As filed with the Securities and Exchange Commission on August 11, 1999
Registration Statement No. 333-_____
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REGISTRATION STATEMENT
ON FORM S-3
UNDER
THE SECURITIES ACT OF 1933
FINANCIAL ASSET SECURITIES CORP.
(Exact name of registrant as specified in its charter)
Delaware 13-3172275
(State of incorporation) (I.R.S. Employer
Identification No.)
600 Steamboat Road
Greenwich, Connecticut 06830
(203) 625-2700
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
---------------------
John C. Anderson
600 Steamboat Road
Greenwich, Connecticut 06830
(203) 625-2700
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
---------------------
With a copy to:
Stephen B. Esko, Esq.
Brown & Wood LLP
One World Trade Center
New York, New York 10048
Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective.
If the only securities being registered on this form are being
offered pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, please check the following box. [X]
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===========================================================================================================================
Proposed Proposed
Amount Maximum Maximum Amount of
Title of to be Aggregate Price Aggregate Registration
Securities to Be Registered Registered Per Unit* Offering Price* Fee
===========================================================================================================================
<S> <C> <C> <C> <C>
Asset Backed Securities........................... $2,000,000,000 100% $2,000,000,000 $556,000
===========================================================================================================================
</TABLE>
* Estimated for the purpose of calculating the registration fee.
Pursuant to Rule 429 under the Securities Act of 1933, as amended,
the Prospectus included in this Registration Statement is a combined
prospectus and also relates to registration statement No. 333-67329 as
previously filed by the Registrant on Form S-3. Such registration statement
No. 333-67329 was declared effective in December 1998 . This Registration
Statement, which is a new registration statement, also constitutes
Post-Effective Amendment No.1 to registration statement No. 333-67329 and such
Post-Effective Amendment No. 1 shall hereafter become effective concurrently
with the effectiveness of this Registration Statement and in accordance with
Section 8(c) of the Securities Act of 1933, as amended.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
===============================================================================
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED _________, 199__)
HOME LOAN TRUST 199__-__
$_________ CLASS A-1 ADJUSTABLE RATE NOTES
CONSIDER CAREFULLY THE
RISK FACTORS BEGINNING
ON PAGE-S-17 IN THIS
PROSPECTUS SUPPLEMENT
AND ON PAGE 11 IN THE
PROSPECTUS.
$_________ CLASS A-4 _____% NOTES
FINANCIAL ASSET SECURITIES CORP.
Depositor
----------------------
-------------------------------
Transferor
----------------------
--------------------------------
Master Servicer
----------------------
The trust will issue four classes of notes. The notes identified above
are being offered by this prospectus supplement and the accompanying
prospectus.
THE NOTES
The notes represent non-recourse obligations of the trust.
Payments on the notes are secured by the proceeds of the home loans.
The Class A-1 Notes will accrue interest at a rate equal to One-Month
LIBOR plus a fixed margin, subject to the limitations described herein.
The Class A-2, Class A-3 and Class A-4 Notes will accrue interest at the
applicable rates specified above.
CREDIT ENHANCEMENT
Note insurance policy issued by ___________ will guarantee receipt of
interest and principal by Noteholders at the times and to the extent
described in this prospectus supplement.
Excess interest received from the home loans in the trust will be applied
as payments of principal on the notes to establish and maintain a required
level of overcollateralization.
Neither the SEC nor any state securities commission has approved these
notes or determined that this prospectus supplement or the prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
The notes are being offered by Greenwich Capital Markets, Inc. from time
to time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the depositor with respect to the
notes are expected to be approximately $________, before deducting issuance
expenses payable by the depositor, estimated to be $_______. See "Method of
Distribution" in this prospectus supplement.
We expect that delivery of the notes will be made in book-entry form
through the facilities of The Depository Trust Company, Cedel Bank, societe
anonyme, and the Euroclear System on or about _________, 199__.
-------------------
[GREENWICH LOGO]
_________, 199__
<PAGE>
CONTENT OF PROSPECTUS SUPPLEMENT AND PROSPECTUS
You should rely only on the information contained in this document. We have
not authorized anyone to provide you with different information. You should not
assume that the information in the prospectus supplement or the prospectus is
accurate as of any date other than the date on the front of this document.
We provide information to you about the notes in two separate documents
that progressively provide more detail: (a) the prospectus, which provides
general information, some of which may not apply to the notes, and (b) this
prospectus supplement, which describes the specific terms of the notes.
If the terms vary between this prospectus supplement and the accompanying
prospectus, you should rely on the information in this prospectus supplement.
We include cross-references in this prospectus supplement and the
prospectus to captions in these materials where you can find further related
discussions. The table of contents on the back cover of this document provides
the pages on which these captions are located.
You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under the caption "Index of Defined Terms" on
page S-__ in this prospectus supplement.
LIMITATIONS ON OFFERS OR SOLICITATIONS
We do not intend this document to be an offer or solicitation:
(A) if used in a jurisdiction in which such offer or solicitation
is not authorized;
(B) ______ if the person making such offer or solicitation is not
qualified to do so; or
(C) if such offer or solicitation is made to anyone to whom it is
unlawful to make such offer or solicitation.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page Page
PROSPECTUS SUPPLEMENT PROSPECTUS
<S> <C>
Summary of Terms.......................S- Prospectus Supplement.................. 2
Risk Factors...........................S- Incorporation of Certain Information
The Trust..............................S- by Reference....................... 2
The Depositor..........................S- Available Information.................. 2
The Transferor.........................S- Reports to Securityholders............. 2
The Originator.........................S- Summary of Terms....................... 4
Description of the Notes...............S- Risk Factors...........................11
The Servicer...........................S- The Trust Fund.........................16
The Master Servicer, the Custodian Use of Proceeds........................22
and the Note Administrator...........S- The Depositor..........................22
The Pool...............................S- Loan Program...........................22
Description of the Notes...............S- Description of the
Servicing of the Loans.................S- Securities .........................24
Note Insurance.........................S- Credit Enhancement.....................34
Method of Distribution.................S- Yield and Prepayment
Prepayment and Yield Considerations....S- Considerations......................40
Ratings................................S- The Agreements.........................42
Certain Federal Income Certain Legal Aspects
Tax Consequences.....................S- of the Loans........................55
State Tax Consequences.................S- Certain Material Federal Income
ERISA Considerations...................S- Tax Considerations..................67
Experts................................S- FASIT Securities.......................87
Legal Investment Matters...............S- State Tax Considerations...............90
Legal Matters..........................S- ERISA Considerations...................90
Ratings................................S- Legal Investment.......................94
Index of Terms.........................S- Method of Distribution.................95
Legal Matters..........................96
Financial Information..................96
Rating.................................96
</TABLE>
<PAGE>
SUMMARY
The following summary is a short, concise description of the main
terms of the notes. For this reason, the summary does not contain all the
information that may be important to you. You will find a detailed
description of the terms of the notes following this summary and in the
prospectus.
THE NOTES
On the closing date, the trust will issue Class A-1, Class A-2, Class A-3 and
Class A-4 Notes pursuant to the indenture. Each class of notes will be secured
principally by certain assets of the trust. The assets pledged to secure the
notes under the indenture and the payments under the insurance policy will be
the only sources of payments on the notes. The notes will be available in
book-entry form through the clearing facilities of DTC (in the United States)
or Cedel or Euroclear (in Europe) in minimum denominations of [$50,000].
TRUST
Home Loan Trust 199__-__
CUT-OFF DATE
_________, 199__
CLOSING DATE
On or about ________, 199__
DEPOSITOR
Financial Asset Securities Corp.
600 Steamboat Road
Greenwich, Connecticut 06830
(203) 625-2700
TRANSFEROR
- --------------
ORIGINATOR
- --------------
SERVICER
- --------------
MASTER SERVICER, CUSTODIAN AND NOTE ADMINISTRATOR
- --------------
INDENTURE TRUSTEE
- --------------
OWNER TRUSTEE
- --------------
NOTE INSURER
- --------------
THE LOANS
The trust's main source of funds for making payments on the notes will consist
of a pool of fixed rate home loans made to finance debt consolidation, property
improvements and/or cash out or other consumer purposes. Most of the loans are
secured by junior liens on single family residences in which the borrowers have
little or no equity. As of ________, 199__, the loans consist of approximately
_______ loans with an aggregate principal balance of approximately $__________
and original terms to maturity ranging from _______ years.
See "Description of the Loans."
PAYMENT DATES
The 25th day of each month, or if the 25th day is not a business day, then the
next business day, beginning in ________ 199__.
INTEREST AND PRINCIPAL PAYMENTS
The interest rate for the Class A-1 Notes will equal the lesser of (i) one
month LIBOR plus __% and (ii) the weighted average of the interest rates on the
home loans net of certain trust expenses. If on any payment date the interest
rate for the Class A-1 Notes is the rate specified in clause (ii) above, then
the difference between the amount of interest calculated using clause (i) and
that using clause (ii) will be payable on the following payment date, with
accrued interest on the amount of such difference, if sufficient funds are
available for such purpose. The note insurance policy will not guarantee the
payment of any such shortfall in interest amounts.
Interest payable on the Class A-1 Notes on any payment date will accrue from
the preceding payment date (or in the case of the first payment date, the
closing date) through the day preceding such current payment date. Calculations
of interest on the Class A-1 Notes will be computed on the basis of a year of
360 days and actual days elapsed.
The interest rate for each of the Class A-2, Class A-3 and Class A-4 Notes is
set forth on the cover.
Interest payable on the Class A-2, Class A-3 and Class A-4 Notes on any payment
date will accrue during the calendar month preceding the month in which such
payment date occurs. Calculations of interest on the Class A-2, Class A-3 and
Class A-4 Notes will be computed on the basis of 360 days consisting of twelve
30-day months.
On each payment date available funds remaining after the payment of certain
trust expenses will be applied to pay interest on the notes and then to pay
principal on the notes. Payments of principal will be made sequentially to the
holders of the Class A-1, Class A-2, Class A-3 and Class A-4 Notes, in that
order, until the balance of each class of notes is reduced to zero.
See "Description of the Notes -- Payments on the Notes."
STATED MATURITY DATE
The stated maturity dates of the classes of notes are as follows:
Class A-1
Class A-2
- --------------
Class A-3
- --------------
Class A-4
- --------------
The actual final payment date for each class of notes is likely to occur
earlier, and may occur significantly earlier, than its stated maturity date.
See "Prepayment and Yield Considerations".
CREDIT ENHANCEMENT
The credit enhancements include a note insurance policy and
overcollateralization. The credit enhancements are designed to increase the
likelihood that noteholders will receive regular payments of interest and
principal.
NOTE INSURANCE POLICY
The note insurer will issue the note insurance policy which will guarantee
principal and interest payments on the notes at the times and in the amounts
described in this prospectus supplement.
In the absence of payments under the note insurance policy, noteholders will
directly bear the credit risk and other risks associated with the loans.
On each payment date, the indenture trustee will determine whether funds
available to make the payments of principal and interest are sufficient. If an
insufficiency exists and is covered by the note insurance policy, then the
trustee will make a claim under the note insurance policy.
See "The Insurance Policy".
OVERCOLLATERALIZATION
It is anticipated that the home loans owned by the trust will pay interest each
month in an aggregate amount greater than the amount needed to pay fees and
monthly interest on the notes. A portion of this excess interest will be
applied to pay principal on the notes, which will reduce the principal balance
of the notes at a faster rate than the principal balance of the loans is being
reduced. As a result, the principal balance of the loans is expected to exceed
the principal balance of the notes. This feature is referred to as
"OVERCOLLATERALIZATION." The required level of overcollateralization may
increase or decrease over time. We cannot assure you that sufficient interest
will be generated by the loans to maintain overcollateralization.
See "Description of the Notes."
OPTIONAL REDEMPTION
The holders of the trust certificates or the note insurer may redeem the
outstanding notes once the aggregate balance of the notes has declined to 5% or
less of their initial aggregate balance.
See "Description of the Notes - Redemption of the Notes."
RATINGS
It is a condition of the issuance of the notes that they be assigned a rating
of "AAA" by Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc., and "Aaa" by Moody's Investors Service, Inc.
A rating is not a recommendation to buy, sell or hold securities. These ratings
may be lowered or withdrawn at any time by either of the rating agencies.
See "Ratings."
TAX STATUS
In the opinion of Brown & Wood LLP, for federal income tax purposes, the notes
will be characterized as debt, and the trust will not be characterized as an
association (or publicly traded partnership) taxable as a corporation or as a
taxable mortgage pool.
See "Certain Federal Income Tax Consequences" in this prospectus supplement and
"Certain Federal Income Tax Consequences" in the prospectus.
ERISA CONSIDERATIONS
If you are a fiduciary of any employee benefit plan or other retirement
arrangement subject to the Employee Retirement Income Security Act of 1974, as
amended, or Section 4975 of the Internal Revenue Code, you should review
carefully with your lawyer whether you can buy or hold a note.
See "ERISA Considerations" in this prospectus supplement and in the prospectus.
LEGAL INVESTMENT
You should consult with your lawyer to see if you are permitted to buy the
notes since the legal investment rules vary depending on what kind of entity
you are and who regulates you. The notes will not be "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended.
See "Legal Investment Matters" in this prospectus supplement and "Legal
Investment" in the prospectus.
<PAGE>
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER,
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN
THE NOTES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER
"RISK FACTORS" IN THE PROSPECTUS.
UNPREDICTABILITY OF PREPAYMENTS
AND EFFECT ON YIELDS.................... Borrowers may prepay their home loans
in whole or in part at any time. We
cannot predict the rate at which
borrowers will repay their home loans.
A prepayment of a home loan generally
will result in a prepayment on the
notes.
If you purchase your notes at a
discount and principal is repaid
slower than you expect, then your
yield may be lower than you expect.
If you purchase your notes at a
premium and principal is repaid
faster than you expect, then your
yield may be lower than you expect.
The rate of prepayments on the
loans will be sensitive to
prevailing interest rates.
Generally, if prevailing interest
rates fall significantly below the
interest rates on the loans, the
loans are more likely to prepay.
Conversely, if prevailing interest
rates rise significantly, the rate
of prepayments is likely to
decrease.
The originator may be required to
repurchase home loans from the
trust as a result of certain
breaches of representations and
warranties or certain defects in
the home loan files that have not
been cured. These repurchases will
have the same effect on noteholders
as a prepayment of the loans.
Approximately ___% of the loans
require the borrower to pay a
penalty if the borrower prepays the
loan during periods ranging from
[six months to five years] after
origination. A prepayment penalty
may discourage a borrower from
prepaying the loan during the
applicable penalty period.
The amount of overcollateralization
required under the indenture may
vary over time. Any increase in
this amount may result in an
accelerated principal payment on
the notes. Conversely, any decrease
in this amount may lead to a
reduced principal payment on the
notes.
In most circumstances, liquidations
of defaulted loans will have the
same effect on the yield of the
holders of the notes as a
prepayment of the loans.
See"--Default Risks" for a
discussion of the default risks
presented by the mortgage loans.
If the notes are prepaid, you have
no assurance that similar
investments offering comparable
yields will be available.
See "Prepayment and Yield
Considerations" in this prospectus
supplement for a description of
factors that may influence the rate
and timing of prepayments on the
notes.
POTENTIAL INADEQUACY
OF CREDIT ENHANCEMENT................... The home loans are expected to
generate more interest than is needed
to pay interest on the notes since the
weighted average interest rate on the
loans is expected to be higher than
the weighted average interest rate on
the notes. If the home loans generate
more interest than is needed to pay
interest owed on the notes and certain
fees and expenses of the trust, the
remaining interest will be used to
compensate for losses which occur on
the loans. After these financial
obligations have been satisfied, any
available excess interest will be used
to create and maintain
overcollateralization. We cannot
assure you, however, that enough
excess interest will be generated to
maintain the required level of
overcollateralization.
The excess interest available on any
payment date will be affected by the
actual amount of interest received,
collected or recovered in respect of
the loans during the preceding month.
Such amount will be influenced by
changes in the weighted average of the
loan interest rates resulting from
prepayments and liquidations of the
loans as well as from adjustments of
the interest rate on the Class A-1
Notes. Because the interest rates on
the loans are fixed rates and the
interest rate of the Class A-1 Notes
adjusts based on the One-Month LIBOR
index, it is possible that the
weighted average of the interest rates
on the notes may increase relative to
the weighted average of the interest
rates for the loans. In that event, it
may be necessary to apply all or a
portion of the available excess
interest to make required payments of
interest on the notes. As a result,
such excess interest may be
unavailable for any other purpose.
If the protection afforded by
overcollateralization is insufficient
and if the note insurer is unable to
meet its obligations under the note
insurance policy, then the holders of
the notes could experience a loss on
their investment.
RISK OF LIMITATIONS ON
ADJUSTMENTS OF THE CLASS
A-1 NOTE INTEREST RATE
AND YIELD CONSIDERATIONS................ The yield on the Class A-1 Notes will
be sensitive to fluctuations in
one-month LIBOR and may be capped by
the weighted average of the home loan
interest rates (net of certain amounts
described herein). The prepayment of
the higher interest rate loans may
result in a lower cap. The application
of the cap may result in an interest
payment on the Class A-1 notes lower
than the interest that would have been
paid under the One-Month LIBOR
formula.
Although holders of the Class A-1
Notes will be entitled to receive
certain excess funds to cover this
deficiency, there is no assurance that
such funds will be available. The note
insurance policy does not cover, and
the ratings of the notes do not
address, the likelihood of the payment
of any such deficiency.
LOAN DEFAULT RISKS...................... Noteholders are protected by the
available forms of credit enhancement
against the risk of loss realized on
the home loans. In most circumstances,
liquidations of home loans will have
the same effect on holders of the
notes as a loan prepayment. However,
in the unlikely event that the credit
enhancements are no longer available
to provide protection to noteholders,
any losses on the home loans would be
borne by such holders. The risks
presented by the home loans include
the following:
Underwriting Standards. The home
loans were generally provided to
borrowers who do not qualify for
loans conforming to Freddie Mac and
Fannie Mae guidelines. Consequently
the loans in the trust are likely
to experience substantially higher
rates of delinquency, foreclosure
and bankruptcy than loans
underwritten in a more traditional
manner. In addition, no assurance
can be given that the
creditworthiness of the borrowers
will not deteriorate as a result of
future economic and social factors,
which may result in delinquency or
default by such borrower on the
related loans. Furthermore, the
losses sustained from defaulted
home loans are likely to be more
severe (and will frequently be
total losses) because the costs
incurred in the collection and
liquidation of defaulted loans in
relation to the smaller principal
balances are disproportionately
higher than for first lien, single
family mortgage loans, and because
substantially all of the loans are
secured by junior liens on
mortgaged properties in which the
borrowers had little or no equity
at the time of origination.
Early Default. Defaults on home
loans are generally expected to
occur more frequently in the early
years of the terms of home loans.
The weighted average number of
months since origination of the
loans as of the cut-off date is ___
months, which is not a sufficiently
long period of time to develop
reliable performance data regarding
the loans. You should expect that
delinquencies will increase as the
loans become more seasoned.
High LTV Ratios. Approximately ___%
of the home loans have combined
loan-to-value ratios in excess of
___%. Loans with high combined
loan-to-value ratios will be more
sensitive to declining property
values than would those with lower
combined loan-to-value ratios and
therefore may experience a higher
incidence of default. In addition,
with respect to loans with combined
loan-to-value ratios near or in
excess of ___%, if the related
borrowers relocate, such borrowers
may be unable to repay the loans in
full from the sale proceeds of the
financed properties and other funds
available. Accordingly such loans
likely will experience higher rates
of delinquencies, defaults and
losses. With respect to home loans
the proceeds of which were used in
whole or in part for debt
consolidation, the related borrower
may incur further consumer debt.
This reloading of debt could impair
the ability of such borrowers to
repay the loans.
Geographic Concentration. Mortgaged
properties located in the states of
______, ______ and ______ secure
approximately __%, __%, and __%,
respectively, of the home loans.
This geographic concentration might
magnify the effect on the trust of
adverse economic conditions in
these states and might increase the
rate of delinquencies, defaults and
losses on the home loans more than
would be the case if the mortgaged
properties were more geographically
diversified. [Additionally,
mortgaged properties in California
may be particularly susceptible to
certain types of uninsurable
hazards, such as earthquakes,
floods, mudslides and other natural
disasters.]
Limitation on Repurchase of
Defective Loans by the Originator.
No assurance can be given that, at
any particular time, the originator
will be capable, financially or
otherwise, of repurchasing home
loans as a result of certain
breaches of representations and
warranties or certain defects in
the home loan files that have not
been cured. If the originator is
not able or otherwise does not make
these repurchases, the master
servicer, on behalf of the trust,
will make customary and reasonable
efforts to recover the maximum
amount possible with respect to the
defective loan. However, there is
no assurance that such recoveries
will be adequate to fully cover
principal and interest amounts
owing on such loan.
[None of the loans were more than 30
days delinquent in payment as of the
cut-off date.]
INSOLVENCY, RECEIVERSHIP OR
CONSERVATORSHIP OF THE ORIGINATOR
MAY INCREASE THE RISK OF LOSS
OR DELAY ON YOUR PAYMENTS............... The originator believes that the
transfer of the home loans to the
Seller is an absolute and
unconditional sale. If a receiver or a
conservator is appointed for the
originator, however, such receiver or
conservator may attempt to
recharacterize the sale as a borrowing
secured by a pledge of the loans. Such
an attempt, even if unsuccessful,
could result in delays on the note
PAYMENTS. If such receiver or
conservator were successful, then it
could accelerate payment of the notes
and sell the assets pledged under the
indenture. You would then be entitled
to no more than the outstanding
principal amount of such notes
together with interest to the date of
payment. There is no assurance that
the proceeds of any sale of trust
assets would be sufficient to pay such
amounts.
