to guarantee or hedge
against the FASIT's risks associated with being the obligor on FASIT
interests, (v) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments, (vi) FASIT regular interests, and (vii) REMIC
regular interests. Permitted assets do not include any debt instruments issued
by the holder of the FASIT's ownership interest or by any person related to
such holder.
Interests in a FASIT. In addition to the foregoing asset
qualification requirements, the interests in a FASIT also must meet certain
requirements. All of the interests in a FASIT must belong to either of the
following: (i) one or more classes of regular interests or (ii) a single class
of ownership interest that is held by a fully taxable domestic corporation. In
the case of Series that include FASIT Ownership Securities, the ownership
interest will be represented by the FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it
is designated as a regular interest, (ii) it has a stated maturity no greater
than thirty years, (iii) it entitles its holder to a specified principal
amount, (iv) the issue price of the interest does not exceed 125% of its
stated principal amount, (v) the yield to maturity of the interest is less
than the applicable Treasury rate published by the IRS plus 5%, and (vi) if it
pays interest, such interest is payable at either (a) a fixed rate with
respect to the principal amount of the regular interest or (b) a permissible
variable rate with respect to such principal amount. Permissible variable
rates for FASIT regular interests are the same as those for REMIC regular
interest (i.e., certain qualified floating rates and weighted average rates).
See "--Taxation of Debt Securities--Variable Rate Debt Securities" above.
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 "--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 original issue
discount or acquired with market discount or premium, interest paid or accrued
on a FASIT Regular Security generally will be treated as ordinary income to
the Securityholder and a principal payment on such Security will be treated as
a return of capital to the extent that the Securityholder's basis is allocable
to that payment. FASIT Regular Securities issued with OID 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 "--Taxation of Debt Securities", "--Market Discount", and
"--Premium" above. High-Yield Securities may be held only by fully taxable
domestic corporations, other FASITs, and certain securities dealers. Holders
of High-Yield Securities are subject to limitations on their ability to use
current losses or net operating loss carryforwards or carrybacks to offset any
income derived from those Securities.
If a FASIT Regular Security is sold or exchanged, the Securityholder
generally will recognize gain or loss upon the sale in the manner described
above for REMIC Regular Securities. See "--Sale or Exchange" above. 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 "--Taxation of Debt
Instruments--Effects of Default and Delinquencies" above.
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." In addition, FASIT Regular
Securities held by a financial institution to which section 585 of the Code
applies will be treated as evidences of indebtedness for purposes of section
582(c)(1) of the Code. FASIT Securities will not qualify as "Government
Securities" for either REIT or RIC qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject
to special rules regarding the eligibility of holders of such interests, and
the ability of such holders to offset income derived from their FASIT Security
with losses. High-Yield Interests may be held only by Eligible Corporations
other FASITs, and dealers in securities who acquire such interests as
inventory. If a securities dealer (other than an Eligible Corporation)
initially acquires a High-Yield Interest as inventory, but later begins to
hold it for investment, the dealer will be subject to an excise tax equal to
the income from the High-Yield Interest multiplied by the highest corporate
income tax rate. In addition, transfers of High-Yield Interests to
disqualified holders will be disregarded for federal income tax purposes, and
the transferor still will be treated as the holder of the High-Yield Interest.
The holder of a High-Yield Interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from the High-Yield Interest, for either regular Federal income tax
purposes or for alternative minimum tax purposes. In addition, the FASIT
provisions contain an anti-abuse rule that imposes corporate income tax on
income derived from a FASIT Regular Security that is held by a pass-through
entity (other than another FASIT) that issues debt or equity securities backed
by the FASIT Regular Security and that have the same features as High-Yield
Interests.