YEAR 2000 SYSTEMS RISK ................. As is the case with most companies
using computers in their operations,
the Master Servicer and Servicer are
faced with the task of completing
their compliance goals in connection
with the year 2000 issue. In the event
that the Master Servicer, the
Servicer, or any of their suppliers,
customers, brokers or agents do not
successfully and timely achieve year
2000 compliance, the performance of
obligations of the Master Servicer and
Servicer under the relevant agreements
could be materially adversely
affected.
See "The Servicer--Year 2000
Compliance" in this prospectus
supplement.
NOTES MAY NOT BE
APPROPRIATE FOR CERTAIN
INVESTORS............................... The notes may not be an appropriate
investment for investors that do not
have sufficient resources or expertise
to evaluate the particular
characteristics of the notes. This may
be the case because, among other
things:
The yield to maturity of notes
purchased at a price other than par
will be sensitive to the uncertain
rate and timing of principal
prepayments on the loans.
The rate of principal payments on
and the weighted average lives of
the notes will be sensitive to the
uncertain rate and timing of
principal prepayments on the loans.
Accordingly, the notes may be an
inappropriate investment if you are
an investor that requires a payment
of a particular amount of principal
on a specific date or an otherwise
predictable stream of payments.
You may be unable to reinvest
amounts distributed as principal on
a note at a rate comparable to the
interest rate on the note. In
general, principal prepayments are
expected to be greater during
periods of relatively low interest
rates.
A market for resale of the notes
may not develop or provide you with
liquidity of investment.
You should also carefully
consider the further matters discussed
under the heading "Yield, Prepayment
and Maturity Considerations" in this
prospectus supplement and under the
heading "Risk Factors" in the
prospectus.
<PAGE>
THE TRUST
GENERAL
The Trust, Home Loan Trust 199__-__, is a business trust formed under
the laws of the State of Delaware pursuant to the deposit trust agreement dated
as of ______, 199__ (the "TRUST AGREEMENT") among Financial Asset Securities
Corp., as depositor (the "DEPOSITOR"), and _________, as owner trustee (the
"OWNER TRUSTEE"), _______, as paying agent (the "PAYING AGENT") and note
administrator (the "NOTE ADMINISTRATOR" ) and _________, as servicer (the
"SERVICER"). After its formation, the Trust will not engage in any activity
other than (i) acquiring, holding and managing the loans conveyed to it
pursuant to the Trust Agreement (the "LOANS") and the other assets of the Trust
and proceeds therefrom, (ii) issuing the Asset-Backed Notes, Series 199__-__
(the "NOTES") and a single class of trust certificates representing the
beneficial ownership interest in the assets of the Trust (the "TRUST
CERTIFICATES"), (iii) making payments on the Notes and in respect of the Trust
Certificates, and (iv) engaging in other activities that are necessary,
suitable or convenient to accomplish the foregoing or are incidental thereto or
connected therewith. The Trust will acquire home loans (the "LOANS") having an
aggregate principal balance of $_________ (the "CUT-OFF DATE POOL PRINCIPAL
BALANCE") as of ________, 199__ (the "CUT-OFF DATE") from the Depositor
pursuant to the Trust Agreement.
The assets of the Trust primarily will consist of the Loans, each of
which will be secured by a mortgage, deed of trust or other security instrument
(a "MORTGAGE"). See "The Pool" herein. The assets of the Trust also will
include (i) payments of interest and principal in respect of the Loans received
on or after the Cut-off Date; (ii) security interests in the related mortgaged
properties (the "MORTGAGED PROPERTIES"); (iii) amounts on deposit in the
Collection Account, the Note Account and the Certificate Distribution Account
(each as defined herein); (iv) the assignment of the rights of _________ (the
"TRANSFEROR") under the home loan sale agreement dated as of ______, 199__ (the
"TRANSFEROR SALE Agreement") between _______, as originator (the "ORIGINATOR")
and the Transferor; (v) the rights of the Indenture Trustee under the Insurance
Policy (each as defined herein); and (vi) certain other ancillary or incidental
funds, rights and properties related to the foregoing. The unpaid principal
balance of each Loan as of the Cut-off Date is defined herein as the "CUT-OFF
DATE PRINCIPAL BALANCE". The "PRINCIPAL BALANCE" of a Loan on any day
subsequent to the Cut-off Date is equal to its Cut-off Date Principal Balance,
minus all principal reductions credited against the Principal Balance of such
Loan since the Cut-off Date; provided, however, that the Principal Balance of a
Liquidated Loan as defined herein will be zero. With respect to any date, the
"POOL PRINCIPAL BALANCE" will be equal to the aggregate Principal Balances of
all Loans as of such date.
The Trust's principal offices are located in Wilmington, Delaware, in
care of _______, as Owner Trustee, at the address set forth below under "- The
Owner Trustee."
THE OWNER TRUSTEE
________ will act as the Owner Trustee under the Trust Agreement.
______ is a Delaware ______ and its principal offices are located at
___________.
THE DEPOSITOR
Financial Asset Securities Corp. (the "DEPOSITOR") is a Delaware
corporation. The Depositor is an indirect limited purpose finance subsidiary of
National Westminster Bank Plc and an affiliate of Greenwich Capital Markets,
Inc. (the "UNDERWRITER"). See "The Depositor" in the Prospectus and "Method of
Distribution" herein. None of the Depositor, National Westminster Bank Plc or
any of their affiliates or any other person or entity will insure or guarantee
or otherwise be obligated with respect to the Notes.
THE TRANSFEROR
______________ (the "TRANSFEROR") is a _______. [Transferor
Information]. The Transferor will acquire the Loans from the Originator in a
transaction contemporaneous with the transfer of the Loans from the Transferor
to the Depositor. The Transferor's corporate headquarters are located at
______________.
THE ORIGINATOR
GENERAL
[Originator Information]
UNDERWRITING CRITERIA
[Substantially all of the Loans transferred to the Trust will have
been underwritten in accordance with the Originator's underwriting
requirements. Generally, the underwriting standards of the Originator place a
greater emphasis on the creditworthiness of the borrower than on the value of
the underlying collateral in evaluating the likelihood that a borrower will be
able to repay a Loan.]
[In many cases, Loans will have been made to borrowers that typically
have limited access to mortgage financing for a variety of reasons, such as
high ratios of debt-to-income and insufficient home equity value. Each Loan is
subject to various risks, including, without limitation, the risk that the
related borrower will not be able to make payments of interest and principal on
the loan and that the realizable value of the related Mortgaged Property will
be insufficient to repay the outstanding interest and principal owed on such
loan. The Originator uses its own credit evaluation criteria to classify the
loans by risk class. These criteria include, as a significant component, a
credit score (the "CREDIT Score") derived based on a methodology developed by
_________. The Credit Scores, which are obtained from national credit reporting
organizations, are numerical representations of borrowers' estimated default
probability, and generally range from a low of 200 to a high of 800. A borrower
with a Credit Score of 700 or higher would be assigned the highest
classification for credit quality by the Originator. Additional criteria
include the borrower's debt-to-income ratio, mortgage credit history, consumer
credit history, prior bankruptcies, prior foreclosures, notices of default,
deeds-in-lieu of foreclosure and repossessions. The Originator believes that
the most important credit characteristics are the borrower's Credit Score and
debt-to-income ratio. The range of the Credit Scores and debt-to-income ratios
of the borrowers under the Loans is set forth under "The Pool --
Characteristics of the Loans" herein.]
The Originator requires a full appraisal of a Mortgaged Property only
for Loans in excess of $_____. For loans of more than $_____ to $_____, a
drive-by appraisal or comparable method is obtained. For loans of more than
$_____ to $______, a broker's price opinion, statistical appraisal or
comparable method is obtained, and for loans of $______ or less, the Originator
relies on the property value stated by the borrower in the loan application.
The Originator's underwriting guidelines provide for the evaluation of
a loan applicant's creditworthiness through the use of a consumer credit
report, verification of employment and a review of the debt-to-income ratio of
the applicant. The borrower's income is generally verified through various
means, including without limitation applicant interviews, written verifications
with employers and review of pay stubs or tax returns. A borrower must
generally demonstrate sufficient levels of disposable income to satisfy debt
repayment requirements.
Less than ____% of the Cut-off Date Pool Principal Balance consists of
Loans that were originated by the Originator pursuant to expanded underwriting
guidelines. These guidelines were established to conform to the requirements of
certain third party investors, and in certain instances may result in more
stringent and in other instances less stringent underwriting requirements than
under the Originator's general underwriting guidelines. Accordingly, certain
Loans included in the Pool may be of a different credit quality and have
different loan characteristics than other Loans.
In certain cases, the Loans fall outside the Originator's underwriting
guidelines due to various documentation issues and/or credit limitations.
However, to the extent that the expanded underwriting guidelines were followed,
compensating factors associated with the loan or the borrower were noted which,
in the Originator's judgment, outweighed the deviation from the Originator's
general underwriting guidelines. To the extent that certain Loans were
originated by the Originator under less stringent underwriting guidelines, such
Loans may be more likely to experience higher rates of delinquencies, defaults
and losses than those Loans originated pursuant to more stringent underwriting
guidelines.
The Originator's underwriting requirements for certain types of loans
may change from time to time, which in certain instances may result in more
stringent and in other instances less stringent underwriting requirements.
Depending upon the date on which the Loans were originated or purchased by the
Originator, Loans included in the Pool may have been originated or purchased by
the Originator under different underwriting standards, and accordingly, some
Loans included in the Pool may be of a different credit quality and have
different characteristics than other Loans. Furthermore, to the extent that
certain Loans were originated or purchased by the Originator under less
stringent underwriting standards, such Loans are more likely to experience
higher rates of delinquencies, defaults and losses than those Loans originated
or purchased under more stringent underwriting standards.
THE SERVICER
GENERAL
[Servicer Information]
SERVICING EXPERIENCE
As of _________, 199__, the Servicer had a total mortgage loan
servicing, portfolio of ______ accounts approximating $______ in principal
balance. The Servicer's servicing portfolio includes both loans serviced for
the account of _________ and its affiliates and loans serviced for the accounts
of others. Less than ___% of the Servicer's servicing portfolio represents
first lien residential mortgage loans. The balance of the Servicer's servicing
portfolio is composed of junior lien mortgage loans, including FHA Title I
loans, home improvement loans, home equity loans, and debt consolidation loans.
DELINQUENCY EXPERIENCE
The tables that follow present the delinquency experience of the
Servicer's servicing portfolio (the "TOTAL SERVICING PORTFOLIO").
The delinquency experience of the Servicer set forth in the following
tables may not be indicative of the expected performance of the Loans, and the
information in the tables below is not intended to predict the expected
delinquency experience of the Loans or of past, current or future pools of
loans of the Servicer.
SERVICER DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
TOTAL SERVICING PORTFOLIO
<S> <C> <C> <C> <C>
_________, 199__ _________, 199__ ________, 199__
Percent of Percent of Percent of
Outstanding Total Outstanding Total Outstanding Total
Delinquency Status Balance Balance Balance Balance Balance Balance
- -----------------------
Current $___________ % $___________ % $ %
- -----------------------
30 Days ___________ % ___________ % %
- -----------------------
60 Days ___________ % ___________ % %
- -----------------------
90 Days ___________ % ___________ % %
- -----------------------
120 Days ___________ % ___________ % %
- -----------------------
Loans in Liquidation ___________ % ___________ % %
Foreclosure,
Litigation and Claims
Processing
Total $___________ 100.00% $___________ 100.00% $ 100.0%
- -----------------------
</TABLE>
YEAR 2000 COMPLIANCE
_____________ and _______________ is each heavily dependent upon
complex computer systems for all phases of its operations. The "YEAR 2000"
issue -- common to most corporations -- concerns the inability of certain
software and databases properly to recognize date sensitive information
beginning January 1, 2000. This problem could result in a disruption to either
company's operations, if not corrected. Financial service companies are
particularly sensitive to such disruptions. __________ and _________ each uses
third party vendors for certain of its systems. As a result, much of each
company's remediation efforts relates to monitoring and communicating with
those vendors. Each of _________ and ___________ has assessed and developed a
detailed strategy to prevent or at least minimize problems related to the Year
2000 issue. Resources have been committed and implementation has begun to
modify the affected information systems of each company. However, no assurance
can be given that any or all of the systems discussed above, including the
systems of _________ and ________ and their respective third party vendors, are
or will be Year 2000 compliant or that the costs required to address Year 2000
issues will not adversely affect the business, financial condition or results
of operations of the respective companies or the performance of their
respective obligations under the various transaction documents
THE MASTER SERVICER, CUSTODIAN AND NOTE ADMINISTRATOR
The information set forth below has been provided by ________ ("____")
and neither the Trust, the Depositor nor the Underwriter makes any
representations or warranties as to the accuracy or completeness of such
information.
________ is a _______, located at __________. If the Servicer is
terminated as a result of a Servicer Event of Default, the Master Servicer (or
the Indenture Trustee, in limited circumstances) shall be obligated to succeed
to the obligations of the Servicer or to appoint a successor Servicer. If the
Master Servicer is terminated pursuant to the Servicing Agreement as a result
of a failure to perform its obligations thereunder, the Indenture Trustee shall
be obligated to succeed to the obligations of the Master Servicer or to appoint
a successor Master Servicer with the prior consent of the Note Insurer.
THE POOL
GENERAL
The "POOL" will consist of the Loans conveyed to the Trust pursuant to
the Trust Agreement. The Loans will consist of loans for which the related net
proceeds were used to finance (i) property improvements, (ii) debt
consolidation, or (iii) a combination of property improvements, debt
consolidation, cash-out or other consumer purposes. Substantially all of the
Mortgages for the Loans will be junior in priority to one or more senior liens
on the related Mortgaged Properties, which will consist primarily of
owner-occupied single family residences. Substantially all of the Loans will be
secured by liens on Mortgaged Properties in which the borrowers have little or
no equity (i.e., the related Combined Loan-to-Value Ratios approach or exceed
100%).
"COMBINED LOAN-TO-VALUE RATIO" means, with respect to any Loan, the
fraction, expressed as a percentage, the numerator of which is the principal
balance of such Loan at origination plus, in the case of a Loan secured by a
junior lien, the aggregate outstanding principal balance of all other mortgage
loans on such Mortgaged Property on the date of origination of such Loan, and
the denominator of which is the appraised or stated value of the related
Mortgaged Property at the time of origination of such Loan.
Generally, the Loans will have been originated or acquired by the
Transferor in one of three ways: (i) the wholesale purchase of loans, on a flow
basis, originated by unaffiliated lenders, as correspondents ("CORRESPONDENT
ORIGINATIONS"), including delegated underwriting, correspondents; (ii) the
origination of loans directly to consumers, including but not limited to
solicitations through advertising and telemarketing and referrals from home
improvement contractors ("DIRECT ORIGINATIONS"); or (iii) the purchase, on a
bulk basis, of loan portfolios originated by other unaffiliated lenders
("PORTFOLIO ACQUISITIONS").
For a description of the underwriting criteria applicable to
the Loans, see "The Originator--Underwriting Criteria" herein. All of the Loans
will have been originated or acquired by the Transferor and sold by the
Transferor to the Depositor and, pursuant to the Trust Agreement, the Depositor
will transfer the Loans to the Trust. Pursuant to the Indenture, the Trust will
pledge and assign the Loans to the Indenture Trustee for the benefit of the
Noteholders. The Trust will be entitled to all payments of interest and
principal and all proceeds received in respect of the Loans on or after the
Cut-off Date, subject to the lien of the Indenture.
ASSIGNMENT OF LOANS
The Loans were originated by the Originator or acquired by the
Originator through its network of brokers and correspondents. On or prior to
the date the Notes are issued, the Originator will sell each Loan (together
with all right, title and interest in and to all payments of principal and
interest received in respect of the Loans on or after the Cut-out Date) to the
Transferor pursuant to the Transferor Sale Agreement. The Transferor will
convey each such Loan (together with such rights to payments received in
respect of the Loans) and its rights under the Transferor Sale Agreement to the
Depositor pursuant to the home loan sale agreement dated ________, 199__ (the
"HOME LOAN SALE AGREEMENT") between the Transferor and the Depositor, which
will in turn convey such Loans (together with such rights to payments) and such
rights under the Transferor Sale Agreement and its rights under the Home Loan
Sale Agreement to the Trust, pursuant to the Trust Agreement. The Transferor
will acquire the Loans from the Originator in a transaction contemporaneous
with the transfer of the Loans from the Transferor to the Depositor.
At the time of issuance of the Notes, the Trust will pledge to the
Indenture Trustee for the benefit of the Noteholders and the Note Insurer all
of the Trust's right, title and interest in and to the Loans, including all
principal and interest due on each such Loan on and after the Cut-off Date,
together with its right, title and interest in and to the proceeds of any
related insurance policies received after the issuance of the Notes. The
Indenture Trustee, concurrently with such assignment, will authenticate and
deliver the Notes at the direction of the Trust in exchange for, among other
things, the Loans.
The Indenture will require the Trust to deliver to the Custodian the
Mortgage Notes relating to the Loans, endorsed without recourse to the
Indenture Trustee, the related Mortgages with evidence of recording- thereon,
the title policies with respect to the related Mortgaged Properties, all
intervening mortgage assignments, if applicable, and certain other documents
relating to the Loans (the "MORTGAGE Files"). The Transferor will be required
to cause to be prepared and recorded, at the expense of the Transferor and
within the time period specified in the Indenture (or, if original recording
information is unavailable, within such later period as is permitted by the
Indenture), assignments of the Mortgages from the Transferor to the Indenture
Trustee.
The Custodian will review the Mortgage Files delivered to it and if
any document required to be included in any Mortgage File is found to be
missing or to be defective in any material respect and such defect is not cured
within 60 days following notification thereof to the Servicer, the Indenture
Trustee, the Note Insurer, the Transferor and the Originator by the Custodian,
the Originator will be required to remove the related Loan from the Pool in the
manner described below.
In connection with the transfer of the Loans to the Transferor, the
Originator will make certain representations and warranties in the Transferor
Sale Agreement as to the accuracy in all material respects of the information
set forth on a schedule identifying and describing each Loan. In addition, the
Originator will make certain other representations and warranties in the
Transferor Sale Agreement regarding the Loans, including, for instance, that
each Loan, at its origination, complied in all material respects with
applicable state and federal laws, that each mortgage is a valid lien on the
related Mortgaged Property, that, as of the Cut-off Date, no Loan was more than
30 days past due, that each Mortgaged Property consists of a one- to
four-family residential property or unit in a condominium or planned unit
development, that the Originator had a good title to each Loan prior to
transfer and that the Originator was authorized to originate each Loan. The
rights of the Transferor to enforce remedies for breaches of such
representations and warranties in the Transferor Sale Agreement against the
Originator will be assigned to the Depositor pursuant to the Home Loan Sale
Agreement. Those rights to enforce remedies for breaches of such
representations and warranties will in turn be assigned by the Depositor to the
Trust pursuant to the Trust Agreement, and then by the Trust to the Indenture
Trustee pursuant to the Indenture.
If with respect to any Loan (1) a defect in any document constituting
a part of the related Mortgage File remains uncured within the period specified
above and materially and adversely affects the value of any such Loan or
materially and adversely affects the interest of the Indenture Trustee, the
Noteholders or the Note Insurer therein or (2) a breach of any representation
or warranty made by the Originator relating to such Loan occurs and such breach
materially and adversely affects the value of any such Loan or materially and
adversely affects the interests of the Indenture Trustee, the Noteholders or
the Note Insurer therein, the Originator will be required to remove the related
Loan (any such Loan, a "DEFECTIVE LOAN") from the Pool by remitting to the
Indenture Trustee an amount equal to the Principal Balance of such Defective
Loan together with interest accruing at the Mortgage Rate (net of the
applicable Servicing Fee rate) on such Defective Loan from the date interest
was last paid by the related borrower to the end of the Collection Period
immediately preceding the related Deposit Date, less any payments received
during the related Collection Period in respect of such Defective Loan (the
"RELEASE PRICE"). Upon deposit of the Release Price in the Note Account (as
hereinafter defined) and receipt by the Indenture Trustee and the Note Insurer
of written notification of any such removal, the Indenture Trustee shall
execute and deliver an instrument of transfer or assignment necessary to vest
legal and beneficial ownership of such Defective Loan (including any property
acquired in respect thereof or proceeds of any insurance policy with respect
thereto) in the Depositor and release such Defective Loan from the lien of the
Indenture.
The obligation of the Originator to cure or remove any Loan as
described above will constitute the sole remedy available to Noteholders, the
Note Insurer (with certain exceptions) or the Indenture Trustee for a Defective
Loan.
PAYMENTS ON THE LOANS
The Loans provide for a schedule of payments that will be, if timely
paid, sufficient to amortize fully the principal balance of the Loans on or
before their maturity date. The Loans have scheduled monthly payment dates that
occur throughout each month. Each Loan bears interest at a fixed rate (the
"LOAN RATE"). [Interest on the Loans will accrue under an "actuarial interest"
method. No Loan provides for deferred interest or negative amortization.]
The actuarial interest method provides that interest is charged and
payments are due as of a scheduled day each month that is fixed at the time of
origination, and payments received after a grace period following such
scheduled day are subject to late charges. A scheduled payment on such a Loan
received either earlier or later than the scheduled due date thereof will not
affect the amortization schedule or the relative application of such payment to
principal and interest in respect of such Loan.
CHARACTERISTICS OF LOANS
Set forth below is certain statistical information regarding
characteristics of the Loans expected to be included in the Pool as of the date
of this Prospects Supplement. Prior to the Closing Date, the Transferor may
remove any of the Loans intended for inclusion in the Pool, substitute
comparable loans therefor, or add comparable loans thereto; provided, however,
that the aggregate principal balance of Loans so removed, replaced or added
will not exceed 5% of the Cut-off Date Pool Principal Balance. As a result, the
statistical information presented below regarding the characteristics of the
Loans expected to be included in the Pool may vary in certain respects from
comparable information based on the actual composition of the Pool at the
Closing Date. A schedule of the Loans included in the Pool as of the Closing
Date will be attached to the Trust Agreement.
The Loans expected to be included in the Pool will consist of
approximately _____ loans having a Cut-off Date Pool Principal Balance of
approximately $___________. Except as provided above, the Loans are expected to
have the approximate characteristics set forth in the tables beginning on the
following factors. The sums of the amounts and percentages in the following
tables may not equal the totals shown due to rounding.
Wherever reference is made in this Prospectus Supplement to an amount
or a percentage of the Loans, such amount or percentage is determined (unless
otherwise specified) on the basis of the Cut-off Date Pool Principal Balance.
Numerical entries in the following tables may not sum to the indicated totals
due to rounding.
LOAN RATES
<TABLE>
<CAPTION>
Range of Loan rates Number of Loans Aggregate Cut-off Date Percent of Total By
Principal Balance Aggregate Cut-off Date
Principal Balance
<S> <C> <C> <C>
- --------------------------------------------
9.850% to 11.000%....................... $ %
- --------------------------------------------
11.001% to 12.000%........................ %
- --------------------------------------------
12.001% to 13.000%........................ %
- --------------------------------------------
13.001% to 14.000%........................ %
- --------------------------------------------
14.001% to 15.000%........................ %
- --------------------------------------------
15.001% to 16.000%........................ %
- --------------------------------------------
16.001% to 17.000%........................ %
- --------------------------------------------
17.001% to 18.000%........................ %
- --------------------------------------------
Totals............................... $ %
- --------------------------------------------
</TABLE>
The weighted average Loan Rate of the Loans as of the Cut-off Date was
approximately ____% per annum.
CUT-OFF DATE PRINCIPAL BALANCES
<TABLE>
<CAPTION>
Range of Cut-off Date Principal Balances Number of Loans Aggregate Cut-off Date Percent of Total By
Principal Balance Aggregate Cut-off Date
Principal Balance
<S> <C> <C> <C>
- --------------------------------------------
Up to $10,000.00.......................... $ %
- --------------------------------------------
$10,000.01 to $20,000.00.................. %
- --------------------------------------------
$20,000.01 to $30,000.00.................. %
- --------------------------------------------
$30,000.01 to $40,000.00.................. %
- --------------------------------------------
$40,000.01 to $50,000.00.................. %
- --------------------------------------------
$50,000.01 to $60,000.00.................. %
- --------------------------------------------
$60,000.01 to $70,000.00.................. %
- --------------------------------------------
$70,000.01 to $80,000.00.................. %
- --------------------------------------------
$80,000.01 to $90,000.00.................. %
- --------------------------------------------
$90,000.01 to $100,000.00................. %
- --------------------------------------------
Totals .............................. $ %
- --------------------------------------------
</TABLE>
The average principal balance of the Loans as of the Cut-off Date was
$________.
ORIGINAL LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
Range of Principal Balances at Origination Number of Loans Aggregate Original Percent of Total By
Principal Balance Aggregate Original
Principal Balance
<S> <C> <C> <C>
- --------------------------------------------
Up to $10,000.00.......................... $ %
- --------------------------------------------
$10,000.01 to $20,000.00.................. %
- --------------------------------------------
$20,000.01 to $30,000.00.................. %
- --------------------------------------------
$30,000.01 to $40,000.00.................. %
- --------------------------------------------
$40,000.01 to $50,000.00.................. %
- --------------------------------------------
$50,000.01 to $60,000.00.................. %
- --------------------------------------------
$60,000.01 to $70,000.00.................. %
- --------------------------------------------
$70,000.01 to $80,000.00.................. %
- --------------------------------------------
$80,000.01 to S90,000.00.................. %
- --------------------------------------------
$90,000.01 to $100,000.00................. %
- --------------------------------------------
Totals............................... $ %
- --------------------------------------------
</TABLE>
The average principal balance of the Loans at origination was approximately
$________.
REMAINING TERMS TO STATED MATURITY
<TABLE>
<CAPTION>
Range of Remaining Terms to Stated Number of Loans Aggregate Cut-off Date Percent of Total By
Maturity (Months) Principal Balance Aggregate Cut-off Date
Principal Balance
<S> <C> <C> <C>
- --------------------------------------------
31 to 60.................................. $ %
- --------------------------------------------
61 to 90.................................. %
- --------------------------------------------
91 to 120................................. %
- --------------------------------------------
121 to 150................................ %
- --------------------------------------------
151 to 180................................ %
- --------------------------------------------
181 to 210................................ %
- --------------------------------------------
211 to 240................................ %
- --------------------------------------------
241 to 270................................ %
- --------------------------------------------
271 to 300................................ %
- --------------------------------------------
Totals .............................. $ %
- --------------------------------------------
</TABLE>
The weighted average term to stated maturity of the Loans as of the Cut-off
Date was approximately _______ months.
MONTHS SINCE ORIGINATION
<TABLE>
<CAPTION>
Months Since Origination Number of Loans Aggregate Cut-off Date Percent of Total By
Principal Balance Aggregate Cut-off Date
Principal Balance
<S> <C> <C> <C>
- --------------------------------------------
0......................................... $ %
- --------------------------------------------
1......................................... %
- --------------------------------------------
2......................................... %
- --------------------------------------------
3......................................... %
- --------------------------------------------
4......................................... %
- --------------------------------------------
5......................................... %
- --------------------------------------------
6......................................... %
- --------------------------------------------
7......................................... %
- --------------------------------------------
8 or more................................. %
- --------------------------------------------
Totals............................... $ %
- --------------------------------------------
</TABLE>
The weighted average number of months since origination of the Loans as of the
Cut-off Date was approximately ____ months.
<PAGE>
GEOGRAPHIC CONCENTRATION (1)
<TABLE>
<CAPTION>
Jurisdiction Number of Loans Aggregate Cut-off Date Percent of Total
Principal Balance By Cut-off Date Aggregate
Principal Balance
<S> <C> <C> <C>
$ %
- --------------------------------------------
%
- --------------------------------------------
%
- --------------------------------------------
%
- --------------------------------------------
%
- --------------------------------------------
%
- --------------------------------------------
Totals.............................. $ %
- --------------------------------------------
</TABLE>
(1) Based on the mailing address of the borrower as of the Cut-off Date.
CREDIT SCORES
<TABLE>
<CAPTION>
Range of Credit Scores Number of Loans Aggregate Cut-off Date Percent of Total
Principal Balance By Aggregate
Cut-off Date
Principal Balance
<S> <C> <C> <C>
- --------------------------------------------
601 to 620.......................... $ %
- --------------------------------------------
621 to 640.......................... %
- --------------------------------------------
641 to 660.......................... %
- --------------------------------------------
661 to 680.......................... %
- --------------------------------------------
681 to 700.......................... %
- --------------------------------------------
701 to 720.......................... %
- --------------------------------------------
721 to 740.......................... %
- --------------------------------------------
741 to 760.......................... %
- --------------------------------------------
761 to 780.......................... %
- --------------------------------------------
781 to 800.......................... %
- --------------------------------------------
Totals ....................... $ %
</TABLE>
The weighted average Credit Score of the Loans as of the Cut-off Date was
approximately ______.
<TABLE>
<CAPTION>
PROPERTY TYPE
Property Type Number of Loans Aggregate Cut-off Date Percent of Total
Principal Balance By Aggregate
Cut-off Date
Principal Balance
<S> <C> <C> <C>
- --------------------------------------------
Condominium......................... $ %
- --------------------------------------------
Duplex.............................. %
- --------------------------------------------
Manufactured Housing................ %
- --------------------------------------------
Multiple Units...................... %
- --------------------------------------------
Planned Unit Development............ %
- --------------------------------------------
Single Family Residence............. %
- --------------------------------------------
Totals ....................... $ 100%
- --------------------------------------------
</TABLE>
DEBT-TO-INCOME RATIOS
<TABLE>
<CAPTION>
Range of Number of Loans Aggregate Cut-off Date Percent of Total
Debt-to-Income Ratios Principal Balance By Aggregate
Cut-off Date
Principal Balance
<S> <C> <C> <C>
- --------------------------------------------
Up to 20.00%............................. $ %
- --------------------------------------------
20.01% to 25.00%......................... %
- --------------------------------------------
25.01% to 30.00%......................... %
- --------------------------------------------
30.01% to 35.00%......................... %
- --------------------------------------------
35.01% to 40.00%......................... %
- --------------------------------------------
40.01% to 45.00%......................... %
- --------------------------------------------
45.01% to 50.00%......................... %
- --------------------------------------------
50.01% to 55.00%......................... %
- --------------------------------------------
Totals............................. $ %
- --------------------------------------------
</TABLE>
The weighted average debt-to-income ratio of the Loans as of the Cut-off Date
was approximately ____%.
Debt-to-income ratios are computed based on information contained in the
borrower's loan application, and are not updated to the Cut-off Date.
<TABLE>
<CAPTION>
ORIGINAL COMBINED LOAN TO VALUE RATIOS
Range of Original Number of Loans Aggregate Cut-off Date Percent of Total
Combined Loan to Value Ratios Principal Balance By Aggregate
Cut-off Date
Principal Balance
<S> <C> <C> <C>
Up to 60.00%............................. $ %
- --------------------------------------------
60.01% to 70.00%....................... %
- --------------------------------------------
70.01% to 80.00%....................... %
- --------------------------------------------
80.01% to 90.00%....................... %
- --------------------------------------------
90.01% to 100.00%...................... %
- --------------------------------------------
100.01% to 105.00%....................... %
- --------------------------------------------
105.01% to 110.00%....................... %
- --------------------------------------------
110.01% to 115.00%....................... %
- --------------------------------------------
115.01% to 120.00%....................... %
- --------------------------------------------
120.01% to 125.00%....................... %
- --------------------------------------------
125.01% to 130.00%....................... %
- --------------------------------------------
130.01% to 135.00%....................... %
- --------------------------------------------
Totals............................ $ %
- --------------------------------------------
</TABLE>
The weighted average Original Combined Loan-To-Value Ratio of the Loans as of
the Cut-off Date was approximately ______%
<PAGE>
DESCRIPTION OF THE NOTES
The Asset Backed Notes, Series 199__-__ (the "NOTES") will be issued
by the Trust pursuant to the Indenture, dated as of _______ 1, 199__ between
the Trust, _______, as indenture trustee (the "INDENTURE TRUSTEE"), the Note
Administrator and the Servicer. The summaries of certain provisions of the
Indenture set forth below and under the caption "The Agreements" in the
Prospectus, while complete in material respects, do not purport to be
exhaustive. For more details regarding the terms of the Indenture, prospective
investors in the Notes are advised to review the Indenture, a copy of which the
Depositor will provide (without exhibits) without charge upon written request
addressed to the Depositor at 600 Steamboat Road, Greenwich, Connecticut 06830.
GENERAL
The Trust will issue the Notes pursuant to the Indenture. The Notes
will be secured by the pledge of assets of the Trust pursuant to the Indenture.
The Notes will not represent an interest in or obligation of the Servicer, the
Master Servicer, the Indenture Trustee, the Owner Trustee, the Underwriter, the
Note Insurer, any of their respective affiliates or any other entity and will
not represent an interest in or recourse obligation of the Transferor or the
Depositor.
The Notes will consist of four classes of sequential pay asset-backed
Notes: the Class A-1 Notes, the Class A-2 Notes, the Class A-3 Notes and the
Class A-4 Notes (the "NOTES"). The Class A-1 Notes represent the right to
receive payments of interest as adjusted monthly based on One Month LIBOR as
described herein and the Class A-2 Notes, the Class A-3 Notes and the Class A-4
Notes represent the right to receive payments of interest at the applicable
rate set forth on the cover hereof (each, a "NOTE INTEREST RATE"), payable
monthly, and payments of principal to the extent set forth below.
On each Payment Date, the Indenture Trustee or its designee will pay
to the persons in whose names the Notes are registered on the last Business Day
of the month immediately preceding the month of the related Payment Date (the
"RECORD DATE"), the portion of the aggregate payment to be made to each
Noteholder as described below.
The Notes will be issued in minimum denominations of $______ and
integral multiples of $1 in excess thereof.
BOOK-ENTRY REGISTRATION
The Notes will be book-entry notes (the "BOOK-ENTRY NOTES")
represented by one or more notes registered in the name of Cede & Co. or any
other nominee of The Depository Trust Company ("DTC"). DTC is a limited purpose
trust company organized under the laws of the State of New York, a member of
the Federal Reserve System, a "clearing corporation" within the meaning of the
New York UCC and a "clearing agency" registered pursuant to Section 17A of the
Exchange Act. DTC was created to hold securities for participating members in
DTC ("PARTICIPANTS") and to facilitate the clearance and settlement of
securities transactions between Participants through electronic book entries,
thereby eliminating the need for physical movement of certificates.
Participants include securities brokers and dealers, banks, trust companies and
clearing corporations. Indirect access to the DTC system also is available to
others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ("INDIRECT PARTICIPANTS").
Investors that are not Participants or Indirect Participants but who
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Notes may do so only through Participants and Indirect Participants. In
addition, Noteholders will receive all distributions of principal and interest
from the Indenture Trustee through Participants. Under a book-entry format,
Noteholders may experience some delay in their receipt of payments, since such
payments will be forwarded by the Indenture Trustee to DTC's Nominee. DTC's
Nominee will forward such payments to its Participants, which thereafter will
forward them to Indirect Participants or Noteholders. The only "NOTEHOLDERS"
(as defined in the Indenture) will be DTC's Nominee. Noteholders will not be
recognized by the Indenture Trustee as Noteholders, as such term is used in the
Indenture, and Noteholders will be permitted to exercise the rights of
Noteholders only indirectly through DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "RULES"), DTC is required to make book-entry transfers
of Notes among Participants on whose behalf its acts with respect to the
Noteholders and to receive and transmit distributions of principal of, and
interest on, the Notes. Participants and Indirect Participants with which
Noteholders have accounts with respect to the Notes similarly are required to
make book-entry transfers and receive and transmit such payments on behalf of
their respective Noteholders. Accordingly, although Noteholders will not
possess Notes, the Rules provide a mechanism by which Participants will receive
payments and will be able to transfer their interests. See "Description of the
Securities - Book Entry Registration of Securities" in the Prospectus.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Noteholder
to pledge Notes to persons or entities that do not participate in the DTC
system, or otherwise to act with respect to such Notes, may be limited due to
the lack of a physical certificate for such Notes.
DTC has advised the Transferor and the Indenture Trustee that it will
take any action permitted to be taken by a Noteholder under the Indenture only
at the direction of one or more Participants to whose accounts with DTC the
applicable Notes are credited.
Except as required by law, none of the Master Servicer, the Indenture
Trustee, the Note Administrator, any paying agent or registrar acting on its
behalf or the Trust will have any liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests of
the Notes held by DTC's Nominee, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
DEFINITIVE NOTES
The Notes will be issued in fully registered, certificated form
("DEFINITIVE NOTES") to Noteholders or their respective nominees, rather than
to DTC or its nominee, only if (i) DTC or the Transferor advises the Indenture
Trustee in writing, that DTC is no longer willing or able to discharge properly
its responsibilities as depository with respect to such Notes and the
Transferor or the Indenture Trustee is unable to locate a qualified successor,
(ii) the Transferor, at its option, elects to terminate the book-entry system
through DTC or (iii) after the occurrence of an Event of Default with respect
to such Notes, Noteholders representing at least a majority of the outstanding
principal amount of the Notes advise the Indenture Trustee through DTC in
writing that the continuation of a book-entry system through DTC (or a
successor thereto) with respect to such Notes is no longer in the best interest
of the Noteholders of such Notes.
Upon the occurrence of any event described in the immediately
preceding paragraph, the Indenture Trustee will be required to notify DTC,
which in turn will notify all applicable Noteholders of a given series through
Participants of the availability of Definitive Notes. Upon surrender by DTC of
the definitive notes representing the corresponding Notes and receipt of
instructions for re-registration, the Indenture Trustee will reissue such Notes
as Definitive Notes to such Noteholders.
Distributions of principal of, and interest on, such Definitive Notes
will thereafter be made by the Indenture Trustee in accordance with the
procedures set forth in the Indenture, directly to Noteholders of Definitive
Notes in whose names the Definitive Notes were registered at the close of
business on the Record Date. Such distributions will be made by check mailed to
the address of such Noteholder as it appears on the register maintained by the
Indenture Trustee. The final payment on any such Definitive Notes, however,
will be made only upon representation and surrender of such Definitive Notes at
the office or agency specified in the notice of final distribution to the
applicable Noteholders.
Definitive Notes will be transferable and exchangeable at the offices
of the Indenture Trustee or of a registrar named in a notice delivered to
Noteholders of Definitive Notes. No service charge will be imposed for any
registration of transfer or exchange, but the Indenture Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
PAYMENTS ON THE NOTES
Payments on the Notes will be made by the Indenture Trustee (in such
capacity, the "PAYING Agent") on each Payment Date, commencing with the Payment
Date in ________, to Noteholders of a Class of Notes as of the related Record
Date in an amount equal to the product of such Noteholders' respective
Percentage Interests in such Class of Notes and the amount to be paid in
respect of such Class of Notes. The "PERCENTAGE INTEREST" represented by any
Note will be equal to the percentage obtained by dividing the initial principal
balance of such Note by the related initial Class Note Balance. For so long as
any Note is in book-entry form with DTC, the only "NOTEHOLDER" of such Note
will be Cede. See "Book-Entry Registration" herein.
On each Payment Date, the Paying Agent will be required to pay the
following amounts, in the following order of priority, out of Available Funds
to the extent available:
(a) to the Note Insurer, the aggregate amount necessary to reimburse
the Note Insurer for any unreimbursed payments of Insured Payments
(together with interest thereon at the Late Payment Rate specified in the
Insurance Agreement) in respect of the Notes on prior Payment Dates and
the amount of any unpaid Note Insurer Premiums for prior Payment Dates
(together with interest thereon at the Late Payment Rate specified in the
Insurance Agreement); provided, however, that the Note Insurer shall be
paid unreimbursed Insured Payments and unpaid Note Insurer Premiums (and
any interest thereon) only after Noteholders have received Note Interest
and any Overcollateralization Deficit with respect to such Payment Date;
(b) to the Noteholders, the related Note Interest with respect
to such Payment Date;
(c) sequentially, first to the Class A-1 Noteholders, then to the
Class A-2 Noteholders, then to the Class A-3 Noteholders, and then to the
Class A-4 Noteholders, the amount of Monthly Principal for the Notes with
respect to such Payment Date, in reduction of the related Class Note
Balance until the Class Note Balance of each such Class is reduced to
zero;
(d) sequentially, first to the Class A-1 Noteholders, then to the
Class A-2 Noteholders, then to the Class A-3 Noteholders, and then to the
Class A-4 Noteholders, in reduction of the related Class Note Balance of
each such Class, the amount, if any, equal to the lesser of (A) Excess
Cash with respect to such Pavement Date, and (B) the lesser of (1) the
amount necessary for the Overcollateralization Amount to equal the
Required Overcollateralization Amount on such Payment Date (after giving
effect to application of Monthly Principal for such Payment Date) and (2)
the amount necessary to reduce such Class Note Balance to zero;
(e) to the Note Insurer, any amounts due and owing under the
Insurance Agreement that are not paid as described in clause (a) above;
(f) to the Class A-1 Noteholders, the Available Funds Cap Carry
Forward Amount; and
(g) to the Servicer, the amount of Servicing Advances not otherwise
reimbursed to the Servicer from the Collection Account, 20% of any
collections in respect of any Liquidated Loan received subsequent to the
date such Loan became a Liquidated Loan, to the extent of any Realized
Loss on such Loan, and certain costs incurred by the Servicer pursuant to
the Servicing Agreement. Any Available Funds remaining after application
in the manner specified above will be released to the holders of the Trust
Certificates on such Payment Date pursuant to the Trust Agreement, free
from the lien of the Indenture, and such amounts will not be available to
make payments on the Notes or payments to the Note Insurer on any
subsequent Payment Date.
In the event that, with respect to a particular Payment Date,
Available Funds on such date are not sufficient to pay any portion of Note
Interest, the Indenture Trustee will file a claim on the Insurance Policy in an
amount equal to such deficiency and apply the Insured Payment in respect of
such claim to the payment of the deficiency in such Note Interest. In addition,
the Indenture Trustee will file a claim on the Insurance Policy in an amount
equal to any Overcollateralization Deficit on a Payment Date (after taking into
account payments in respect of Monthly Principal and Excess Cash on such
Payment Date) and apply the portion of the Insured Payment related to such
Overcollateralization Deficit to reduce the Aggregate Note Balance on such
Payment Date by the amount of such Overcollateralization Deficit. Any Insured
Payment paid in respect of the Notes to make up any Overcollateralization
Deficit shall be paid to the Noteholders of the Notes then entitled to payments
of principal, in reduction of the related Class Note Balance, until such Class
Note Balance shall be reduced to zero.
In no event will the aggregate payments of principal to Noteholders
exceed the original Aggregate Note Balance.
The Note Interest Rate for the Class A-1 Notes will be a per annum
rate equal to the lesser of (i) One Month LIBOR plus __% (the "NOTE FORMULA
RATE"), and (ii) the weighted average of the Loan Rates with respect to the
related Payment Date less the aggregate per annum rate of the Servicing Fee,
the Master Servicing Fee, the Indenture Trustee's Fee, the Custodian's Fee and
the Note Insurer's Premium (the "AVAILABLE FUNDS CAP"). See "DESCRIPTION OF THE
NOTES--Payments on the Notes" herein. The "NOTE INTEREST RATE" for the Class
A-2, Class A-3 and Class A-4 Notes will be the applicable per annum rate set
forth on the cover hereof. "NOTE INTEREST" for any Class of Notes on any
Payment Date will be an amount equal to interest accrued during the related
Interest Period at the Note Interest Rate on the related Class Note Balance as
of the preceding Payment Date (after giving effect to the payment, if any, in
reduction of principal made on the Notes on such preceding Payment Date).