Tax Treatment of FASIT Ownership Securities. A FASIT Ownership
Security represents the residual equity interest in a FASIT. As such, the
holder of a FASIT Ownership Security determines its taxable income by taking
into account all assets, liabilities and items of income, gain, deduction,
loss and credit of a FASIT. In general, the character of the income to the
holder of a FASIT Ownership Interest will be the same as the character of such
income of the FASIT, except that any tax-exempt interest income taken into
account by the holder of a FASIT Ownership Interest is treated as ordinary
income. In determining that taxable income, the holder of a FASIT Ownership
Security must determine the amount of interest, original issue discount,
market discount and premium recognized with respect to the FASIT's assets and
the FASIT Regular Securities issued by the FASIT according to a constant yield
methodology and under an accrual method of accounting. In addition, holders of
FASIT Ownership Securities are subject to the same limitations on their
ability to use losses to offset income from their FASIT Security as are the
holders of High-Yield Interests. See "--Treatment of High-Yield Interests"
above.
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 "--Miscellaneous Tax
Aspects--Backup Withholding" above. For purposes of reporting and tax
administration, holders of record of FASIT Securities generally will be
treated in the same manner as holders of REMIC Securities.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Certain Material Federal Income Tax Considerations," potential investors
should consider the state and local income tax consequences of the
acquisition, ownership, and disposition of the Securities. State and local
income tax law may differ substantially from the corresponding federal law,
and this discussion does not purport to describe any aspect of the income tax
laws of any state or locality. Therefore, potential investors should consult
their own tax advisors with respect to the various state and local tax
consequences of an investment in the Securities.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the
Code, which apply only to Securities of a Series that are not divided into
subclasses. If Securities are divided into subclasses the related Prospectus
Supplement will contain information concerning considerations relating to
ERISA and the Code that are applicable to such Securities.
ERISA imposes requirements on employee benefit plans (and on certain
other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and
separate accounts in which such plans, accounts or arrangements are invested)
(collectively "Plans") subject to ERISA and on persons who are fiduciaries
with respect to such Plans. Generally, ERISA applies to investments made by
Plans. Among other things, ERISA requires that the assets of Plans be held in
trust and that the trustee, or other duly authorized fiduciary, have exclusive
authority and discretion to manage and control the assets of such Plans. ERISA
also imposes certain duties on persons who are fiduciaries of Plans. Under
ERISA, any person who exercises any authority or control respecting the
management or disposition of the assets of a Plan is considered to be a
fiduciary of such Plan (subject to certain exceptions not here relevant).
Certain employee benefit plans, such as governmental plans (as defined in
ERISA Section 3(32)) and, if no election has been made under Section 410(d) of
the Code, church plans (as defined in ERISA Section 3(33)), are not subject to
ERISA requirements. Accordingly, assets of such plans may be invested in
Securities without regard to the ERISA considerations described above and
below, subject to the provisions of applicable state law. Any such plan which
is qualified and exempt from taxation under Code Sections 401(a) and 501(a),
however, is subject to the prohibited transaction rules set forth in Code
Section 503.
On November 13, 1986, the United States Department of Labor (the
"DOL") issued final regulations concerning the definition of what constitutes
the assets of a Plan. (Labor Reg. Section 2510.3-101) Under this regulation,
the underlying assets and properties of corporations, partnerships and certain
other entities in which a Plan makes an "equity" investment could be deemed
for purposes of ERISA to be assets of the investing Plan in certain
circumstances. However, the regulation provides that, generally, the assets of
a corporation or partnership in which a Plan invests will not be deemed for
purposes of ERISA to be assets of such Plan if the equity interest acquired by
the investing Plan is a publicly-offered security. A publicly-offered
security, as defined in the Labor Reg. Section 2510.3-101, is a security that
is widely held, freely transferable and registered under the Securities
Exchange Act of 1934, as amended.
In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA prohibits a broad range of
transactions involving Plan assets and persons ("Parties in Interest") having
certain specified relationships to a Plan and imposes additional prohibitions
where Parties in Interest are fiduciaries with respect to such Plan. Because
the Loans may be deemed Plan assets of each Plan that purchases Securities, an
investment in the Securities by a Plan might be a prohibited transaction under
ERISA Sections 406 and 407 and subject to an excise tax under Code Section
4975 unless a statutory or administrative exemption applies.