If, on any Payment Date, the Available Funds Cap limits the Note
Interest Rate payable with respect to the Class A-1 Notes (i.e., the rate set
by the Available Funds Cap is less than the Note Formula Rate), the amount of
any such shortfall will be carried forward and be due and payable on the
following Payment Date and shall accrue interest at the applicable Note
Interest Rate until paid (such shortfall, together with such accrued interest,
the "AVAILABLE FUNDS CAP CARRY FORWARD AMOUNT"). The Insurance Policy does not
cover the Available Funds Cap Carry Forward Amount; the payment of such amount
may be funded only from (i) any excess interest resulting from the Available
Funds Cap being in excess of the Note Formula Rate on future Payment Dates and
(ii) any Excess Cash which would otherwise be paid to the holder(s) of the
Trust Certificates. The ratings assigned to the Notes do not address the
payment of the Available Funds Cap Carry Forward Amount.
The "INTEREST PERIOD" in respect of any Payment Date and the Class A-1
Notes will be the period from and including the Closing Date, in the case of
the initial Payment Date, or from and including the immediately preceding
Payment Date, in the case of any subsequent Payment Date, to but excluding the
related Payment Date. All calculations of interest on the Class A-1 Notes will
be computed on the basis of a year of 360 days and actual days elapsed.
The "INTEREST PERIOD" in respect of any Payment Date and the Class
A-2, Class A-3 and Class A-4 Notes will be the period from the first day of the
calendar month preceding the month of such Payment Date through the last day of
such calendar month. All calculations of interest on the Class A-2, Class A-3
and Class A-4 Notes will be computed on the basis of a year of 360 days
consisting of twelve 30-day months.
"ONE MONTH LIBOR" means the London interbank offered rate for
one-month United States dollar deposits. One Month LIBOR for each Interest
Period shall be determined on each LIBOR Determination Date, on the basis of
the offered rates of the Reference Banks for one-month United States dollar
deposits, as such rate appears on the Telerate Screen Page 3750, as of 11:00
a.m. (London, England time) on such LIBOR Determination Date. If such rate does
not appear on such page or such other page as may replace that page on that
service, or if such service is no longer offered, such other service for
displaying One Month LIBOR or comparable rates as may be reasonably selected by
the Indenture Trustee, the rate will be the Reference Bank Rate. If no such
quotations can be obtained and no Reference Bank Rate is available, One Month
LIBOR will be One Month LIBOR applicable to the preceding Payment Date.
"LIBOR DETERMINATION DATE" means, with respect to any Interest Period,
the second London business day preceding the commencement of such Interest
Period. For purposes of determining One Month LIBOR, a "LONDON BUSINESS DAY" is
any day on which dealings in deposits of United States dollars are transacted
in the London interbank market.
"REFERENCE BANK RATE" means, with respect to any Interest Period, as
follows: the arithmetic mean (rounded upwards, if necessary, to the nearest one
sixteenth of a percent) of the offered rates for United States dollar deposits
for one month which are offered by the Reference Banks as of 11:00 a.m.,
London, England time, on the LIBOR Determination Date to prime banks in the
London interbank market for a period of one month in amounts approximately
equal to the aggregate outstanding Class Note Balance of the Class A-1 Notes;
provided that at least two such Reference Banks provide such rate. If fewer
than two offered rates appear, the Reference Bank Rate will be the arithmetic
mean of the rates quoted by one or more major banks in New York City, selected
by the Trustee, as of 11:00 a.m., New York time, on such date for loans in U.S.
Dollars to leading European banks for a period of one month in amounts
approximately equal to the aggregate outstanding Class Note Balance of the
Class A-1 Notes. If no such quotations can be obtained, the Reference Bank Rate
shall be the Reference Bank Rate applicable to the preceding Payment Date.
"REFERENCE BANKS" means leading banks selected by the Indenture
Trustee and engaged in transactions in Eurodollar deposits in the international
Eurocurrency market (i) with an established place of business in London,
England; (ii) whose quotations appear in the Reuters Screen LIBOR Page on the
LIBOR Determination Date in question; (iii) which have been designated as such
by the Indenture Trustee; and (iv) which are not controlling, controlled by, or
under common control with the Trust or the Transferor.
"TELERATE PAGE 3750" means the display page currently so designated on
the Dow Jones Telerate Capital Markets Report (or such other page as may
replace that page on that service for the purpose of displaying comparable
rates or prices).
The establishment of One Month LIBOR on each LIBOR Determination Date
by the Indenture Trustee and the Indenture Trustee's calculation of the Note
Interest Rate for the related Interest Period shall (in the absence of manifest
error) be final and binding.
The "CLASS NOTE BALANCE" with respect to any Class of Notes will
equal, as of any Payment Date, the original Class Note Balance of such Class
less all Monthly Principal and Excess Cash paid to the Noteholders of such
Class on previous Payment Dates in reduction of such Class Note Balance
(exclusive, for the sole purpose of effecting the Note Insurer's subrogation
rights, of payments made by the Note Insurer in respect of any
Overcollateralization Deficit under the Insurance Policy, except to the extent
reimbursed to the Note Insurer pursuant to the Indenture). The "AGGREGATE NOTE
BALANCE" will equal, as of any Payment Date, the sum of the Class Note Balances
of all outstanding Classes of Notes on such Payment Date.
"MONTHLY PRINCIPAL" for any Payment Date will be an amount equal to
(A) the aggregate of (i) all scheduled payments of principal received with
respect to the Loans and due during the related Collection Period and all other
amounts collected, received or otherwise recovered in respect of principal of
the Loans (including Principal Prepayments, but not including Payments Ahead
that are not allocable to principal for the related Collection Period) during
or in respect of the related Collection Period, and (ii) the aggregate of the
amounts allocable to principal deposited in the Note Account on the related
Deposit Date by the Trust, the Depositor, the Transferor, the Servicer or the
Note Insurer in connection with a repurchase, release or removal of any Loans
pursuant to the Indenture, reduced by (B) the amount of any
Overcollateralization Surplus with respect to such Payment Date.
The "PRINCIPAL BALANCE" of a Loan with respect to any Determination
Date is the actual outstanding principal balance thereof as of the close of
business on the Determination Date in the preceding month (or, in the case of
the first Payment Date, as of the Cut-off Date), less (i) all scheduled
payments of principal received with respect to the Loans and due during the
related Collection Period and all other amounts collected, received or
otherwise recovered in respect of principal on the Loans (including Principal
Prepayments, but not including Payments Ahead that are not allocable to
principal for the related Collection Period) during or in respect of the
related Collection Period Net Liquidation Proceeds and Trust Insurance Proceeds
allocable to principal recovered or collected in respect of such Loan during
the related Collection Period, (ii) the portion of the Release Price allocable
to principal remitted by the Trust, the Depositor, the Servicer or the Note
Insurer to the Indenture Trustee on or prior to the next succeeding Deposit
Date in connection with a release and removal of such Loan pursuant to the
Indenture to the extent such amount is actually remitted on or prior to such
Deposit Date, and (iii) any other reduction in the principal balance of the
related Mortgage Note, including a reduction as a result of any bankruptcy or
other court order; provided, however, that Loans that have become Liquidated
Loans since the preceding Determination Date (or, in the case of the first
Determination Date, since the Cut-off Date) will be deemed to have no Principal
Balance on the current Determination Date.
"DETERMINATION DATE" means, as to any Payment Date, the close of
business on the last day of the calendar month preceding the calendar month in
which such Payment Date occurs.
"PAYMENTS AHEAD" means any payment of one or more scheduled monthly
payments remitted by a borrower with respect to a Mortgage Note in excess of
the scheduled monthly payment due during the related Collection Period with
respect to such Mortgage Note, which sums the related borrower has instructed
the Servicer to apply to scheduled monthly payments due in one or more
subsequent Collection Periods. Payments Ahead will be deemed received in the
Collection Period in which they would have become due had they not been paid in
advance.
"PRINCIPAL PREPAYMENT" means any borrower payment or other recovery in
respect of principal of a Loan (including Net Liquidation Proceeds and Trust
Insurance Proceeds allocable to principal) which, in the case of a borrower
payment, is received in advance of its scheduled due date and is not a Payment
Ahead.
"LIQUIDATED LOAN" means, as to any Payment Date, any Loan as to which
(i) the Servicer has determined during the related Collection Period, in
accordance with its customary servicing procedures, that all Liquidation
Proceeds which it expects to recover from or on account of such Loan have been
recovered or (ii) any portion of any monthly payment thereof is 180 days or
more past due.
"AVAILABLE FUNDS" with respect to any Payment Date will consist of the
sum of the amounts described in clauses (a) through (g) below, less (i) the
Administrative Fee Amount (as defined below) in respect of such Payment Date,
(ii) Servicing Advances previously made that are reimbursable to the Servicer
(other than those included in liquidation expenses for any Liquidation Loan and
already reimbursed from the related Liquidation Proceeds) in such Collection
Period to the extent permitted by the Servicing Agreement and (iii) the
aggregate amounts (A) deposited into the Collection Account or Note Account
that may not be withdrawn therefrom pursuant to a final and nonappealable order
of the United States bankruptcy court of competent jurisdiction imposing a stay
pursuant to Section 362 of the United States Bankruptcy Code and that would
otherwise have been included in Available Funds on such Payment Date and (B)
received by the Indenture Trustee that are recoverable and sought to be
recovered from the Trust as a voidable preference by a trustee in bankruptcy
pursuant to the United States Bankruptcy Code in accordance with a final
nonappealable order of a court of competent jurisdiction:
(a) all scheduled payments of interest received with
respect to the Loans and due during the related Collection Period and
all other interest payments on or in respect of the Loans received by
or on behalf of the Servicer during the related Collection Period
(including any amounts representing interest accrued on such Loans
prior to the Cut-off Date), plus any net income from related REO
Properties for such Collection Period;
(b) all scheduled payments of principal received with
respect to the Loans and due during the related Collection Period and
all other principal payments (including Principal Prepayments, but
excluding amounts described elsewhere in this definition) received
during the related Collection Period in respect of the Loans;
(c) the aggregate of any proceeds from or in respect of any
policy of insurance covering a Mortgaged Property that are received
during the related Collection Period and applied by the Servicer to
reduce the Principal Balance of the related Loan ("TRUST INSURANCE
PROCEEDS") (which proceeds will not include any amounts applied to
the restoration or repair of the related Mortgaged Property or
released to the related borrower in accordance with applicable law,
the Servicer's customary servicing procedures or the terms of the
related Loan);
(d) the aggregate of any other proceeds received by the
Servicer during the related Collection Period in connection with the
liquidation of any Mortgaged Property securing a Loan, whether
through trustee's sale, foreclosure, condemnation, taking by eminent
domain or otherwise (including any Trust Insurance Proceeds to the
extent not duplicative of amounts in clause (c) above) ("LIQUIDATION
PROCEEDS"), less expenses incurred by the Servicer in connection with
the liquidation of such Loan ("NET LIQUIDATION PROCEEDS");
(e) the aggregate of the amounts received in respect of any
Loans that are required or permitted to be repurchased, released or
removed by the Transferor or Servicer during the related Collection
Period as described in "--Assignment of Loans" and "Servicing of the
Loans" herein, to the extent such amounts are received by the
Indenture Trustee on or before the related Deposit Date;
(f) the aggregate of amounts deposited in the Note Account
by the redeeming party during such Collection Period in connection
with redemption of the Notes as described under "--Redemption of the
Notes" herein; and
(g) subsequent Collections on any Liquidated Loan to the
extent of any Realized Loss incurred with respect to such Loan, after
payment of any additional compensation permitted to the Servicer
under the Servicing Agreement.
The "ADMINISTRATIVE FEE AMOUNT" for any Payment Date will equal the
sum of the Servicing Fee, the Master Servicing Fee, the Indenture Trustee's
fee, the Custodian's fee and the Note Insurer Premium, each relating to such
Payment Date.
NOTE ACCOUNT
Pursuant to the Indenture, the Indenture Trustee shall establish and
maintain an account (the "NOTE ACCOUNT") from which all payments with respect
to the Notes will be made. As described below, not later than the 18th day of
each month in which a Payment Date occurs (or if such 18th day is not a
Business Day, the next succeeding Business Day) (the "DEPOSIT DATE"), the
Servicer will be required pursuant to the Servicing Agreement to remit to the
Indenture Trustee for deposit in the Note Account the sum (without duplication)
of all amounts on deposit in the Collection Account that constitute any portion
of Available Funds for the related Payment Date.
Investment of Note Account
All or a portion of the Note Account may be invested and reinvested by
the Indenture Trustee at the direction of the Depositor in one or more
Permitted Investments bearing interest or sold at a discount. The Indenture
Trustee, the Transferor or any affiliate thereof may be the obligor on any
investment in the Note Account which otherwise qualifies as a Permitted
Investment. No investment in the Note Account may mature later than the
Business Day preceding the Payment Date; provided that any Permitted Investment
that is an obligation of the Indenture Trustee may mature on the Payment Date.
All income or other gain from investments in the Note Account will not
be available to Noteholders or otherwise subject to any claims or rights of the
Noteholders and will be held in the Note Account for the benefit of the
Depositor subject to withdrawal from time to time as permitted by the
Indenture. Any loss resulting from such investments will be for the account of
the Depositor. The Depositor will be required to deposit the amount of any such
loss immediately upon the realization of such loss to the extent such loss will
not be offset by other income or gain from investments in the Note Account and
then available for such application.
Permitted Investments
Permitted Investments include:
(a) direct obligations of, or obligations fully guaranteed
by, the United States of America, Freddie Mac, Fannie Mae, the
Federal Home Loan Banks or any agency or instrumentality of the
United States of America rated Aa3 or higher by Moody's, the
obligations of which are backed by the full faith and credit of the
United States of America;
(b) (i) demand and time deposits in, certificates of deposit
of, banker's acceptances issued by or federal funds sold by any
depository institution or trust company (including the Indenture
Trustee or its agent acting in their respective commercial
capacities) incorporated under the laws of the United States of
America or any state thereof and subject to supervision and
examination by federal and/or state authorities, so long as, at the
time of such investment or contractual commitment providing for such
investment, such depository institution or trust company or its
ultimate parent has a short-term unsecured debt rating in one of the
two highest available rating categories of S&P and the highest
available rating category of Moody's and provided that each such
investment has an original maturity of no more than 365 days, and
(ii) any other demand or time deposit or deposit which is fully
insured by the FDIC;
(c) repurchase obligations with a term not to exceed 30 days
with respect to any security described in clause (a) above and
entered into with a depository institution or trust company (acting
as a principal) rated "A" or higher by S&P and rated "A2" or higher
by Moody's; provided, however, that collateral transferred pursuant
to such repurchase obligation must be of the type described in clause
(a) above and must (i) be valued daily at current market price plus
accrued interest, (ii) pursuant to such valuation, be equal, at all
times, to 105% of the cash transferred by the Indenture Trustee in
exchange for such collateral and (iii) be delivered to the Indenture
Trustee, or if the Indenture Trustee is supplying the collateral, an
agent for the Indenture Trustee, in such manner as to accomplish
perfection of a security interest in the collateral by possession of
certified securities;
(d) securities bearing interest or sold at a discount issued
by any corporation incorporated under the laws of the United States
of America or any state thereof which has a long-term unsecured debt
rating in the highest available rating category of each of the Rating
Agencies at the time of such investment;
(e) commercial paper having an original maturity of less
than 365 days and issued by an institution having a short-term
unsecured debt rating in the highest available rating category of
each of the Rating Agencies at the time of such investment;
(f) a guaranteed investment contract approved by each of the
Rating Agencies and the Note Insurer and issued by an insurance
company or other corporation having a long-term unsecured debt rating
in the highest available rating category of each of the Rating
Agencies at the time of such investment;
(g) money market funds having ratings in the highest
available rating category of Moody's and one of the two highest
available rating categories of S&P at the time of such investment
which invest only in other Permitted Investments (any such money
market funds which provide for demand withdrawals being conclusively
deemed to satisfy any maturity requirements for Permitted Investments
set forth herein), including money market funds of the Indenture
Trustee and any such funds that are managed by the Indenture Trustee
or its affiliates or for which the Indenture Trustee or any affiliate
acts as advisor as long as such money market funds satisfy the
criteria of this subparagraph (g); and
(h) any investment otherwise acceptable to the Note Insurer
and each Rating Agency.
The Indenture Trustee may purchase from or sell to itself or an
affiliate, as principal or agent, the Permitted investments listed above. All
Permitted Investments shall be held in a trust account under the Indenture and
shall be made in the name of the Indenture Trustee for the benefit of the
Noteholders and the Note Insurer.
OVERCOLLATERALIZATION FEATURE
Credit enhancement with respect to the Notes initially will be
provided in part by overcollateralization resulting from the Cut-off Date Pool
Principal Balance exceeding the original Aggregate Note Balance. On the Closing
Date, the initial Overcollateralization Amount for the Notes will be
approximately ___% of the Cut-off Date Pool Principal Balance. The Indenture
requires that this Overcollateralization Amount be increased to, and thereafter
maintained at, the Required Overcollateralization Amount. This increase and
subsequent maintenance is intended to be accomplished by the application of
monthly Excess Cash to accelerate the payment of the Aggregate Note Balance
until the Overcollateralization Amount reaches the Required
Overcollateralization Amount. Such application of Excess Cash, which consists
of interest collections on the Loans, but is paid as principal on the Notes,
will increase the related Overcollateralization Amount. Such
overcollateralization is intended to result in amounts received on the Loans in
excess of the amount necessary to pay Note Interest and the Monthly Principal
required to be paid on the Notes on any Payment Date being applied to reduce
the Aggregate Note Balance to zero no later than the Stated Maturity Date of
the Class A-4 Notes.
The "EXCESS CASH" on any Payment Date will equal Available Funds for
such Payment Date, reduced by the sum of (i) any amounts payable to Note
Insurer for Insured Payments paid on prior Payment Dates and not yet reimbursed
and for any unpaid Note Insurer Premiums for prior Payment Dates (in each case
with interest thereon at the Late Payment Rate set forth in the Insurance
Agreement), (ii) the Note Interest for the related Payment Date and (iii) the
Monthly Principal for the related Payment Date.
The "OVERCOLLATERALIZATION AMOUNT" with respect to any Payment Date is
the amount, if any, by which (x) the Pool Principal Balance as of the end of
the related Collection Period exceeds (y) the Aggregate Note Balance as of such
Payment Date after taking into account payments of Monthly Principal
(disregarding any permitted reduction in Monthly Principal due to an
Overcollateralization Surplus) made on such Payment Date. The required level of
the Overcollateralization Amount with respect to any Payment Date (the
"REQUIRED OVERCOLLATERALIZATION AMOUNT") will be equal to the amount specified
as such in the Indenture. The Indenture generally provides that the Required
Overcollateralization Amount may, over time, decrease or increase, subject to
certain floors, caps and triggers including triggers that allow the Required
Overcollateralization Amount to decrease or "step down" based on the
performance on the Loans with respect to certain delinquency tests specified in
the Indenture. In addition, Excess Cash will be applied to principal of the
Notes during the period that the Loans are unable to meet certain tests
specified in the Indenture based on delinquency. Any increase in the applicable
Required Overcollateralization Amount may result in an accelerated amortization
of the Notes until such Required Overcollateralization Amount is reached.
Conversely, any decrease in the Required Overcollateralization Amount will
result in a decelerated amortization of the Notes until such Required
Overcollateralization Amount is reached.
The application of Excess Cash to reduce the Aggregate Note Balance on
any Payment Date will have the effect of accelerating the amortization of the
Notes relative to the amortization of the Loans in the Trust Estate. In the
event that the Required Overcollateralization Amount is permitted to decrease
or "step down" on any Payment Date in the future, or in the event of an
Overcollateralization Surplus, the Indenture will provide that all or a portion
of the Excess Cash that would otherwise be paid to the Notes on any such
Payment Date in reduction of the Aggregate Note Balance will be released to the
holder(s) of the Trust Certificates, as provided in the Trust Agreement.
With respect to any Payment Date, an "OVERCOLLATERALIZATION SURPLUS"
means, the amount, if any, by which (x) the Overcollateralization Amount for
such Payment Date exceeds (y) the then applicable Required
Overcollateralization Amount of such Payment Date. An Overcollateralization
Surplus may result prior to the occurrence of any decrease or "step down" in
the Required Overcollateralization Amount because, in the absence of an
Overcollateralization Surplus, the Notes will be entitled to receive 100% of
collected principal on the Loans, even though the Aggregate Note Balance will,
as a result of the initial overcollateralization and the accelerated
amortization caused by the application of the Excess Cash, be less than the
Pool Principal Balance, in the absence of any Realized Losses on the Loans.
The Indenture will provide that, on any Payment Date, all amounts
collected on the Loans in respect of principal to be applied on such Payment
Date will be paid to Noteholders in reduction of the Aggregate Note Balance on
such Payment Date, except as provided above with respect to any Payment Date
for which there exists an Overcollateralization Surplus. If any Loan became a
Liquidated Loan during such prior Collection Period, the Net Liquidation
Proceeds related thereto and allocated to principal may be less than the
Principal Balance of the related Loan; the amount of any such deficiency is a
"REALIZED Loss." In addition, the Indenture will provide that the Principal
Balance of any Loan that becomes a Liquidated Loan shall equal zero. The
Indenture will not require that the amount of any Realized Loss be paid to
Noteholders on the Payment Date following the event of loss. However, the
occurrence of a Realized Loss will reduce the Overcollateralization Amount for
the Notes, and will result in more Excess Cash, if any, being paid on the Notes
in reduction of the Aggregate Note Balance on subsequent Payment Dates than
would be the case in the absence of such Realized Loss.
Overcollateralization and the Insurance Policy
The Indenture will require the Indenture Trustee to file a claim for
an Insured Payment under the Insurance Policy not later than 12:00 noon (New
York City time) on the third Business Day prior to any Payment Date as to which
the Indenture Trustee has determined that an Overcollateralization Deficit with
respect to the Notes will occur for the purpose of applying the proceeds of
such Insured Payment as a payment of principal to the Noteholders on such
Payment Date. With respect to any Payment Date, an "OVERCOLLATERALIZATION
DEFICIT" will mean the amount, if any, by which (x) the Aggregate Note Balance,
after taking into account all payments to be made on such Payment Date in
reduction thereof, including any Excess Cash payments, exceeds (y) the Pool
Principal Balance as of the end of the related Collection Period. Accordingly,
the Insurance Policy is similar to the provisions described above with respect
to the overcollateralization provisions insofar as the Insurance Policy
guarantees ultimate collection of the full amount of the Class Note Balances,
rather than current payments of the amounts of any Realized Losses to
Noteholders. Investors in the Notes should realize that, under certain loss or
delinquency scenarios, they may temporarily receive no payments in reduction of
their Class Note Balance even if their Class of Notes is entitled to payments
of principal.
REPORTS TO NOTEHOLDERS
Concurrently with each payment to Noteholders, the Note Administrator
will prepare and the Indenture Trustee will mail a statement to each Noteholder
and the Note Insurer in the form required by the Indenture and setting forth
the following information (to the extent the Servicer makes such information
available to the Note Administrator):
(a) the amount of the payment to the Noteholders on the related
Payment Date allocable to (i) Monthly Principal (separately setting forth
Principal Prepayments) and (ii) any Excess Cash payment;
(b) the amount of the payment to the Noteholders on such Payment Date
allocable to Note Interest;
(c) the Aggregate Note Balance and the Class Note Balance of each
Class of Notes, in each case after giving effect to the payment of Monthly
Principal and any Excess Cash on such Payment Date;
(d) the Aggregate Principal Balance of the Loans as of the end of the
related Collection Period;
(e) the amount of Servicing Advances made with respect to such
Payment Date and the aggregate amount of unreimbursed Servicing Advances,
if any;
(f) the number and the aggregate of the Principal Balances of the
Loans delinquent (i) one month, (ii) two months and (iii) three or more
months, as of the end of the related Collection Period;
(g) the aggregate of the Principal Balances of the Loans in
foreclosure or other similar proceedings or in which the borrower is in
bankruptcy and the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure during the related
Collection Period;
(h) the aggregate of the Principal Balances of the Loans repurchased
by the Transferor or the Servicer, separately setting forth the aggregate
of the Principal Balances of Loans delinquent for three consecutive
monthly installments purchased by the Servicer at its option pursuant to
the Servicing Agreement;
(i) the Insured Payment, if any, for such Payment Date;
(j) the amount of the Servicing Fee and the Master Servicing Fee paid
to or retained by the Servicer and the Master Servicer with respect to
such Payment Date;
(k) the Overcollateralization Amount, the then applicable Required
Overcollateralization Amount, the Overcollateralization Surplus, if any,
and the Overcollateralization Deficit, if any, with respect to such
Payment Date;
(l) the aggregate outstanding Principal Balance of the three largest
outstanding Loans in the Pool;
(m) the aggregate amount of Realized Losses incurred during the
related Collection Period and the cumulative amount of Realized Losses
since the Cut-off Date;
(n) for the purpose of determining whether there has been a Servicer
Termination Event, the Rolling Delinquency Percentage, the Rolling Loss
Percentage, the Cumulative Loss Percentage, the Delinquency Loss Factor
and Total Expected Losses;
(o) for the purposes of calculating the Required
Overcollateralization Amount, the Rolling Three Month Average Annualized
Losses, the Delinquency Percentage, the Delinquency Loss Factor and the
Total Expected Losses; and
(p) the percentage of Loans (as measured by the) Aggregate Principal
Balance of such Loans) that have been modified during the related
Collection Period and the percentage of Loans (as measured by the
Aggregate Principal Balance of such Loans) that have been modified since
the Cutoff Date. In the case of information furnished pursuant to clauses
(a) and (b) above, the amounts shall be expressed as a dollar amount per
Note with a $1,000 principal denomination.
Within 90 days after the end of each calendar year, the Note
Administrator will mail to each person who at any time during such calendar
year was a Noteholder a statement containing the information set forth in
clauses (a) and (b) above, aggregated for such calendar year or applicable
portion thereof during which such person was a Noteholder. Such obligation of
the Indenture Trustee shall be deemed to have been satisfied to the extent that
substantially comparable information shall be prepared and furnished by the
Indenture Trustee to Noteholders pursuant to any requirements of the Code as
are in force from time to time.
REDEMPTION OF THE NOTES
The Notes will be subject to redemption, in whole but not in part, at
the option of the holder(s) of the Trust Certificates or, if not so exercised,
at the option of the Note Insurer, on or after the Payment Date on which the
Aggregate Note Balance has declined to 5% or less of the Aggregate Note Balance
as of the Cut-off Date (the "REDEMPTION DATE").
The Notes will be redeemed at a redemption price of 100% of the then
outstanding Aggregate Note Balance, plus accrued but unpaid Note Interest
thereon through the end of the Interest Period immediately preceding the
related Payment Date. Notwithstanding the foregoing, however, no redemption may
take place unless, in connection with such redemption, any amounts due and
owing to the Note Insurer under the Insurance Agreement are paid in full to the
Note Insurer. There will be no prepayment premium in connection with such a
redemption. Notice of an optional redemption of the Notes must be mailed by the
Indenture Trustee to the Noteholders and the Note Insurer at 1east ten days
prior to the Payment Date set for such redemption.
In addition, the Trust may redeem the Notes at any time upon a
determination by the Trust, based upon an opinion of counsel, that a
substantial risk exists that the Notes will not be treated for federal income
tax purposes as evidences of indebtedness. See "Certain Federal Income Tax
Consequences -- General" herein. The Note Insurance Policy will not cover such
redemption.
The payment on the final Payment Date in connection with the
redemption of the Notes shall be in lieu of the payment otherwise required to
be made on such Payment Date in respect of the Notes.
PAYMENTS TO THE HOLDER(S) OF THE TRUST CERTIFICATES
On each Payment Date, any portion of Available Funds remaining after
making payments of interest and principal due on the Notes and other payments
required on such Payment Date will be released to the holder(s) of the Trust
Certificates as provided in the Trust Agreement, free of the lien of the
Indenture. Such amounts will not be available to make payments on the Notes or
payments to the Note Insurer on any subsequent Payment Date.
THE INDENTURE TRUSTEE
_________, a _________, will be the Indenture Trustee under the
Indenture. The Indenture will provide that the Indenture Trustee is entitled to
the Indenture Trustee Fee and reimbursement of certain expenses. In addition,
the Indenture Trustee will retain the benefit, if any, from investment of funds
in the Note Account.
The Indenture also will provide that the Indenture Trustee may resign
at any time, upon notice to the Trust, the Servicer, the Note Insurer and any
Rating Agency, in which event the Trust will be obligated to appoint a
successor Indenture Trustee acceptable to the Note Insurer. The Trust, with the
prior consent of the Note Insurer, may remove the Indenture Trustee if the
Indenture Trustee ceases to be eligible to continue as such under the Indenture
or if the Indenture Trustee becomes insolvent. In addition, the Indenture
Trustee may be removed at any time by the Note Insurer, or with the consent of
the Note Insurer, by the holders of more than 50% of the Aggregate Note
Balance. Any resignation or removal of the Indenture Trustee and appointment of
a successor Indenture Trustee will not become effective until acceptance of the
appointment by the successor Indenture Trustee. The Indenture will provide that
the Indenture Trustee is under no obligation to exercise any of the rights or
powers vested in it by the Indenture at the request or direction of any of the
Noteholders, unless such Noteholders shall have offered to the Indenture
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which might be incurred by it in compliance with such request or
direction. The Indenture Trustee may execute any of the rights or powers
granted by the Indenture or perform any duties thereunder either directly or by
or through its agents or attorneys, and the Indenture Trustee is not
responsible for any misconduct or negligence on the part of any agent or
attorney appointed and supervised with due care by it thereunder. Pursuant to
the Indenture, the Indenture Trustee is not liable for any action it takes or
omits to take in good faith which it reasonably believes to be authorized by an
authorized officer of any person or within its rights or powers under the
Indenture. The Indenture Trustee may rely and will be protected in acting or
refraining from acting in good faith in reliance on any certificate, notice or
other document of any kind prima facie properly executed and submitted by the
authorized officer of any person respecting any matters arising under the
Indenture. The Indenture Trustee will be indemnified by the Transferor for
certain losses and other events to the extent described in the Servicing
Agreement.
NOTE EVENTS OF DEFAULT
An Event of Default with respect to the Notes shall occur if, on any
Payment Date, after taking into account all payments made in respect of the
Notes on such Payment Date, the Note Interest for such Payment Date remains
unpaid or an Overcollateralization Deficit exists with respect to the Notes, or
any Class of Notes is not paid in full before its Stated Maturity Date, and
such default continues unremedied for a period of five days. An "EVENT OF
DEFAULT" with respect to the Notes will also occur upon the occurrence of any
of the following (a) a default in the observance of certain negative covenants
in the Indenture; (b) a default in the observance of any other covenant of the
Indenture, and the continuation of any such default for a period of thirty days
after the earlier of (i) the date on which the Trust obtains knowledge of such
default, and (ii) the date on which notice is given to the Trust by the
Indenture Trustee at the direction of the Note Insurer or to the Trust and the
Indenture Trustee by the Holders of at least 25% in principal amount of the
Notes then outstanding with the prior written consent of the Note Insurer; (c)
any representation or warranty made by the Trust in the Indenture or in any
certificate delivered pursuant thereto having been incorrect in a material
respect as of the time made, and the circumstance in respect of which such
representation or warranty is incorrect not having been cured within thirty
days after the earlier of (i) the date on which the Trust obtains knowledge of
such incorrectness, and (ii) the date on which notice thereof is given to the
Trust by the Indenture Trustee or by the Holders of at least 25% in principal
amount of the Notes then outstanding; or (d) certain events of bankruptcy,
insolvency, receivership or reorganization of the Trust.
RIGHTS UPON EVENT OF DEFAULT
In case an Event of Default should occur and be continuing with
respect to the Notes, the Indenture Trustee may, with the consent of the Note
Insurer in the absence of a Note Insurer Default, and on request of Holders of
more than 50% in principal amount of the Notes then outstanding shall, with the
consent of the Note Insurer in the absence of a Note Insurer Default, declare
the principal of the Notes to be due and payable. Such declaration may under
certain circumstances be rescinded by the Holders of a majority in principal
amount of the Notes then outstanding, with the prior consent of the Note
Insurer.
Subject to the provisions of the Indenture relating to the duties of
the Indenture Trustee, in case an Event of Default shall occur and be
continuing, the Indenture Trustee shall be under no obligation to exercise any
of the rights and powers under the Indenture at the request or direction of any
of the Holders of Notes, unless such Holders have offered to the Indenture
Trustee reasonable security or indemnity satisfactory to it against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request or direction. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, the Note Insurer or the Holders
of a majority in principal amount of the outstanding Notes, with the prior
written consent of the Note Insurer, shall have the right to direct the time,
method, and place of conducting any proceeding or any remedy available to the
Indenture Trustee or exercising any trust or power conferred on the Indenture
Trustee with respect to the Notes; and the Holders of a majority in principal
amount of the Notes then outstanding may, with the prior written consent of the
Note Insurer, in certain cases, waive any default with respect thereto, except
a default in the payment of principal or interest or a default in respect of a
covenant or provision of the Indenture than cannot be modified without the
waiver or consent of the Holder of each outstanding, Note affected thereby.
SUPPLEMENTAL INDENTURES
Subject to the prior written consent of the Note Insurer, at any time
and from time to time, without the consent of the Noteholders, the Indenture
Trustee and the Trust may enter into one or more supplemental indentures to
cure any ambiguity, to correct or supplement any provision of the Indenture
that may be defective or inconsistent with any other provision thereof, or to
amend any other provisions with respect to matters or questions arising under
the Indenture, which shall not be inconsistent with the provisions of the
Indenture; provided, however, that such action shall not adversely affect in
any material respect the interests of the Noteholders; and provided further
that the amendment shall not be deemed to adversely affect in any material
respect the interests of the Noteholders if the party requesting the amendment
obtains an opinion of counsel to such effect.
The Indenture may also be amended by the Indenture Trustee and the
Trust at any time and from time to time, with the prior written approval of the
Rating Agencies and the Note Insurer for the purpose of adding any provisions
or changing in any manner or eliminating any of the provisions thereof or of
modifying in any manner the rights of the Noteholders thereunder; provided,
however, that no such amendment shall, without the consent of all Noteholders,
(a) change the date of any Payment Date or the Stated Maturity Date of the
Notes or reduce the principal amount thereof, the Note Interest Rate thereon or
the redemption price with respect to, or (b) reduce the percentage of Aggregate
Note Balance which is required to consent to any such amendments.
EXERCISE OF NOTEHOLDER RIGHTS BY THE NOTE INSURER
The Indenture provides that, unless a Note Insurer Default exists, the
Note Insurer shall have the right to exercise all rights of the Noteholders
under the Indenture without any further consent of the Noteholders, other than
rights with respect to the approval of certain amendments to the Indenture and
certain other specified rights.
SERVICING OF THE LOANS
GENERAL
The Servicer will service and administer the Loans in accordance with
the policies, procedures and practices customarily employed by the Servicer in
servicing other comparable loans and pursuant to the provisions of the
Servicing Agreement. The Servicer will not amend or modify in any material
respect its policies, procedures and practices with respect to the Loans (other
than as required by applicable laws and regulations) without the prior consent
of the Note Insurer.
Generally, servicing includes, but is not limited to, post-origination
loan processing, customer service, remittance handling, collections and
liquidations. Consistent with the servicing standard described in the foregoing
paragraph, the Servicer, in its discretion, may (a) waive any assumption fees,
late payment charges, charges for checks returned for insufficient funds or
other fees that may be collected in the ordinary course of servicing a Loan,
(b) arrange a schedule for the payment of delinquent payments on the related
Loan, subject to conditions set forth in the Servicing Agreement, if a borrower
is in default or about to be in default because of such borrower's financial
condition or (c) modify monthly payments on Loans in accordance with
limitations imposed by the Servicing Agreement and subject to the Relief Act
(as defined herein); provided, however, the Servicer may not, without the prior
consent of the Note Insurer, permit any waiver, modification or variance of a
Loan which would (i) change the Mortgage Rate, (ii) forgive the payment of any
principal or interest, (iii) lessen the lien priority, (iv) extend the final
maturity date on a Loan past eighteen months prior to the maturity date of the
Notes, in any case except to the extent required under the Relief Act, or (v)
modify any monthly payment to an amount less than the monthly interest accrual
for such Loan, and provided, further, that the Servicer may not modify, waive
or amend any provisions of any Loans if the aggregate principal balance of
modified Loans would exceed ___% of the Cut-off Date Pool Principal Balance
without the consent of the Note Insurer. The Servicer, acting as agent for the
Indenture Trustee, will not consent to the subsequent placement of a deed of
trust or mortgage, as applicable, on any Mortgaged Property that is of equal or
higher priority to that of the lien securing the related Loan unless such Loan
is prepaid in full and thereby removed from the Pool.
CUSTOMARY SERVICING PROCEDURES
The procedures of the Servicer with respect to day to day servicing of
the Loans may vary considerably depending on the particular Loan, the Mortgaged
Property, the borrower, the availability of an acceptable party to assume a
Loan and the laws of the jurisdiction in which the Mortgaged Property is
located. Generally, it is the current practice of the Servicer to send
borrowers coupon books periodically reflecting their monthly payments and the
due dates therefor. Although borrowers generally make loan payments within ten
to fifteen days after the due date, if a borrower fails to pay the monthly
payment within such time period, the Servicer will commence collection efforts
by notifying the borrower of the delinquency through telephonic and written
communications methods. Under the terms of each Loan, the borrower agrees to
pay a late charge (which the Servicer is entitled to retain as additional
servicing compensation under the Servicing Agreement) if a monthly payment on a
Loan is not received within the number of days specified in the Mortgage Note
after its due date. If the Loan remains delinquent, the Servicer will attempt
to contact the borrower to determine the cause of the delinquency and to obtain
a commitment to cure the delinquency at the earliest possible time.
As a general matter, if efforts to obtain payment have not been
successful shortly after the due date of the next subsequently scheduled
installment, an established collection procedure using telephonic and a series
of written communications is followed. The status of the delinquency determines
the level of collection effort and methodology followed. However, if no
substantial progress has been made in obtaining delinquent monies from the
borrower, legal procedures, including foreclosure and garnishment proceedings,
will be evaluated and commenced where appropriate.
Regulations and practices regarding foreclosure vary greatly from
state to state. Generally, the Servicer will have commenced foreclosure,
collection or enforcement proceedings prior to the time when a loan is 150 days
delinquent. If the Servicer determines that purchasing a property securing a
mortgage loan will minimize the loss associated with such defaulted loan, the
Servicer may bid at the foreclosure sale for such property or accept a deed in
lieu of foreclosure. After the Servicer converts title to a mortgaged property
into the name of the Indenture Trustee on behalf of the Noteholders and the
Note Insurer by foreclosure or deed in lieu of foreclosure, a real estate
broker is selected to market the property. Where appropriate, the Servicer also
will seek garnishment of wages once the Servicer obtains judgment in
enforcement proceedings.
THE SERVICING AGREEMENT
General
The summaries of certain provisions of the Servicing Agreement set
forth below and under the caption "The Agreements" in the Prospectus, while
complete in material respects, do not purport to be exhaustive. For more
details regarding the terms of the Servicing Agreement, prospective investors
in the Notes are advised to review the Servicing Agreement, a copy of which the
Depositor will provide (without exhibits) without charge upon written request
addressed to the Depositor at 600 Steamboat Road, Greenwich, Connecticut 06830.
Generally, the Servicer will be authorized and empowered pursuant to
the Servicing Agreement (i) to execute and deliver (or procure the execution
and delivery by the Indenture Trustee of) any and all instruments of
satisfaction or cancellation or of partial or full release or discharge and all
other comparable instruments with respect to the Loans and with respect to the
Mortgaged Properties and (ii) to institute foreclosure proceedings or obtain
deeds in lieu of foreclosure so as to convert title to any Mortgaged Property
in the name of the Indenture Trustee on behalf of the Noteholders and the Note
Insurer.
Payments on Loans and Establishment of Collection Account
The Servicer shall establish and maintain one or more accounts
(collectively, the "COLLECTION ACCOUNT") at one or more institutions meeting
the requirements set forth in the Servicing Agreement. The Collection Account,
and all amounts deposited therein from time to time, shall be part of the Trust
Estate. The Servicer will deposit into the Collection Account not later than
two Business Days after receipt, all payments on or in respect of the Loans
received from or on behalf of borrowers and all proceeds of the Loans, net of
servicing fees, all other items of servicing compensation, and reimbursable
outstanding Servicing Advances, to the extent the Servicer's automated system
deducts such amounts prior to deposit to the Collection Account. On or prior to
each Deposit Date, funds to be remitted to the Note Account will be remitted
from the Collection Account to the Indenture Trustee for deposit into the Note
Account. Notwithstanding the foregoing, payments and collections that do not
constitute Available Funds (e.g., amounts representing interest accrued on
Loans in respect of any period prior to the Cut-off Date, fees, late payment
charges, prepayment charges, charges for checks returned for insufficient
funds, extension or other administrative charges or other amounts received for
application towards the payment of taxes, insurance premiums, assessments and
similar items) will not be required to be deposited into the Collection
Account. The Servicer may make withdrawals from the Collection Account only for
the following purposes: (a) to make deposits into the Note Account as described
above; (b) to pay itself any monthly Servicing Fees and other items of
servicing compensation and investment income on Permitted Investments to the
extent permitted by the Servicing Agreement; (c) to make any Servicing Advance
to the extent permitted by the Servicing Agreement or to reimburse itself for
any Servicing Advance previously made to the extent permitted by the Servicing
Agreement; (d) to withdraw amounts that have been deposited to the Collection
Account in error; and (e) to clear and terminate the Collection Account.
Investment of Collection Account
All or a portion of the Collection Account may be invested and
reinvested in one or more Permitted Investments bearing interest or sold at a
discount, at the Servicer's direction. The Indenture Trustee or any affiliate
thereof may be the obligor on any investment in any Collection Account which
otherwise qualifies as a Permitted Investment. No investment in the Collection
Account may mature later than the Deposit Date next succeeding the date of
investment.
The Indenture Trustee will not in any way be held liable by reason of
any insufficiency in the Collection Account resulting from any loss on any
Permitted Investment included therein (except to the extent the Indenture
Trustee is the obligor thereon).
All income or other gain from investments in the Collection Account
will be held in the Collection Account for the benefit of the Servicer and will
be subject to withdrawal from time to time as permitted by the Servicing
Agreement. Any loss resulting from such investments will be for the account of
the Servicer. The Servicer will be required to deposit the amount of any such
loss immediately upon the realization of such loss to the extent such loss will
not be offset by other income or gain from investments in the Collection
Account and then available for such application.