In Prohibited Transaction Exemption 83-1 ("PTE 83-1"), which amended
Prohibited Transaction Exemption 81-7, the DOL exempted from ERISA's
prohibited transaction rules certain transactions relating to the operation of
residential mortgage pool investment trusts and the purchase, sale and holding
of "mortgage pool pass-through certificates" in the initial issuance of such
certificates. PTE 83-1 permits, subject to certain conditions, transactions
which might otherwise be prohibited between Plans and Parties in Interest with
respect to those Plans related to the origination, maintenance and termination
of mortgage pools consisting of mortgage loans secured by first or second
mortgages or deeds of trust on single-family residential property, and the
acquisition and holding of certain mortgage pool pass-through certificates
representing an interest in such mortgage pools by Plans. If the general
conditions (discussed below) of PTE 83-1 are satisfied, investments by a Plan
in Securities that represent interests in a Pool consisting of Loans ("Single
Family Securities") will be exempt from the prohibitions of ERISA Sections
406(a) and 407 (relating generally to transactions with Parties in Interest
who are not fiduciaries) if the Plan purchases the Single Family Securities at
no more than fair market value and will be exempt from the prohibitions of
ERISA Sections 406(b)(1) and (2) (relating generally to transactions with
fiduciaries) if, in addition, the purchase is approved by an independent
fiduciary, no sales commission is paid to the pool sponsor, the Plan does not
purchase more than 25% of all Single Family Securities, and at least 50% of
all Single Family Securities are purchased by persons independent of the pool
sponsor or pool trustee. PTE 83-1 does not provide an exemption for
transactions involving Subordinate Securities. Accordingly, unless otherwise
provided in the related Prospectus Supplement, no transfer of a Subordinate
Security or a Security which is not a Single Family Security may be made to a
Plan.
The discussion in this and the next succeeding paragraph applies only
to Single Family Securities. The Depositor believes that, for purposes of PTE
83-1, the term "mortgage pass-through certificate" would include: (i)
Securities issued in a Series consisting of only a single class of Securities;
and (ii) Securities issued in a Series in which there is only one class of
Trust Securities; provided that the Securities in the case of clause (i), or
the Securities in the case of clause (ii), evidence the beneficial ownership
of both a specified percentage of future interest payments (greater than 0%)
and a specified percentage (greater than 0%) of future principal payments on
the Loans. It is not clear whether a class of Securities that evidences the
beneficial ownership in a Trust Fund divided into Loan groups, beneficial
ownership of a specified percentage of interest payments only or principal
payments only, or a notional amount of either principal or interest payments,
or a class of Securities entitled to receive payments of interest and
principal on the Loans only after payments to other classes or after the
occurrence of certain specified events would be a "mortgage pass-through
certificate" for purposes of PTE 83-1.
PTE 83-1 sets forth three general conditions which must be satisfied
for any transaction to be eligible for exemption: (i) the maintenance of a
system of insurance or other protection for the pooled mortgage loans and
property securing such loans, and for indemnifying Securityholders against
reductions in pass-through payments due to property damage or defaults in loan
payments in an amount not less than the greater of one percent of the
aggregate principal balance of all covered pooled mortgage loans or the
principal balance of the largest covered pooled mortgage loan; (ii) the
existence of a pool trustee who is not an affiliate of the pool sponsor; and
(iii) a limitation on the amount of the payment retained by the pool sponsor,
together with other funds inuring to its benefit, to not more than adequate
consideration for selling the mortgage loans plus reasonable compensation for
services provided by the pool sponsor to the Pool. The Depositor believes that
the first general condition referred to above will be satisfied with respect
to the Securities in a Series issued without a subordination feature, or the
Securities only in a Series issued with a subordination feature, provided that
the subordination and Reserve Account, subordination by shifting of interests,
the pool insurance or other form of credit enhancement described herein (such
subordination, pool insurance or other form of credit enhancement being the
system of insurance or other protection referred to above) with respect to a
Series of Securities is maintained in an amount not less than the greater of
one percent of the aggregate principal balance of the Loans or the principal
balance of the largest Loan. See "Description of the Securities" herein. In
the absence of a ruling that the system of insurance or other protection with
respect to a Series of Securities satisfies the first general condition
referred to above, there can be no assurance that these features will be so
viewed by the DOL.