Realization upon Defaulted Loans
The Servicing Agreement will require the Servicer, acting as the agent
of the Indenture Trustee, to foreclose upon or otherwise comparably convert to
ownership in the name of the Indenture Trustee, on behalf of the Noteholders
and the Note Insurer, Mortgaged Properties securing such of the Loans as come
into default, as to which no satisfactory arrangements can be made for the
collection of delinquent payments and which the Servicer has not reacquired
pursuant to the option described below; provided, however, that if the Servicer
has actual knowledge or reasonably believes that any Mortgaged Property is
contaminated by hazardous or toxic wastes or substances, the Servicer will
cause an environmental inspection of the Mortgaged Property that complies with
Fannie Mae's selling and servicing guide applicable to single family homes and
its servicing procedures to be conducted. If the environmental inspection
reveals any potentially hazardous substances, the Servicer will notify the
Indenture Trustee and the Note Insurer, and the Servicer will not foreclose or
accept a deed in lieu of foreclosure on the Mortgaged Property without the
consent of the Indenture Trustee and the Note Insurer. In connection with such
foreclosure or other conversion, the Servicer will follow such practices as it
deems necessary or advisable and as are in keeping with its general mortgage
loan servicing activities; provided, however, that the Servicer will not be
required to expend its own funds in connection with foreclosure or other
conversion, correction of a default on a senior deed of trust or restoration of
any Mortgaged Property unless the Servicer determines that such foreclosure,
correction or restoration will increase Net Liquidation Proceeds.
In servicing the Loans, the Servicer will be required to determine,
with respect to each defaulted Loan, when it has recovered, whether through
trustee's sale, foreclosure sale, collection and enforcement actions, or
otherwise, all amounts, if any, it expects to recover from or on account of
such defaulted Loan, whereupon such Loan will be charged off and will become a
Liquidated Loan.
Assumption of Loans
In any case in which the Servicer becomes aware that a Mortgaged
Property has been or is about to be voluntarily conveyed by the related
borrower, the Servicer may enter into an assumption agreement with the person
to whom such property has been or is about to be conveyed, pursuant to which
such person becomes liable under the related promissory note and, to the extent
permitted by applicable law or the mortgage documents, the borrower remains
liable thereon. The Servicer may not enter into any assumption agreement that
modifies the mortgage interest rate or payment terms of the Mortgage Note
without the consent of the Note Insurer. The Servicing Agreement will prohibit
the Servicer from entering into an assumption or substitution of liability
agreement unless permitted by applicable law and unless the Servicer determines
that the assuming party would not fall within a significantly lower credit risk
category than the original borrower and such assumption or substitution of
liability agreement would not materially increase the risk of default or
delinquency on, or materially decrease the security for, such Loan.
Notwithstanding any of the foregoing, the Servicer will not enter into any
assumption agreement unless such assumption agreement is pursuant to its
standard servicing procedure and the Servicer would enter into such assumption
agreement with respect to a mortgage loan in its own portfolio. Any fees
collected by the Servicer for entering into an assumption or substitution of
liability agreement will be retained by the Servicer as additional servicing
compensation.
Evidence as to Compliance
The Servicing Agreement provides that on or before a specified date in
each year, a firm of independent public accountants will furnish a report to
the Indenture Trustee, the Rating Agencies and the Note Insurer to the effect
that on the basis of certain procedures substantially in conformance with the
Uniform Single Attestation Program for Mortgage Bankers ("USAP") (to the extent
the procedures are applicable to the servicing obligations set forth in the
Servicing Agreement), the servicing by or on behalf of the Servicer of mortgage
loans, and such procedures have disclosed no exceptions or errors in records
relating to the mortgage loans serviced by the Servicer for others which, in
the opinion of such firm, such firm's required to report under USAP, except for
such exceptions as will be referred to in the report. The Servicing Agreement
will provide that the Servicer will be required to deliver to the Indenture
Trustee, the Master Servicer, the Rating Agencies and the Note Insurer, on or
before a specified date in each year, an annual statement signed by an officer
of the Servicer to the effect that the Servicer has fulfilled its material
obligations under the Servicing Agreement throughout the preceding year.
Certain Matters Regarding Servicer's Servicing Obligations
The Servicing Agreement will provide that the Servicer may not resign
from its obligations and duties as the Servicer thereunder, except upon (i) the
consent of the Master Servicer, the Note Insurer and the Indenture Trustee, or
(ii) the delivery, at the Servicer's expense, of an opinion of counsel
addressed to the Indenture Trustee and the Note Insurer and in form and
substance acceptable to the Indenture Trustee and the Note Insurer to the
effect that its duties thereunder are no longer permissible under applicable
law or regulation or are in material conflict by reason of applicable law or
regulation with any other of its activities carried on as of the date of the
Servicing Agreement. No such resignation will become effective until the Master
Servicer has assumed the servicing obligations and duties of the Servicer under
the Servicing Agreement.
The Servicing Agreement will also provide that neither the Servicer,
nor any of its directors, officers, employees or agents, will be liable to the
Indenture Trustee, the Trust, or the Noteholders for any action taken or for
refraining from the taking of any action by the Servicer pursuant to the
Servicing Agreement, or for errors in judgment; provided, however, that neither
the Servicer nor any such person will be protected against any liability which
would otherwise be imposed by reason of willful misfeasance, bad faith or
negligence in the performance of duties of the Servicer, or by reason of
reckless disregard of obligations and duties of the Servicer, thereunder.
In addition, the Servicing Agreement will provide that the Servicer
will not be under any obligation to appear in, prosecute or defend any legal
action which is not incidental to its duties to service the Loans under the
Servicing Agreement and which in its opinion may involve it in any expense or
liability.
The Servicing Agreement will provide that any corporation or other
entity (a) into which the Servicer may be merged or consolidated, (b) that may
result from any merger, conversion or consolidation to which the Servicer shall
be a party or (c) that may succeed to all or substantially all of the business
of the Servicer, will, in any case where an assumption is not effected by
operation of law, execute an agreement of assumption to perform every
obligation of the Servicer under the Servicing Agreement, and will be the
successor to the Servicer thereunder without the execution or filing of any
document or any further act by any of the parties to the Servicing Agreement;
provided, however, that if the Servicer in any of the foregoing cases is not
the surviving entity, the surviving entity shall execute an agreement of
assumption to perform every obligation of the Servicer thereunder and the
corporation or other entity satisfies the eligibility requirements for a
successor Servicer.
Servicer Events of Default
Events of default (each, a "SERVICER EVENT OF DEFAULT") under the
Servicing Agreement will include (a) any failure by the Servicer to deposit in
the Collection Account or transfer to the Indenture Trustee for deposit in the
Note Account any amount required to be so deposited under the Servicing
Agreement; (b) any failure by the Servicer to duly observe or perform in any
material respect any other of its covenants or agreements in the Servicing
Agreement or so long as the Servicer and the Transferor under the Home Loan
Sale Agreement are the same, the failure of the Transferor, which materially
and adversely affects the rights of Noteholders and continues unremedied for
the applicable cure period, if any, after the earlier of (i) the date on which
the Transferor obtains knowledge of such failure, and (ii) the date on which
written notice of such failure is given to the Servicer by the Master Servicer
or the Indenture Trustee; (c) certain events of insolvency, readjustment of
debt, marshaling of assets and liabilities or similar proceedings regarding the
Servicer and certain actions by the Servicer indicating its insolvency or
inability to pay its obligations; (d) any representation or warranty made by
the Transferor in the Servicing Agreement or the Home Loan Sale Agreement or
certificate delivered by the Transferor pursuant thereto having been incorrect
in any material respect as of the time made and the circumstance in respect of
which such representation and warranty is incorrect, if capable of being cured,
not having been cured within 30 days after the earlier of (i) the date on which
the Transferor obtains knowledge of such incorrectness, and (ii) the date on
which notice is given to the Transferor by the Trust, the Indenture Trustee,
the Master Servicer, or the Note Insurer; and (e) the occurrence of
delinquencies and/or losses in respect of the Loans in excess of a level, and
for a period of time, as specified in the Servicing Agreement.
Rights Upon Servicer Events of Default
Upon the occurrence of a Servicer Event of Default, the Master
Servicer will be obligated to enforce the Servicing Agreement or to terminate
the Servicer at the direction of the Note Insurer (so long as no Note Insurer
Default exists and is continuing) and appoint a successor Servicer, or if it
does not, succeed to all the responsibilities, duties and liabilities of the
Servicer under the Servicing Agreement and, if it succeeds to such
responsibilities, will be entitled to such compensation as the Servicer would
have been entitled to under the Servicing Agreement. In the event that the
Master Servicer fails to appoint a successor Servicer and it is unwilling or
legally unable to act as Servicer, it may petition a court of competent
jurisdiction for the appointment of a successor Servicer. Any such successor
Servicer (other than the Master Servicer or the Indenture Trustee) must be an
established housing and home finance institution or any institution that
regularly services nonconforming residential mortgage loans, that is currently
servicing a nonconforming residential mortgage loan portfolio, that has all
licenses, permits and approvals required by applicable law and a net worth of
at least $10,000,000. The appointment of any such successor Servicer (other
than the Master Servicer or the Indenture Trustee) shall be acceptable to the
Note Insurer and shall not result in the qualification, reduction or withdrawal
of the implied rating assigned to the Notes by the Rating Agencies (without
taking into account the Insurance Policy). Pending appointment of a successor
Servicer, unless the Master Servicer is prohibited by law from so acting, the
Master Servicer shall be obligated to act as Servicer. The Master Servicer and
such successor Servicer may agree upon the servicing compensation to be paid,
which in no event may be greater than the compensation described above.
Master Servicer Events of Default
Master Servicer Events of Default will be set forth in the Servicing
Agreement. Upon the occurrence of a Master Servicer Event of Default, the
Indenture Trustee shall, at the direction of the Note Insurer (so long as no
Note Insurer Default exists and is continuing), terminate the Master Servicer's
rights and obligations under the Servicing Agreement. Upon a termination of the
Master Servicer, the Indenture Trustee shall be obligated to succeed to the
obligations of the Master Servicer or to appoint a successor Master Servicer
with the consent of the Note Insurer.
Amendments
Subject to the prior written consent of the Note Insurer, at any time
and from time to time, without the consent of the Noteholders, the Indenture
Trustee, the Trust, the Master Servicer and the Servicer may amend the
Servicing Agreement for the purposes of (a) curing any ambiguity or affecting
or supplementing any provision of such agreement that may be inconsistent with
any other provision of such agreement or (b) complying with the requirements of
the Code; provided, however, that such action shall not materially and
adversely affect the interests of any Noteholder, as evidenced by an opinion of
counsel delivered to the Indenture Trustee to such effect (which opinion shall
not be at the expense of the Indenture Trustee) and written confirmation from
each of the Rating Agencies that such action will not result in a
qualification, reduction or withdrawal of the implied ratings on the Notes
(without taking into account the Insurance Policy).
The Servicing Agreement may also be amended by the Indenture Trustee,
the Trust, the Master Servicer and the Servicer, at any time and from time to
time, with the prior written approval of the Rating Agencies, the Note Insurer
and the holders of not less than 50% of the Aggregate Note Balance represented
by the Notes then outstanding, for the purpose of adding any provisions or
changing in any manner or eliminating any of the provisions thereof or of
modifying in any manner the rights of the Noteholders thereunder; provided,
however, that no such amendment shall (a) reduce in any manner the amount of,
or delay the timing of, payments which are required to be paid to the Note
Account without the consent of all Noteholders or (b) reduce the aforesaid
percentages of Aggregate Note Balance which are required to consent to any such
amendments, without the consent of all Noteholders.
SERVICING AND OTHER COMPENSATION; PAYMENT OF EXPENSES
The Servicing Fee will be the primary compensation to be paid to or
retained by the Servicer in respect of its servicing activities under the
Servicing Agreement and will be paid to the Servicer on each Deposit Date out
of collections of interest received on or in respect of the Loans for the
related Collection Period. The Servicing Fee will equal one-twelfth (1/12) of
the product of (a) 1.00% and (b) the Aggregate Principal Balance of the Loans
as of the first day of the related Collection Period. The Servicer shall be
entitled to retain the Servicing Fee from amounts to be deposited in the
Collection Account. In addition, the Servicer will retain the benefit, if any,
from any deposit, maintenance or investment of funds in the Collection Account.
Assumption fees, late payment charges, prepayment charges, charges for checks
returned for insufficient funds, and extension and other administrative
charges, to the extent collected from borrowers, will be retained by the
Servicer as additional servicing compensation. To the extent the Servicer
obtains any collections on a Liquidated Loan subsequent to the date on which it
becomes a Liquidated Loan, the Servicer will be entitled to receive 20% of such
recovery as servicing compensation, provided that the Servicer's right to
receive such amounts shall be subordinated to the rights of the Noteholders and
of the Note Insurer to receive the amounts due to them.
The Servicer will be required to pay all reasonable and customary
"out-of-pocket" costs and expenses incurred in the performance of its servicing
obligations, including, but not limited to, the payment of fees for any
sub-servicer. The Servicer will also be permitted (but not required) to advance
the cost of (i) any enforcement or judicial proceedings relating to the
borrowers, including foreclosures, and (ii) the management and liquidation of
Mortgaged Properties acquired in satisfaction of the related Loans. Such
expenditures (each, a "SERVICING ADVANCE") may include costs of collection
efforts, reappraisals, forced placement of hazard insurance if a borrower
allows his hazard policy to lapse, legal fees in connection with foreclosure
actions, advancing delinquent property taxes and upkeep and maintenance of the
Mortgaged Property if it is acquired through foreclosure and similar types of
expenses. The Servicer will not be required to make any Servicing Advance that
it determines would not be recoverable from subsequent collections, Trust
Insurance Proceeds, or Liquidation Proceeds on the related Loan or otherwise.
The Servicing Agreement provides that the Servicer may pay all or a
portion of any Servicing Advance out of amounts on deposit in the Collection
Account which are being held for payment on a subsequent Payment Date relating
to such Collection Period; any such amounts so used are required to be replaced
by the Servicer by deposit to the Collection Account on or before the Deposit
Date relating to such subsequent Payment Date.
The Servicer may recover Servicing Advances, if not theretofore
recovered from the borrower on whose behalf such Servicing Advance was made,
from subsequent collections on the related Loan, including Liquidation
Proceeds, Trust Insurance Proceeds and such other amounts as may be collected
by the Servicer from the borrower or otherwise relating to the Loan, or if such
collections are insufficient, from the Note Account, subject to certain
limitations.
<PAGE>
NOTE INSURANCE
THE INSURANCE POLICY
The information set forth in this section has been provided by
________, a _________ (the "NOTE INSURER"). No representation is made by the
Trust, the Depositor, the Servicer, the Transferor or any of their affiliates
as to the accuracy or completeness of such information or any information
related to the Note Insurer incorporated by reference herein.
The Note Insurer, in consideration of the payment of the premium and
subject to the terms of the Insurance Policy, thereby unconditionally and
irrevocably guarantees to any Noteholder that an amount equal to each full and
complete Insured Payment will be received by the Indenture Trustee or its
successor, as trustee for the Noteholders, on behalf of the Noteholders from
the Note Insurer, for distribution by the Indenture Trustee to each Noteholder
of each Noteholder's proportionate share of the Insured Payment. The Note
Insurer's obligations under the Insurance Policy with respect to a particular
Insured Payment shall be discharged to the extent funds equal to the applicable
Insured Payment are received by the Indenture Trustee, whether or not such
funds are properly applied by the Indenture Trustee. Insured Payments shall be
made only at the time set forth in the Insurance Policy and no accelerated
Insured Payments shall be made regardless of any acceleration of the Notes,
unless such acceleration is at the sole option of the Note Insurer.
Notwithstanding the foregoing paragraph, the Insurance Policy does not
cover shortfalls, if any, attributable to the liability of the Trust or the
Indenture Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability). The Insurance Policy does not
cover any Available Funds Cap Carry Forward Amount.
The Note Insurer will pay any Insured Payment that is a Preference
Amount on the Business Day following receipt on a Business Day by the Fiscal
Agent (as described below) of (i) a certified copy of the order requiring the
return of such preference payment, (ii) an opinion of counsel satisfactory to
the Note Insurer that such order is final and not subject to appeal, (iii) an
assignment in such form as is reasonably required by the Note Insurer,
irrevocably assigning to the Note Insurer all rights and claims of the
Noteholder relating to or arising under the Notes against the debtor which made
such preference payment or otherwise with respect to such preference payment
and (iv) appropriate instruments to effect the appointment of the Note Insurer
as agent for such Noteholder in any legal proceeding related to such preference
payment, such instruments being in a form satisfactory to the Note Insurer;
provided, that if such documents are received after 12:00 noon New York City
time on such Business Day, they will be deemed to be received on the following
Business Day. Such payment shall be disbursed to the receiver or trustee in
bankruptcy named in the final order of the court exercising jurisdiction on
behalf of the Noteholder and not to any Noteholder directly unless such
Noteholder has returned principal or interest paid on the Notes to such
receiver or trustee in bankruptcy, in which case such payment shall be
disbursed to such Noteholder.
The Note Insurer will pay any other amount payable under the Insurance
Policy no later than 12:00 noon New York City time, on the later of the Payment
Date on which the related Deficiency Amount is due or the third Business Day
following receipt in New York, New York, on a Business Day by _________, as
Fiscal Agent for the Note Insurer or any successor fiscal agent appointed by
the Note Insurer (the "FISCAL Agent") of a Notice (as described below);
provided that if such Notice is received after 12:00 noon New York City time on
such Business Day, it will be deemed to be received on the following Business
Day. If any such Notice received by the Fiscal Agent is not in proper form or
is otherwise insufficient for the purpose of making a claim under the Insurance
Policy, it shall be deemed not to have been received by the Fiscal Agent for
purposes of this paragraph, and the Note Insurer or the Fiscal Agent, as the
case may be, shall promptly so advise the Indenture Trustee and the Indenture
Trustee may submit an amended Notice.
Insured Payments due under the Insurance Policy, unless otherwise
stated therein, will be disbursed by the Fiscal Agent to the Indenture Trustee
on behalf of Noteholders by wire transfer of immediately available funds in the
amount of the Insured Payment less, in respect of Insured Payments related to
Preference Amounts, any amount held by the Indenture Trustee for the payment of
such Insured Payment and legally available therefor.
The Fiscal Agent is the agent of the Note Insurer only and the Fiscal
Agent shall in no event be liable to Noteholders for any acts of the Fiscal
Agent or any failure of the Note Insurer to deposit or cause to be deposited,
sufficient funds to make payment due under the Insurance Policy.
Subject to the terms of the Agreement, the Note Insurer shall be
subrogated to the rights of each Noteholder to receive payments under the Notes
to the extent of any payment by the Note Insurer under the Insurance Policy.
As used in the Insurance Policy, the following terms shall have the
following meanings:
"AGREEMENT" means the Indenture, dated as of ________ 1,
199__, among the Trust, the Indenture Trustee, the Note Administrator
and the Custodian, without regard to any amendment or supplement
thereto, unless the Note Trust shall have consented in writing
thereto.
"NOTEHOLDER" means each Noteholder (as defined in the
Indenture) who, on the applicable Payment Date, is entitled under the
terms of the applicable Note to payment thereunder.
"BUSINESS DAY" means any day other than a Saturday, a Sunday
or a day on which banking institutions in New York City or the city in
which the corporate trust office of the Indenture Trustee is located
are authorized or obligated by law or executive order to close.
"DEFICIENCY AMOUNT" means, with respect to any Payment Date
the sum of (i) the Note Interest for such Payment Date minus Available
Funds and (ii) the then existing Overcollateralization Deficit, if
any, after application of Available Funds to reduce the Aggregate Note
Balance on such Payment Date.
"INSURED PAYMENT" means, (i) as of any Payment Date, the
Deficiency Amount and (ii) any Preference Amount due and then owing
under the Insurance Policy.
"NOTICE" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy substantially in the form of Exhibit
A attached to the Insurance Policy, the original of which is
subsequently delivered by registered or certified mail, from the
Indenture Trustee specifying the Insured Payment which shall be due
and owing on the applicable Payment Date.
"PREFERENCE AMOUNT" means any amount previously distributed
to a holder of a Note that is recoverable and sought to be recovered
as avoidable preference by a trustee in bankruptcy pursuant to the
United States Bankruptcy Code (11 U.S.C.), as amended from time to
time, in accordance with a final nonappealable order of a court having
competent jurisdiction.
Capitalized terms used in the Insurance Policy and not otherwise
defined therein will have the respective meanings set forth in the Agreement as
of the date of execution of the Insurance Policy, without giving effect to any
subsequent amendment to or modification of the Agreement unless such amendment
or modification has been approved in writing by the Note Insurer.
Any notice under the Insurance Policy or service of process on the
Fiscal Agent of the Note Insurer may be made at the address listed below for
the Fiscal Agent of the Note Insurer or such other address as the Note Insurer
shall specify in writing to the Indenture Trustee.
The notice address of the Fiscal Agent is ________, Attention:
_________, or such other address as the Fiscal Agent shall specify to the
Indenture Trustee in writing.
The Insurance Policy is being issued under and pursuant to, and shall
be construed under, the laws of the State of New York, without giving effect to
the conflict of laws principles thereof.
THE INSURANCE PROVIDED BY THE INSURANCE POLICY IS NOT COVERED BY THE
PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW.
The Insurance Policy is not cancelable for any reason. The premium on
the Insurance Policy is not refundable for any reason including payment, or
provision being made for payment, prior to the maturity of the Notes.
THE NOTE INSURER
[Note Insurer Information]. The Note Insurer is domiciled in the State
of ____ and is licensed to do business in and is subject to regulation under
the laws of [all 50 states, the District of Columbia, the Commonwealth of
Puerto Rico, the Commonwealth of the Northern Mariana Islands, the Virgin
Islands of the United States and the Territory of Guam]. [_______ has laws
prescribing minimum capital requirements, limiting classes and concentrations
of investments and requiring the approval of policy rates and forms.] State
laws also regulate the amount of both the aggregate and individual risks that
may be insured, the payment of dividends by the Note Insurer, changes in
control and transactions among affiliates. Additionally, the Note Insurer is
required to maintain contingency reserves on its liabilities in certain amounts
and for certain periods of time.
The principal executive offices of the Note Insurer are located at
________, and its telephone number is _______.
The tables below present selected financial information of the Note
Insurer determined in accordance with statutory accounting practices prescribed
or permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
SAP
_______, 199__ _______, 199__
(Audited (Unaudited)
(In millions)
Admitted Assets $_____ $_____
Liabilities _____ _____
Capital and Surplus _____ _____
GAAP
________, 199__ _______, 199__
(Audited) (Unaudited)
(In millions)
Assets $_____ $_____
Liabilities _____ _____
Shareholder's Equity _____ _____
Copies of the financial statements of the Note Insurer incorporated by
reference herein and copies of the Note Insurer's 199__ year-end audited
financial statements prepared in accordance with statutory accounting practices
are available, without charge, from the Note Insurer. The address of the Note
Insurer is _______. The telephone number of the Note Insurer is ________.
The Note Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Insurance Policy and Note Insurer set forth
under the headings "Note Insurance--The Insurance Policy" and "--The Note
Insurer" herein. Additionally, the Note Insurer makes no representation
regarding the Notes or the advisability of investing in the Notes.
________ rates the claims paying ability of the Note Insurer "____."
________ rates the claims paying ability of the Note Insurer "____."
________ rates the claims paying ability of the Note Insurer as "____."
Each rating of the Note Insurer should be evaluated independently. The
ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Note Insurer and its ability to pay claims on its
policies of insurance. Any further explanation as to the significance of the
above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
Notes, and such ratings may be subject to revision or withdrawal at any time by
the rating agencies. Any downward revision or withdrawal of any of the above
ratings may have an adverse effect on the market price of the Notes. The Note
Insurer does not guaranty the market price of the Notes nor does it guaranty
that the ratings on the Notes will not be revised or withdrawn.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The consolidated financial statements of the Note Insurer [and
subsidiaries] included as an exhibit to the Annual Report on Form 10-K for the
period ended _______, 199__, and the unaudited financial statements of the Note
Insurer [and subsidiaries] for the quarter ended ______, 199__, included as an
exhibit to the Quarterly Report on Form 10-Q for the period ended _______,
199__, each of which have been filed with the Securities and Exchange
Commission by _____, are hereby incorporated by reference in this Prospectus
Supplement.
All financial statements of the Note Insurer and subsidiaries included
in documents filed by ______. 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 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.
CREDIT ENHANCEMENT DOES NOT APPLY TO PREPAYMENT RISK
In general, the protection afforded by the Insurance Policy is
protection for credit risk and not for prepayment risk. A claim may not be made
under the Insurance Policy in an attempt to guarantee or insure that any
particular rate of prepayment is experienced by the Trust.
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
Except in the limited circumstances described herein, no principal
payments will be made on any Class of Notes until the Class Note Balance of
each Class of Notes having a lower numerical designation (and thus a higher
principal payment priority) has been reduced to zero. Thus, the Class A-2 Notes
will not be entitled to payments of principal until the Class Note Balance of
the Class A-1 Notes has been reduced to zero, the Class A-3 Notes will not be
entitled to payments of principal until the Class Note Balance of the Class A-2
Notes has been reduced to zero and the Class A-4 Notes will not be entitled to
payments of principal until the Class Note Balance of the Class A-3 Notes has
been reduced to zero. See "Description of the Notes -- Payments on the Notes"
herein. As the rate of payment of principal of the Notes depends primarily on
the rate of payment (including prepayments) of the principal balance of the
Loans, final payment of any Class of Notes could occur significantly earlier
than its Stated Maturity Date. Noteholders will bear the risk of being able to
reinvest principal payments on the Notes at yields at least equal to the yield
on their respective Notes. No prediction can be made as to the rate or timing
of prepayments on the Loans in either stable or changing interest rate
environments. Any reinvestment risk due to the rate or timing of prepayment of
the Loans will be borne entirely by Noteholders.
The rate of principal payments on the Notes, the aggregate amount of
each interest payment on the Notes and the yields to maturity of the Notes will
be directly affected by the rate and timing of principal reductions on the
Loans. Such principal reductions may be in the form of scheduled amortization
payments or unscheduled payments or reductions, which may include prepayments,
repurchases and liquidations or write-offs due to default, casualty, insurance
or other disposition. On any Payment Date on or after the Payment Date on which
the Aggregate Note Balance declines to 5% or the original Aggregate Note
Balance, the holder(s) of the Trust Certificates or the Note Insurer may effect
a redemption of the Notes. See "Description of the Notes -- Redemption of the
Notes" herein.
The "WEIGHTED AVERAGE LIFE" of a Class of Notes refers to the average
amount of time that will elapse from the Closing Date to the date each dollar
in respect of principal of such Class is repaid. The weighted average life of
each Class of Notes will be influenced by, among other factors, the rate at
which principal reductions occur on the Loans, the rate at which Excess Cash is
paid to Noteholders as described herein, and the extent to which any excess
funds are distributed to the holders of the Trust Certificates as described
herein. If substantial principal prepayments on the Loans are received as a
result of unscheduled payments, liquidations or repurchases, payments to
Noteholders due to such prepayments may significantly shorten the weighted
average lives of the Notes. If the Loans experience delinquencies and defaults
in the payment of principal, then Noteholders will experience a delay in the
receipt of principal payments attributable to such delinquencies and defaults,
which in certain instances may result in longer actual average weighted lives
of the Notes than would otherwise be the case. Interest shortfalls on the Loans
due to principal prepayments in full and curtailments, and any resulting
shortfall in amounts payable on the Notes, will be covered to the extent of
amounts available from the applicable credit enhancement.
The rate and timing of principal payments on the Loans will be
influenced by a variety of economic, geographic, social and other factors.
These factors may include changes in borrowers' housing needs, job transfers,
unemployment, borrowers' net equity, if any, in the Mortgaged Properties,
servicing decisions, homeowner mobility, seasoning of loans, market interest
rates for similar types of loans and the availability of funds for such loans.
In certain cases, the Servicer may, in a manner consistent with its servicing
practices, permit a borrower who is selling his principal residence and
purchasing a new one to substitute the new Mortgaged Property as collateral for
the related Loan, or may simply release its lien on the existing collateral,
leaving the related Loan unsecured. In such event, the Servicer will generally
require the borrower to make a partial prepayment in reduction of the principal
balance of the Loan to the extent that the borrower has received proceeds from
the sale of the prior residence that will not be applied to the purchase of the
new residence. Certain of the Loans are subject to prepayment penalties during
the first three years after origination. Prepayment penalties may have the
effect of reducing the amount or the likelihood of prepayments on such Loans.
As with fixed rate obligations generally, the rate of prepayment on a
pool of loans is affected by prevailing market interest rates for similar types
of loans of a comparable term and risk level. If prevailing interest rates were
to fall significantly below the Loan Rates on the Loans, the rate of prepayment
would be expected to increase. Conversely, if prevailing interest rates were to
rise significantly above the Loan Rates on the Loans, the rate of prepayment on
the Loans would be expected to decrease. In addition, any future limitations on
the rights of borrowers to deduct interest payments on mortgage loans for
federal income tax purposes may result in a higher rate of prepayment on the
Loans. The Depositor and the Transferor make no representations as to the
particular factors that will affect the prepayment of the Loans, as to the
relative importance of such factors, or as to the percentage of the principal
balance of the Loans that will be paid as of any date.
Payments of principal at a faster rate than anticipated will decrease
the yield on Notes purchased at a premium; payments of principal at a slower
rate than anticipated will decrease the yield on Notes purchased at a discount.
The effect on an investor's yield due to payments of principal occurring at a
rate that is faster (or slower) than the rate anticipated by the investor
during any period following the issuance of the Notes may not be entirely
offset by a subsequent like reduction (or increase) in the rate of payments of
principal during any subsequent period.
The rate of delinquencies and defaults on the Loans and of recoveries,
if any, on defaulted Loans and foreclosed properties will affect the rate and
timing of principal payments on the Loans, and, accordingly, the weighted
average lives of the Notes, and could cause a delay in the payment of principal
to the holders of Notes. Certain factors may influence delinquencies and
defaults, including origination and underwriting standards, loan-to value
ratios and delinquency history. In general, defaults on Loans are expected to
occur with greater frequency in their early years, although little data is
available with respect to the rate of default on similar types of loans. The
rate of default on Loans with high loan-to-value ratios, or on Loans secured by
junior liens, may be higher than that of loans with lower loan-to-value ratios
or secured by first liens on comparable properties. In addition, the rate and
timing of prepayments, defaults and liquidations on the Loans will be affected
by the general economic condition of the area in which the related Mortgaged
Properties are located or the related borrower is residing. See "The Pool"
herein. The risk of delinquencies and losses is greater and voluntary principal
prepayments are less likely in regions where a weak or deteriorating economy
exists, as may be evidenced by, among other factors, increasing unemployment or
falling property values.
Although certain data have been published with respect to the
historical prepayment experience of certain residential mortgage loans, such
mortgage loans may differ in material respects from the Loans and such data may
not be reflective of conditions applicable to the Loans. No significant
historical prepayment data is generally available with respect to the types of
Loans included in the Pool or similar types of loans, and there can be no
assurance that the Loans will achieve or fail to achieve any particular rate of
principal prepayment. A number of factors suggest that the prepayment
experience of the Pool may be significantly different from that of a pool of
conventional first lien, single family mortgage loans with equivalent interest
rates and maturities. One such factor is that the principal balance of the
average Loan is smaller than that of the average conventional first lien
mortgage loan. A smaller principal balance may be easier for a borrower to
prepay than a larger-balance and, therefore, a higher prepayment rate may
result for the Pool than for a pool of first lien mortgage loans, irrespective
of the relative average interest rates and the general interest rate
environment. In addition, in order to refinance a first lien mortgage loan, the
borrower must generally repay any junior liens. However, a small principal
balance may make refinancing a Loan at a lower interest rate less attractive to
the borrower as the perceived impact to the borrower of lower interest rates on
the size of the monthly payment may not be significant. Other factors that
might be expected to affect the prepayment rate of the Pool include the amounts
of and interest rates on the underlying senior mortgage loans, and the tendency
of borrowers to use real property mortgage loans as long-term financing for
home purchase and junior liens as shorter-term financing for a variety of
purposes, which may include the direct or indirect financing of home
improvement, education expenses, debt consolidation, purchases of consumer
durables such as automobiles, appliances and furnishings and other consumer
purposes. Furthermore, because at origination the majority of the Loans had
Combined Loan-to-Value Ratios that approached or exceeded 100%, the related
borrowers will generally have significantly less opportunity to refinance the
indebtedness secured by the related Mortgaged Properties, including the Loans,
and a lower prepayment rate may result for the Pool than for a pool of mortgage
(including first or junior lien) loans that have Combined Loan-to-Value Ratios
less than 100%.
REINVESTMENT RISK
During periods of falling interest rates, Noteholders may receive an
increased amount of principal payments at a time when such holders may be
unable to reinvest such payments in investments having a yield and rating
comparable to the Notes. Conversely, during periods of rising interest rates,
Noteholders are likely to receive a decreased amount of principal payments at a
time when such holders may have an opportunity to reinvest such payments in
investments having a yield and rating comparable to the Notes.
STATED MATURITY DATE
The Stated Maturity Date of the Class A-1 Notes is _______, ____. The
Stated Maturity Date of the Class A-2 Notes is __________, ____. The Stated
Maturity Date of Class A-3 Notes is _________, ____. The Stated Maturity Date
of the Class A-4 Notes is ________, ____. The Stated Maturity Dates of the
Class A-1 Notes, the Class A-2 Notes and the Class A-3 Notes have been
determined on the assumption that all Loans are repaid in accordance with their
terms, with no principal payments or defaults, and the Stated Maturity Date of
the Class A-4 Notes has been determined by adding 18 months to the last Payment
Date scheduled for the Loan with the latest stated maturity. It is anticipated
that the actual final Payment Date for each Class of Notes will occur
significantly earlier than its Stated Maturity Date.
WEIGHTED AVERAGE LIVES OF THE NOTES
The following information illustrates the effect of prepayments of the
Loans on the weighted average lives of the Notes under certain stated
assumptions and is not a prediction of the prepayment rate that might actually
be experienced on the Loans. Weighted average life refers to the average amount
of time that will elapse from the date of delivery of a security until each
dollar of principal of such security will be repaid to the investor. The
weighted average lives of the Notes will be influenced by the rate at which
principal of the Loans is paid, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
unscheduled reductions of principal, including without limitation those
resulting from full or partial prepayments, refinancings, liquidations and
write-offs due to defaults, casualties or other dispositions, and repurchases
by or on behalf of the Transferor or the Depositor), the rate at which Excess
Cash is paid to Noteholders as described herein, and the extent to which any
excess funds are distributed to the holders of the Trust Certificates as
described herein.
Prepayments on loans such as the Loans are commonly measured relative
to a prepayment standard or model. The model used in this Prospectus
Supplement, the Constant Prepayment Rate or "CPR" (the "PREPAYMENT ASSUMPTION")
model, represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of the pool of loans for the life of such loans.
A 100% Prepayment Assumption assumes a "CPR" of 3.0% per annum of the
outstanding principal balance of such loans in the first month of the life of
the loans and an additional approximately 1.0% (expressed as a percentage per
annum) in each month thereafter until the twelfth month; beginning in the
twelfth month and in each month thereafter during the life of the loans, a CPR
of 14% per annum each month is assumed. As used in the table below, 0%
Prepayment Assumption assumes prepayment rates equal to 0% of the Prepayment
Assumption (i.e., no prepayments), which would include a CPR of 0%. [75%]
Prepayment Assumption assumes prepayment rates equal to [75%] of the Prepayment
Assumption, and so forth. The Prepayment Assumption does not purport to be a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the Loans.
Neither the Transferor nor the Depositor makes any representations about the
appropriateness of the Prepayment Assumption or the CPR model.
Modeling Assumptions
For purposes of preparing the tables below, the following assumptions
(the "MODELING Assumptions") have been made.
(i) ______ all scheduled payments on the Loans are timely received on
the first day of a Collection Period, commencing on _______, 199__, no
delinquencies or losses occur on the Loans and all Loans have a first payment
date that occurs thirty (30) days after the origination thereof,
(ii) _____ the scheduled payments on the Loans have been calculated on
the basis of the outstanding principal balance (prior to giving effect to
prepayments), the Loan Rate and the remaining term to stated maturity such that
the Loans will fully amortize by their remaining term to stated maturity;
(iii) ____ all scheduled payments of interest and principal in respect
of the Loans have been made through the Cut-off Date;
(iv) _____ the Loans prepay monthly at the specified percentages of
the Prepayment Assumption, no redemption or other early termination of the
Notes occurs and no repurchases of the Loans occur;
(v) all prepayments of Loans include 30 days of interest thereon;
(vi) _____ the Closing Date for the issuance of the Notes is ______,
199__, each month will consist of 30 days and each year will consist of 360
days;
(vii) ____ cash payments are received by the Noteholders on the 25th
day of each month, commencing in _______ 199__;
(viii) the initial Overcollateralization Amount equals $__________,
will gradually increase to the Required Overcollateralization Amount of
$__________ and will thereafter be reduced in accordance with the terms of the
Indenture;
(ix) _____ the Note Interest Rate for each Class of Notes is as set
forth or described on the cover page hereof;
(x) ______ the Servicing Fee and Master Servicing Fee are deducted
from the interest collections in respect of the Loans;
(xi) _____ no reinvestment income from any Trust account is available
for payment to Noteholders; and
(xii) ____ the Pool consists of ____ pools of Loans having the
following characteristics:
OUTSTANDING BALANCE INTEREST ORIGINAL REMAINING
RATE TERM TERM
(MONTHS) (MONTHS)
The table below indicates the percentage of the original Class Note Balance of
each Class of Notes that would be outstanding at each of the dates shown at the
specified percentages of the Prepayment Assumption and the corresponding
weighted average life of each Class of Notes. These tables have been prepared
based on the Modeling Assumptions (including the assumptions regarding the
characteristics and performance of the Loans, which will differ from the actual
characteristics and performance thereof) and should be read in conjunction
therewith.
<PAGE>
PERCENTAGE OF ORIGINAL CLASS NOTE BALANCE OUTSTANDING AT
THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-1
DISTRIBUTION DATE 0% 25% 50% 75% 100% 125% 150% 175% 200%
Initial Percentage
Weighted Average Life(1)
- --------------------
(1) The weighted average life of each Class of Notes is determined by (i)
multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Payment Date, (ii)
adding the results and (iii) dividing the sum by the initial
respective Class Note Balance for such Class of Notes.
<PAGE>
PERCENTAGE OF ORIGINAL CLASS NOTE BALANCE OUTSTANDING AT
THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-2
DISTRIBUTION DATE 0% 25% 50% 75% 100% 125% 150% 175% 200%
Initial Percentage
Weighted Average Life(1)
- --------------------
(1) The weighted average life of each Class of Notes is determined by (i)
multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Payment Date, (ii)
adding the results and (iii) dividing the sum by the initial
respective Class Note Balance for such Class of Notes.
<PAGE>
PERCENTAGE OF ORIGINAL CLASS NOTE BALANCE OUTSTANDING AT
THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-3
DISTRIBUTION DATE 0% 25% 50% 75% 100% 125% 150% 175% 200%
Initial Percentage
Weighted Average Life(1)
- --------------------
(1) The weighted average life of each Class of Notes is determined by (i)
multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Payment Date, (ii)
adding the results and (iii) dividing the sum by the initial
respective Class Note Balance for such Class of Notes.
<PAGE>
PERCENTAGE OF ORIGINAL CLASS NOTE BALANCE OUTSTANDING AT
THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-4
DISTRIBUTION DATE 0% 25% 50% 75% 100% 125% 150% 175% 200%
Initial Percentage
Weighted Average Life(1)
- --------------------
(1) The weighted average life of each Class of Notes is determined by (i)
multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Payment Date, (ii)
adding the results and (iii) dividing the sum by the initial
respective Class Note Balance for such Class of Notes.
<PAGE>
The paydown scenarios for the Notes set forth in the foregoing tables
are subject to significant uncertainties and contingencies (including those
discussed above under "Prepayment and Yield Considerations"). As a result,
there can be no assurance that any of the foregoing paydown scenarios and the
Modeling Assumptions on which they were made will prove to resemble the actual
performance of the Loans and the Notes, or that the actual weighted average
lives of the Notes will not vary substantially from those set forth in the
foregoing tables, which variations may be shorter or longer, and which
variations may be greater with respect to later years. Furthermore, it is not
expected that the Loans will prepay at a constant rate or that all of the Loans
will prepay at the same rate. Moreover, the Loans actually included in the
Pool, the payment experience of such Loans and certain other factors affecting
the payments on the Notes will not conform to the Modeling Assumptions made in
preparing the above tables. In fact, the characteristics and payment experience
of the Loans will differ in many respects from such Modeling Assumptions. See
"The Pool" herein. To the extent that the Loans actually included in the Pool
have characteristics and a payment experience that differ from those assumed in
preparing the foregoing tables, the Notes are likely to have weighted average
lives that are shorter or longer than those set forth in the foregoing tables.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
In the opinion of [Brown & Wood LLP, counsel to the Depositor and the
Underwriter and] special tax counsel to the Trust ("TAX COUNSEL") for Federal
income tax purposes, the Notes will be characterized as debt and the Trust will
not be characterized as an association (or a publicly traded partnership)
taxable as a corporation. Each Noteholder, by the acceptance of a Note, will
agree to treat the Notes as indebtedness for Federal income tax purposes. See
"Certain Federal Income Tax Consequences" in the Prospectus for additional
information concerning the application of Federal income tax laws to the Trust
and the Notes.
The Notes, depending on their issue prices, may be treated as having
been issued with original issue discount. As a result, holders of the Notes may
be required to recognize income with respect to the Notes somewhat in advance
of the receipt of cash attributable to that income. The prepayment assumption
that will be used for the purpose of computing original issue discount for
Federal income tax purposes is 100% of the Prepayment Assumption.
STATE TAX CONSEQUENCES
In addition to the Federal income tax consequences described in
"Certain Federal Income Tax Consequences" herein, potential investors should
consider the state income tax consequences of the acquisition, ownership and
disposition of the Notes. State income tax law may differ substantially from
the corresponding Federal tax law, and this discussion does not purport to
describe any aspect of the income tax laws of any state. Therefore, potential
investors should consult their own tax advisors with respect to the various tax
consequences of investments in the Notes.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and section 4975 of the Internal Revenue Code of 1986, as amended
(the "CODE"), impose certain restrictions on employee benefit plans subject to
ERISA or plans or arrangements subject to section 4975 of the Code (each, a
"PLAN") and on persons who are parties in interest or disqualified persons
("PARTIES IN INTEREST") with respect to such Plans. Certain employee benefit
plans, such as governmental plans and church plans (if no election has been
made under section 410(d) of the Code), are not subject to the restrictions of
ERISA, and assets of such plans may be invested in the Notes without regard to
the ERISA considerations described below, subject to other applicable Federal
and state law. However, any such governmental or church plan which is qualified
under section 401(a) of the Code and exempt from taxation under section 501(a)
of the Code is subject to the prohibited transaction rules set forth in section
503 of the Code. Any Plan fiduciary which proposes to cause a Plan to acquire
any of the Notes should consult with its counsel with respect to the potential
consequences under ERISA, and the Code, of the Plan's acquisition and ownership
of the Notes. See "ERISA Considerations" in the Prospectus. Investments by
Plans are also subject to ERISA's general fiduciary requirements, including the
requirement of investment prudence and diversification and the requirement that
a Plan's investments be made in accordance with the documents governing the
Plan.