The Trustee will not be affiliated with the Depositor.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Single Family
Securities must make its own determination as to whether the first and third
general conditions, and the specific conditions described briefly in the
preceding paragraph, of PTE 83-1 have been satisfied, or as to the
availability of any other prohibited transaction exemptions. Each Plan
fiduciary should also determine whether, under the general fiduciary standards
of investment prudence and diversification, an investment in the Securities is
appropriate for the Plan, taking into account the overall investment policy of
the Plan and the composition of the Plan's investment portfolio.
On September 6, 1990 the DOL issued to Greenwich Capital Markets,
Inc., an individual exemption (Prohibited Transaction Exemption 90-59;
Exemption Application No. D-8374, 55 Fed. Reg. 36724) (the "Underwriter
Exemption") which applies to certain sales and servicing of "certificates"
that are obligations of a "trust" with respect to which Greenwich Capital
Markets, Inc. is the underwriter, manager or co-manager of an underwriting
syndicate. The Underwriter Exemption provides relief which is generally
similar to that provided by PTE 83-1, but is broader in several respects.
The Underwriter Exemption contains several requirements, some of
which differ from those in PTE 83-l. The Underwriter Exemption contains an
expanded definition of "certificate" which includes an interest which entitles
the holder to pass-through payments of principal, interest and/or other
payments. The Underwriter Exemption contains an expanded definition of "trust"
which permits the trust corpus to consist of secured consumer receivables. The
definition of "trust", however, does not include any investment pool unless,
inter alia, (i) the investment pool consists only of assets of the type which
have been included in other investment pools, (ii) certificates evidencing
interests in such other investment pools have been purchased by investors
other than Plans for at least one year prior to the Plan's acquisition of
certificates pursuant to the Underwriter Exemption, and (iii) certificates in
such other investment pools have been rated in one of the three highest
generic rating categories of the four credit rating agencies noted below.
Generally, the Underwriter Exemption holds that the acquisition of the
certificates by a Plan must be on terms (including the price for the
certificates) that are at least as favorable to the Plan as they would be in
an arm's length transaction with an unrelated party. The Underwriter Exemption
requires that the rights and interests evidenced by the certificates not be
"subordinated" to the rights and interests evidenced by other certificates of
the same trust. The Underwriter Exemption requires that certificates acquired
by a Plan have received a rating at the time of their acquisition that is in
one of the three highest generic rating categories of Standard & Poor's
Corporation, Moody's Investors Service, Inc., Duff & Phelps Inc. or Fitch
Investors Service, Inc. The Underwriter Exemption specifies that the pool
trustee must not be an affiliate of the pool sponsor, nor an affiliate of the
Underwriter, the pool servicer, any obligor with respect to mortgage loans
included in the trust constituting more than five percent of the aggregate
unamortized principal balance of the assets in the trust, or any affiliate of
such entities. Finally, the Underwriter Exemption stipulates that any Plan
investing in the certificates must be an "accredited investor" as defined in
Rule 501(a)(1) of Regulation D of the Securities and Exchange Commission under
the Securities Act of 1933.
Any Plan fiduciary which proposes to cause a Plan to purchase
Securities should consult with their counsel concerning the impact of ERISA
and the Code, the applicability of PTE 83-1 and the Underwriter Exemption, and
the potential consequences in their specific circumstances, prior to making
such investment. Moreover, each Plan fiduciary should determine whether under
the general fiduciary standards of investment procedure and diversification an
investment in the Securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
On July 21, 1997, the DOL published in the Federal Register an
amendment to the Exemption which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. The amendment generally
allows mortgage loans (the "Obligations") supporting payments to
certificateholders, and having a value equal to no more than twenty-five
percent (25%) of the total principal amount of the certificates being offered
by the trust, to be transferred to the trust within a 90-day or three-month
period following the closing date ("Pre-Funding Period"), instead of requiring
that all such Obligations be either identified or transferred on or before the
closing date. The relief is available when the following conditions are met:
(1) The ratio of the amount allocated to the pre-funding
account to the total principal amount of the certificates
being offered (the "Pre-Funding Limit") must not exceed
twenty-five percent (25%).
(2) All Obligations transferred after the closing date (the
Additional Obligations") must meet the same terms and
conditions for eligibility as the original Obligations used
to create the trust, which terms and conditions have been
approved by an Exemption Rating Agency.
(3) The transfer of such Additional Obligations to the trust
during the Pre-Funding Period must not result in the
certificates to be covered by the Exemption receiving a
lower credit rating from an Exemption Rating Agency upon
termination of the Pre-Funding Period than the rating that
was obtained at the time of the initial issuance of the
certificates by the trust.
(4) Solely as a result of the use of pre-funding, the
weighted average annual percentage interest rate (the
Average Interest Rate") for all of the Obligations in the
trust at the end of the Pre-Funding Period must not be more
than 100 basis points lower than the average interest rate
for the Obligations which were transferred to the trust on
the closing date.
(5) Either:
(i) the characteristics of the Additional
Obligations must be monitored by an insurer or other credit
support provider which is independent of the depositor; or
(ii) an independent accountant retained by
the depositor must provide the depositor with a letter (with
copies provided to each Exemption Rating Agency rating the
certificates, the related underwriter and the related
trustee) stating whether or not the characteristics of the
Additional Obligations conform to the characteristics
described in the related prospectus or prospectus supplement
and/or pooling and servicing agreement. In preparing such
letter, the independent accountant must use the same type of
procedures as were applicable to the Obligations which were
transferred to the trust as of the closing date.
(6) The Pre-Funding Period must end no later than three
months or 90 days after the closing date or earlier in
certain circumstances if the pre-funding account falls below
the minimum level specified in the pooling and servicing
agreement or an event of default occurs.
(7) Amounts transferred to any pre-funding account and/or
capitalized interest account used in connection with the
pre-funding may be invested only in investments which are
permitted by the Exemption Rating Agencies rating the
certificates and must:
(i) be direct obligations of, or
obligations fully guaranteed as to timely payment of
principal and interest by, the United States or any agency
or instrumentality thereof (provided that such obligations
are backed by the full faith and credit of the United
States); or
(ii) have been rated (or the obligor has
been rated) in one or the three highest generic rating
categories by an Exemption Rating Agency ("DOL Permitted
Investments").
(8) The related prospectus or prospectus supplement must
describe:
(i) any pre-funding account and/or
capitalized interest account used in connection with a
pre-funding account;
(ii) the duration of the Pre-Funding Period;
(iii) the percentage and/or dollar
amount of the Pre-Funding Limit for the trust; and
(iv) that the amounts remaining in the
pre-funding account at the end of the Pre-Funding Period
will be remitted to certificateholders as repayments of
principal.
(9) The related pooling and servicing agreement must
describe the DOL Permitted Investments for the pre-funding
account and/or capitalized interest account and, if not
disclosed in the related prospectus or prospectus
supplement, the terms and conditions for eligibility of
Additional Obligations.
LEGAL INVESTMENT
The Prospectus Supplement for each series of Securities will specify
which, if any, of the classes of Securities offered thereby constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Classes of Securities that qualify as
"mortgage related securities" will be legal investments for persons, trusts,
corporations, partnerships, associations, business trusts, and business
entities (including depository institutions, life insurance companies and
pension funds) created pursuant to or existing under the laws of the United
States or of any state (including the District of Columbia and Puerto Rico)
whose authorized investments are subject to state regulations to the same
extent as, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any such entities. Under SMMEA,
if a state enacted legislation prior to October 4, 1991 specifically limiting
the legal investment authority of any such entities with respect to "mortgage
related securities", securities will constitute legal investments for entities
subject to such legislation only to the extent provided therein. Approximately
twenty-one states adopted such legislation prior to the October 4, 1991
deadline. SMMEA provides, however, that in no event will the enactment of any
such legislation affect the validity of any contractual commitment to
purchase, hold or invest in securities, or require the sale or other
disposition of securities, so long as such contractual commitment was made or
such securities were acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and
loan associations and federal savings banks may invest in, sell or otherwise
deal in Securities without limitations as to the percentage of their assets
represented thereby, federal credit unions may invest in mortgage related
securities, and national banks may purchase certificates for their own account
without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (Seventh), subject in each case to such
regulations as the applicable federal authority may prescribe. In this
connection, federal credit unions should review the National Credit Union
Administration ("NCUA") Letter to Credit Unions No. 96, as modified by Letter
to Credit Unions No. 108, which includes guidelines to assist federal credit
unions in making investment decisions for mortgage related securities and the
NCUA's regulation "Investment and Deposit Activities" (12 C.F.R. Part 703),
which sets forth certain restrictions on investment by federal credit unions
in mortgage related securities.
All depository institutions considering an investment in the
Securities (whether or not the class of Securities under consideration for
purchase constitutes a "mortgage related security") should review the Federal
Financial Institutions Examination Council's Supervisory Policy Statement on
the Securities Activities (to the extent adopted by their respective
regulators) (the "Policy Statement") setting forth, in relevant part, certain
securities trading and sales practices deemed unsuitable for an institution's
investment portfolio, and guidelines for (and restrictions on) investing in
mortgage derivative products, including "mortgage related securities", which
are "high-risk mortgage securities" as defined in the Policy Statement.
According to the Policy Statement such "high-risk mortgage securities" include
securities such as Securities not entitled to distributions allocated to
principal or interest, or Subordinated Securities. Under the Policy Statement,
it is the responsibility of each depository institution to determine, prior to
purchase (and at stated intervals thereafter), whether a particular mortgage
derivative product is a "high-risk mortgage security", and whether the
purchase (or retention) of such a product would be consistent with the Policy
Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to "prudent investor" provisions which may restrict or prohibit
investment in securities which are not "interest bearing" or "income paying".
There may be other restrictions on the ability of certain investors,
including depositors institutions, either to purchase Securities or to
purchase Securities representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Securities constitute legal
investments for such investors.
METHOD OF DISTRIBUTION
The Securities offered hereby and by the Prospectus Supplement will
be offered in Series. The distribution of the Securities may be effected from
time to time in one or more transactions, including negotiated transactions,
at a fixed public offering price or at varying prices to be determined at the
time of sale or at the time of commitment therefor. If so specified in the
related Prospectus Supplement, the Securities will be distributed in a firm
commitment underwriting, subject to the terms and conditions of the
underwriting agreement, by Greenwich Capital Markets, Inc. ("GCM") acting as
underwriter with other underwriters, if any, named therein. In such event, the
related Prospectus Supplement may also specify that the underwriters will not
be obligated to pay for any Securities agreed to be purchased by purchasers
pursuant to purchase agreements acceptable to the Depositor. In connection
with the sale of the Securities, underwriters may receive compensation from
the Depositor or from purchasers of the Securities in the form of discounts,
concessions or commissions. The related Prospectus Supplement will describe
any such compensation paid by the Depositor.
Alternatively, the related Prospectus Supplement may specify that the
Securities will be distributed by GCM acting as agent or in some cases as
principal with respect to Securities that it has previously purchased or
agreed to purchase. If GCM acts as agent in the sale of Securities, GCM will
receive a selling commission with respect to each Series of Securities,
depending on market conditions, expressed as a percentage of the aggregate
principal balance of the related Trust Fund Assets as of the Cut-off Date. The
exact percentage for each Series of Securities will be disclosed in the
related Prospectus Supplement. To the extent that GCM elects to purchase
Securities as principal, GCM may realize losses or profits based upon the
difference between its purchase price and the sales price. The Prospectus
Supplement with respect to any Series offered other than through underwriters
will contain information regarding the nature of such offering and any
agreements to be entered into between the Depositor and purchasers of
Securities of such Series.
The Depositor will indemnify GCM and any underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933, or
will contribute to payments GCM and any underwriters may be required to make
in respect thereof.
In the ordinary course of business, GCM and the Depositor may engage
in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Depositor's loans or private
asset backed securities, pending the sale of such loans or private asset
backed securities, or interests therein, including the Securities.
The Depositor anticipates that the Securities will be sold primarily
to institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Securities. Holders of Securities should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
LEGAL MATTERS
The legality of the Securities of each Series, including certain
material federal income tax consequences with respect thereto, will be passed
upon for the Depositor by Brown & Wood LLP, New York, New York 10048.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Securities and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related Series of
Securities. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
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 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...........................................................21
Additional Obligations.......................................................82
Agreement....................................................................10
APR..........................................................................13
Asset Conservation Act.......................................................49
Available Funds..............................................................20
Average Interest Rate........................................................83
Bankruptcy Bond..............................................................29
BIF..........................................................................36
Book-Entry Securities........................................................24
Cash Flow Bond Method........................................................69
Cede.........................................................................25
CEDEL........................................................................24
CEDEL Participants...........................................................26
CERCLA.......................................................................48
Certificates.................................................................10
Code.........................................................................59
Collateral Value.............................................................13
Combined Loan-to-Value Ratio.................................................13
Contingent Regulations.......................................................60
Cooperative..................................................................26
Cut-off Date.................................................................10
Debt Securities..............................................................59
Definitive Security..........................................................25
Detailed Description.........................................................11
Determination Date...........................................................20
DOL..........................................................................80
DOL Permitted Investments....................................................83
DTC..........................................................................24
Eligible Corporations........................................................78
Euroclear....................................................................24
Euroclear Participants.......................................................26
European Depositaries........................................................25
FASCO........................................................................15
FASIT Qualification Test.....................................................77
FDIC.........................................................................36
Financial Intermediary.......................................................25
Garn-St. Germain Act.........................................................51
GCM..........................................................................85
High-Yield Interest..........................................................77
Home Equity Loans............................................................11
Home Improvement Contracts...................................................11
Home Improvements............................................................11
HUD..........................................................................31
Indenture....................................................................18
Installment Contract.........................................................53
Insurance Proceeds...........................................................37
Insured Expenses.............................................................37
Interest Weighted Securities.................................................62
IO...........................................................................77
IRS..........................................................................60
Liquidation Expenses.........................................................37
Liquidation Proceeds.........................................................37
Loan Rate....................................................................12
Mark-to-Market Regulations...................................................67
Morgan.......................................................................25
Mortgage.....................................................................35
NCUA.........................................................................84
New Regulations..............................................................70
Nonresidents.................................................................70
Notes........................................................................10
Obligations..................................................................82
OID..........................................................................59
OID Regulations..............................................................59
PABS Agreement...............................................................14
PABS Issuer..................................................................14
PABS Servicer................................................................14
PABS Trustee.................................................................14
Participants.................................................................24
Parties in Interest..........................................................80
Pass-Through Rate............................................................10
Pass-Through Securities......................................................67
Pay-Through Security.........................................................61
Permitted Investments........................................................37
Plans........................................................................80
Policy Statement.............................................................84
Pool.........................................................................10
Pool Insurance Policy........................................................30
Pool Insurer.................................................................30
Pooling and Servicing Agreement..............................................18
Pre-Funded Amount............................................................38
Pre-Funding Account..........................................................38
Pre-Funding Limit............................................................82
Pre-Funding Period...........................................................82
Premium......................................................................57
Prepayment Assumption........................................................61
Primary Insurer..............................................................41
Principal Prepayments........................................................22
Properties...................................................................11
Property Improvement Loans...................................................55
PTE 83-1.....................................................................80
Purchase Price...............................................................17
Rating Agency................................................................86
Ratio Strip Securities.......................................................68
RCRA.........................................................................49
Record Date..................................................................19
Refinance Loan...............................................................13
Regular Interest Securities..................................................59
Relevant Depositary..........................................................25
Relief Act...................................................................54
REMIC........................................................................19
Reserve Account..............................................................20
Residual Interest Security...................................................65
Retained Interest............................................................18
Rules........................................................................25
SAIF.........................................................................36
SEC..........................................................................15
Security Account.............................................................37
Security Owners..............................................................24
Security Register............................................................19
Sellers......................................................................10
Senior Securities............................................................27
Servicing Agreement..........................................................10
Servicing Fee................................................................67
Short-Term Note..............................................................72
Single Family Properties.....................................................11
Single Family Securities.....................................................81
Small Mixed-Use Properties...................................................13
SMMEA........................................................................84
Special Hazard Insurance Policy..............................................28
Special Hazard Insurer.......................................................28
Stripped Securities..........................................................67
Sub-Servicers................................................................10
Sub-Servicing Account........................................................36
Sub-Servicing Agreement......................................................38
Support Agreement............................................................23
Support Servicer.............................................................23
Tax Counsel..................................................................58
Terms and Conditions.........................................................26
TIN..........................................................................70
Title I Loans................................................................55
Title I Program..............................................................55
Title V......................................................................52
Trust Agreement..............................................................10
Trust Fund...................................................................10
Trust Fund Assets............................................................10
Trustee......................................................................18
U.S. Person..................................................................59
UCC..........................................................................52
Underwriter Exemption........................................................81
VA Guaranty Policy...........................................................31
[LOGO]
NEW CENTURY HOME EQUITY LOAN TRUST, SERIES 1999-NCA
$325,000,000
ASSET BACKED PASS-THROUGH CERTIFICATES
$96,000,000 Class A-1 Variable Pass-Through Rate
$50,000,000 Class A-2 6.68% Pass-Through Rate
$45,000,000 Class A-3 6.76% Pass-Through Rate
$50,000,000 Class A-4 7.22% Pass-Through Rate
$22,266,000 Class A-5 7.55% Pass-Through Rate
$23,000,000 Class A-6 7.11% Pass-Through Rate
$38,734,000 Class A-7 7.32% Pass-Through Rate
Notional Balance Class A-8IO Weighted Average Pass-Through Rate
NEW CENTURY MORTGAGE CORPORATION
Originator and Servicer
----------------------
NC CAPITAL CORPORATION
Seller
----------------------
FINANCIAL ASSET SECURITIES CORP.
Depositor
----------------------
PROSPECTUS SUPPLEMENT
--------------------
Greenwich Capital Markets, Inc. PaineWebber Incorporated
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 New Century Home Equity Loan Trust, Series
1999-NCA, Asset Backed Pass-Through Certificates 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 New Century Home Equity Loan Trust, Series
1999-NCA, Asset Backed Pass-Through Certificates and with respect to their
unsold allotments or subscriptions. In addition, all dealers selling the New
Century Home Equity Loan Trust, Series 1999-NCA, Asset Backed Pass-Through
Certificates will be required to deliver a prospectus supplement and
prospectus for ninety days following the date of this prospectus supplement.
June 21, 1999