PROHIBITED TRANSACTIONS
GENERAL
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions (including loans) involving a Plan
and its assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes certain excise taxes (or, in some
cases, a civil penalty may be assessed pursuant to section 502(i) of ERISA) on
parties in interest which engage in non-exempt prohibited transactions.
PLAN ASSET REGULATION
The United States Department of Labor ("LABOR") has issued final
regulations concerning the definition of what constitutes the assets of a Plan
for purposes of ERISA and the prohibited transaction provisions of the Code
(the "PLAN ASSET REGULATION"). The Plan Asset Regulation describes the
circumstances under which the assets of an entity in which a Plan invests will
be considered to be "plan assets" such that any person who exercises control
over such assets would be subject to ERISA's fiduciary standards. Under the
Plan Asset Regulation, generally when a Plan invests in another entity, the
Plan's assets do not include, solely by reason of such investment, any of the
underlying assets of the entity. However, the Plan Asset Regulation provides
that, if a Plan acquires an "equity interest" in an entity that is neither a
"publicly-offered security" (as defined therein) nor a security issued by an
investment company registered under the Investment Company Act of 1940, the
assets of the entity will be treated as assets of the Plan investor unless
certain exceptions apply. If the Notes were deemed to be equity interests and
no statutory, regulatory or administrative exemption applies, the Trust could
be considered to hold plan assets by reason of a Plan's investment in the
Notes. Such plan assets would include an undivided interest in any assets held
by the Trust. In such an event, the Servicer and other persons, in providing
services with respect to the Trust's assets, may be parties in interest with
respect to such Plans, subject to the fiduciary responsibility provisions of
Title I of ERISA, including the prohibited transaction provisions of section
406 of ERISA, and section 4975 of the Code with respect to transactions
involving the Trust's assets. Under the Plan Asset Regulation, the term
"equity interest" is defined as any interest in an entity other than an
instrument that is treated as indebtedness under "applicable local law" and
which has no "substantial equity features." Although the Plan Asset Regulation
is silent with respect to the question of which law constitutes "applicable
local law" for this purpose, Labor has stated that these determinations should
be made under the state law governing interpretation of the instrument in
question. In the preamble to the Plan Asset Regulation, Labor declined to
provide a precise definition of what features are equity features or the
circumstances under which such features would be considered "substantial,"
noting that the question of whether a Plan's interest has substantial equity
features is an inherently factual one, but that in making a determination it
would be appropriate to take into account whether the equity features are such
that a Plan's investment would be a practical vehicle for the indirect
provision of investment management services. It is believed that the Notes
will be classified as indebtedness without substantial equity features for
ERISA purposes. However, if the Notes are deemed to be equity interests in the
Trust and no statutory, regulatory or administrative exemption applies, the
Trust could be considered to hold plan assets by reason of a Plan's investment
in the Notes.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any Notes on behalf
of a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment. Among other things, before purchasing any Notes, a
fiduciary of a Plan should make its own determination as to whether the Trust,
as obligor on the Notes, is a party in interest with respect to the Plan, the
availability of the exemptive relief provided in the Plan Asset Regulation and
the availability of any other prohibited transaction exemptions. Purchasers
should analyze whether the decision may have an impact with respect to
purchases of the Notes.
EXPERTS
The consolidated balance sheets of __________ [and its subsidiaries]
as of _______, 199__, and _______, 199__, 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 ________, 199__, incorporated by
reference in this Prospectus Supplement, have been incorporated herein in
reliance on the report of ___________, independent accountants, given on the
authority of that firm as experts in accounting and auditing.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and the Underwriter (an affiliate of the
Depositor), the Depositor has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase from the Depositor, the Notes. [Distribution
of the Notes will be made by the Underwriter from time to time in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. Proceeds to the depositor with respect to the Notes are expected to be
approximately $________, before deducting issuance expenses payable by the
depositor, estimated to be $_______.] In connection with the sale of the Notes,
the Underwriter may be deemed to have received compensation from the Depositor
in the form of underwriting discounts.
The Depositor has been advised by the Underwriter that it intends to
make a market in the Notes but has no obligation to do so. There can be no
assurance that a secondary market for the Notes will develop or, if it does
develop, that it will continue.
The Depositor [and the Originator] have agreed to indemnify the
Underwriter against, or make contributions to the Underwriter with respect to,
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
LEGAL INVESTMENT MATTERS
The Notes will not constitute "mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of 1984, as amended ("SMMEA").
Accordingly, many institutions with legal authority to invest in "mortgage
related securities" may not be legally authorized to invest in the Notes.
There may be restrictions on the ability of certain investors,
including depository institutions, either to purchase the Notes or to purchase
Notes representing more than a specified percentage of the investor's assets.
Investors should consult their own legal advisors in determining whether and to
what extent the Notes constitute legal investments for such investors.
LEGAL MATTERS
Certain legal matters will be passed upon on behalf of the Depositor
and the Underwriter by Brown & Wood LLP, New York, New York, and on behalf of
the Transferor by ________.
RATINGS
It is a condition to the issuance of the Notes that each Class of
Notes be rated "Aaa" by Moody's Investors Service, Inc. and "AAA" by Standard &
Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc.
The ratings on the Notes address the likelihood of the receipt by the
holders of the Notes of all payments on the Loans to which they are entitled.
The ratings on the Notes also address the structural, legal and Trust-related
aspects of the Notes, including the nature of the Loans. In general, the
ratings on the Notes address credit risk and not prepayment risk. The ratings
on the Notes do not represent any assessment of the likelihood that principal
prepayments of the Loans will be made by borrowers or the degree to which the
rate of such prepayments might differ from that originally anticipated. As a
result, the initial ratings assigned to the Notes do not address the
possibility that holders of the Notes might suffer a lower than anticipated
yield in the event of principal payments on the Notes resulting from rapid
prepayments of the Loans, or in the event that the Trust is terminated prior to
the Stated Maturity Date of the Classes of Notes.
The Depositor has not requested ratings on the Notes from any rating
agency other than the Rating Agencies. However, there can be no assurance as to
whether any other rating agency will rate the Notes, or, if it does, what
rating would be assigned by any such other rating agency. Any rating on the
Notes by another rating agency, if assigned at all, may be lower than the
ratings assigned to the Notes by the Rating Agencies.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to any of the Notes by the Rating Agencies are subsequently
lowered for any reason, no person or entity is obligated to provide any
additional support or credit enhancement with respect to such Notes.
<PAGE>
INDEX OF TERMS
<PAGE>
Administrative Fee Amount...................................................31
Aggregate Note Balance......................................................29
Agreement...................................................................45
Available Funds.............................................................30
Available Funds Cap.........................................................28
Available Funds Cap Carry Forward Amount....................................28
Business Day................................................................45
Class Note Balance..........................................................29
Collection Account..........................................................39
Combined Loan-to-Value Ratio................................................17
correspondent originations..................................................17
CPR.........................................................................50
Cut-off Date Principal Balance..............................................12
Defective Loan..............................................................19
Deficiency Amount...........................................................45
Deposit Date................................................................31
Determination Date..........................................................30
direct originations.........................................................17
Event of Default............................................................36
Excess Cash.................................................................33
Fiscal Agent................................................................44
GAAP........................................................................46
Insured Payment.............................................................45
Interest Period.............................................................28
LIBOR Determination Date....................................................29
Liquidated Loan.............................................................30
Liquidation Proceeds........................................................31
Loan Rate...................................................................19
London business day.........................................................29
Modeling Assumptions........................................................50
Monthly Principal...........................................................29
Net Liquidation Proceeds....................................................31
Note Account................................................................31
Note Formula Rate...........................................................28
Note Interest...............................................................28
Note Interest Rate......................................................25, 28
Noteholder..................................................................45
Notes.......................................................................25
Notice......................................................................45
One Month LIBOR.............................................................28
Overcollateralization Amount................................................33
Overcollateralization Deficit...............................................34
Overcollateralization Surplus...............................................33
Paying Agent................................................................27
Payments Ahead..............................................................30
Percentage Interest.........................................................27
Pool Principal Balance......................................................12
portfolio acquisitions......................................................17
Preference Amount...........................................................45
Prepayment Assumption.......................................................50
Principal Balance.......................................................12, 29
Principal Prepayment........................................................30
Realized Loss...............................................................34
Redemption Date.............................................................35
Reference Bank Rate.........................................................29
Reference Banks.............................................................29
Release Price...............................................................19
Required Overcollateralization Amount.......................................33
SAP.........................................................................46
Servicer Event of Default...................................................41
Servicing Advance...........................................................43
Telerate Page 3-1750........................................................29
Trust Insurance Proceeds....................................................30
USAP........................................................................41
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON
HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS HOME LOAN TRUST 199__-__
SUPPLEMENT OR THE PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR $_______ CLASS A-1 ADJUSTABLE NOTES
REPRESENTATIONS MUST NOT BE RELIED
UPON. THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS DO NOT CONSTITUTE AN $_______ CLASS A-2 ___% NOTES
OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN
THE SECURITIES OFFERED HEREBY, NOR AN $_______ CLASS A-3 ___% NOTES
OFFER OF THE SECURITIES IN ANY STATE
OR JURISDICTION IN WHICH, OR TO ANY
PERSON TO WHOM, SUCH OFFER WOULD BE $_______ CLASS A-4 ___% NOTES
UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AT ANY TIME DOES NOT IMPLY
THAT INFORMATION HEREIN OR THEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE. -------------- FINANCIAL ASSET SECURITIES CORP.
(DEPOSITOR)
-----------------------------------
PROSPECTUS SUPPLEMENT
-----------------------------------
[GREENWICH LOGO]
__________, 199__
<PAGE>
- --------------------------------------------------------------------------------
The information in this prospectus supplement is not complete and may be
changed. We may not sell these certificates until the registration statement
filed with the Securities and Exchange commission (SEC) is effective. This
prospectus supplement is not an offer to sell these certificates and it is not
soliciting an offer to buy these certificates in any state where the offer or
sale is not permitted.
- --------------------------------------------------------------------------------
SUBJECT TO COMPLETION, DATED _____________ ___, ____
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED __________, 199__)
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON
PAGE S-9 OF THIS PROSPECTUS SUPPLEMENT AND ON PAGE
14 OF THE PROSPECTUS.
The certificates represent obligations of the
trust only and do not represent an interest in or
obligation of Financial Asset Securities Corp.,
[_______] or any of their affiliates.
This prospectus supplement may be used to offer
and sell the certificates only if accompanied by
the prospectus.
FINANCIAL ASSET SECURITIES CORP.
Depositor
$________ (approximate) Class A, [ %] [Variable Pass-Through Rate]
$________ (approximate) Class M, [ %] [Variable Pass-Through Rate]
$________ (approximate) Class B, [ %] [Variable Pass-Through Rate]
Asset Backed Certificates, Series 199_-__
The trust will issue [___] classes of certificates.
Only the three classes of certificates identified
above are being offered by this prospectus supplement
and the accompanying prospectus.
THE CERTIFICATES
- The Class A certificates will be senior certificates.
- The Class M certificates will be mezzanine certificates.
- The Class B certificates will be subordinate certificates.
- Each class of certificates will accrue interest at a rate equal to
[one-month LIBOR plus a fixed margin, subject to certain limitations
described in this prospectus supplement.
CREDIT ENHANCEMENT
- 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.
- Subordination - The mezzanine certificates and the subordinate
certificates are subordinate in right of certain payments to the
senior certificates. The Class B Certificates are subordinate to the
mezzanine certificates.
- Allocation of Losses - Certain losses may be allocated among the
mezzanine and subordinate certificates in reverse order of seniority,
which would reduce the principal balances of the certificates
affected. Although the outstanding principal balance of the Class A
Certificates will not be reduced as a result of realized losses, in
some circumstances such losses may reduce the amount of principal
ultimately paid to the holders of the Class A Certificates.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION (SEC) NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The offered certificates are being offered by Greenwich Capital Markets, Inc.
from time to time in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. Proceeds to the depositor with respect to the
offered certificates are expected to be approximately $_____________, before
deducting issuance expenses payable by the depositor, estimated to be
$___________. See "Method of Distribution" in this prospectus supplement.
Delivery of the offered certificates will be made in book-entry form through the
facilities of The Depository Trust Company, [Cedel Bank, societe anonyme, and
the Euroclear System,] on or about __________________, 199__.
-------------------
GREENWICH CAPITAL MARKETS, INC.
____________ __, 199__
TABLE OF CONTENTS
SUMMARY OF TERMS..........................................................S-3
RISK FACTORS..............................................................S-9
THE MORTGAGE POOL........................................................S-17
General...............................................................S-17
Mortgage Loan Statistics..............................................S-17
Adjustable Rate Mortgage Loans........................................S-24
The Index.............................................................S-30
UNDERWRITING STANDARDS...................................................S-30
THE MASTER SERVICER......................................................S-31
THE POOLING AND SERVICING AGREEMENT......................................S-33
General...............................................................S-33
Assignment of the Mortgage Loans......................................S-33
Payments on Mortgage Loans; Deposits to
Collection Account and Distribution Account.........................S-35
Advances..............................................................S-36
The Trustee...........................................................S-37
Servicing and Other Compensation and Payment of Expenses..............S-38
Voting Rights.........................................................S-38
Amendment.............................................................S-39
Termination...........................................................S-39
[Optional Purchase of Defaulted Loans.................................S-39
Events of Default.....................................................S-40
Rights upon Event of Default..........................................S-40
DESCRIPTION OF THE CERTIFICATES..........................................S-40
General...............................................................S-40
Book-Entry Certificates...............................................S-41
Priority of Distributions Among Certificates..........................S-46
Allocation of Available Funds.........................................S-47
Definitions...........................................................S-49
Pass-Through Rates....................................................S-54
Calculation of [One-Month LIBOR]......................................S-55
Application of Allocable Loss Amounts.................................S-56
[Excess Reserve Fund Account..........................................S-56
Reports to Certificateholders.........................................S-57
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS............................S-58
Overcollateralization Provisions......................................S-60
[Additional Information...............................................S-60
Weighted Average Lives................................................S-61
USE OF PROCEEDS..........................................................S-62
CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES.........................S-62
Taxation of Regular Interests.........................................S-63
Status of the Offered Certificates....................................S-64
Non-U.S. Persons......................................................S-64
Prohibited Transactions Tax and Other Taxes...........................S-65
Backup Withholding....................................................S-65
STATE TAXES..............................................................S-66
ERISA CONSIDERATIONS.....................................................S-66
LEGAL INVESTMENT CONSIDERATIONS..........................................S-69
METHOD OF DISTRIBUTION...................................................S-69
LEGAL MATTERS............................................................S-70
RATINGS..................................................................S-70
INDEX OF DEFINED TERMS...................................................S-72
ANNEX I..................................................................A-1
SUMMARY OF TERMS
- - THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND DOES
NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER IN MAKING YOUR
INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF AN OFFERING OF THE
CERTIFICATES, READ CAREFULLY THIS ENTIRE DOCUMENT AND THE ACCOMPANYING
PROSPECTUS.
- - THIS SUMMARY PROVIDES AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION TO AID YOUR UNDERSTANDING AND IS QUALIFIED
BY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW PRIORITIES AND
OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS. SOME OF THE INFORMATION CONSISTS OF FORWARD-LOOKING STATEMENTS
RELATING TO FUTURE ECONOMIC PERFORMANCE OR PROJECTIONS AND OTHER FINANCIAL
ITEMS. FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A VARIETY OF RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THE PROJECTED
RESULTS. THOSE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, GENERAL
ECONOMIC AND BUSINESS CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE
WITH GOVERNMENTAL REGULATIONS, AND VARIOUS OTHER MATTERS, ALL OF WHICH ARE
BEYOND OUR CONTROL. ACCORDINGLY, WHAT ACTUALLY HAPPENS MAY BE VERY
DIFFERENT FROM WHAT WE PREDICT IN OUR FORWARD-LOOKING STATEMENTS.
OFFERED CERTIFICATES
On the closing date, [_____________Trust] will issue [___] classes of
certificates, three of which are being offered pursuant to this prospectus
supplement and the accompanying prospectus. The assets of the trust that will
support the certificates will consist of a pool of [fixed-rate] mortgage loans
with a principal balance of approximately $ and [adjustable-rate] mortgage loans
with a principal balance of approximately $ as of , 199 . [All of the adjustable
rate mortgage loans are indexed to [six-month LIBOR], of which [ ]% have initial
fixed rate periods. The mortgage loans will have original terms to maturity
ranging from [ ] years to 30 years and will be secured by first or junior liens
on one- to four-family residential properties.
Each class of certificates that is being offered will be book-entry securities
clearing through DTC [(in the United States) or Cedel or Euroclear (in Europe)]
in minimum denominations of $50,000.
OTHER CERTIFICATES
The trust will issue [two] additional classes of certificates. These
certificates will be designated the [Class OC and] Class R Certificates and are
not being offered to the public pursuant to this prospectus supplement and the
prospectus. [The Class OC Certificates will not have an original principal
certificate balance.] The Class R Certificates will have an original certificate
principal balance of $[100].
See "The Mortgage Pool" and "Description of the Certificates-- General" and
"Book-Entry Certificates" in this prospectus supplement and "The Trust Fund--The
Mortgage" in the prospectus.
CUT-OFF DATE
__________ __, 199_
CLOSING DATE
On or about __________ __, 199_
THE DEPOSITOR
Financial Asset Securities Corp.
600 Steamboat Road
Greenwich, Connecticut 06830
(203) 625-2700
SELLER
[--------------------]
MASTER SERVICER
[--------------------]
TRUSTEE
[--------------------]
DESIGNATIONS
Each class of certificates will have different characteristics, some of which
are reflected in the following general designations.
- - Offered Certificates
Class A, Class M and Class B Certificates
- - Senior Certificates
Class A Certificates
- - Mezzanine Certificates
Class M Certificates
- - Subordinate Certificates
Class B Certificates
- - Residual Certificates
Class R Certificates
- - Book-Entry Certificates
Class A, Class M and Class B Certificates
- - [Excess Reserve Fund Support Certificates
Class OC Certificates]
- - Physical Certificates
[Class OC and] Class R Certificates
DISTRIBUTION DATES
The trustee will make distributions on the certificates on the __th day of each
calendar month beginning on ___________ __, 199_ to the holder of record of the
certificates as of the business day preceding such date of distribution. If the
__th day of a month is not a business day, then the distribution will be made on
the next business day.
PAYMENTS ON THE CERTIFICATES
Interest Payments
The pass-through rate for each class of offered certificates will be calculated
at the rates specified below, subject to the limitations described under
"Description of the Certificates -- Pass-Through Rates" in this prospectus
supplement:
Class A [Index] + __ basis points
Class M [Index] + __ basis points
Class B [Index] + __ basis points
Interest payable on the certificates on a distribution date will accrue during
the period commencing on the prior distribution date and ending on the day
before the current distribution date. The first accrual period will begin on the
Closing Date and end on _________ __, 199_. Interest will be calculated on the
basis of the actual number of days included in the interest accrual period,
based on a 360-day year.
See "Description of the Certificates" in this prospectus supplement.
Payment Priorities
On each distribution date, available funds in the trust will be paid in the
following order of priority and subject to the limitations described under
"Description of the Certificates--Allocation of Available Funds" in this
prospectus supplement:
(i) to the Class A Certificates, as current interest and any previously unpaid
interest;
(ii) as current interest sequentially to the Class M and Class B Certificates;
(iii)as principal of the Class A, Class M and Class B Certificates, in that
order, to the extent such classes are entitled to receive distributions of
principal, up to the aggregate amount received on account of principal of
the mortgage loans;
(iv) as principal of the Class A, Class M and Class B Certificates, in that
order, to the extent such classes are entitled to receive distributions of
principal, up to the amount necessary to achieve the required levels of
overcollateralization;
(v) as unpaid interest and reimbursement of certain previously allocated
losses, if any, to the Class M and Class B Certificates;
[(vi)to the Class OC Certificates for deposit into a reserve account to cover
shortfalls or required reserves, before being released to the Class OC
Certificates;] and
(vi) any remaining amounts to the Class R Certificates.
See "Description of the Certificates" in this prospectus supplement.
ADVANCES
The Master Servicer will make cash advances with respect to delinquent payments
of principal and interest to the extent the Master Servicer reasonably believes
that the cash advances are recoverable from future payments on the related
mortgage loans. Advances are intended to maintain a regular flow of scheduled
interest and principal payments on the certificates and are not intended to
guarantee or insure against losses.
See "The Pooling and Servicing Agreement-Advances" in this prospectus
supplement.
OPTIONAL TERMINATION
The holder of the majority interest in the residual certificates may purchase
all of the remaining assets of the trust after the principal balance of the
mortgage loans and any real estate owned by the trust declines below 10% of the
principal balance of the mortgage loans on [the Cut-off Date].
If the holder of the majority interest in the residual certificates does not
exercise this option, then the Master Servicer will have the right to exercise
this option. [If the option is not exercised, the offered certificates still
outstanding will accrue interest at a higher rate.]
See "The Pooling and Servicing Agreement-Termination" and "Description of the
Certificates -- Pass-Through Rates" in this prospectus supplement.
CREDIT ENHANCEMENT
The credit enhancements include overcollateralization, subordination and
allocation of losses. These credit enhancements are designed to increase the
likelihood that certificateholders with a higher payment priority will receive
regular payments of interest and principal.
OVERCOLLATERALIZATION
The mortgage loans owned by the trust pay interest each month that in the
aggregate is expected to exceed the amount needed to pay monthly interest on the
offered certificates and certain fees and expenses of the trust. A portion of
this excess interest applied to pay principal on the offered certificates, which
reduces the principal balance of the certificates at a faster rate than the
principal balance on the mortgage loans is being reduced. As a result, the
aggregate principal balance of the mortgage loans is expected to exceed the
aggregate principal balance of the offered certificates. This feature is
referred to as "overcollateralization." The required level of
overcollateralization may increase or decrease over time. We cannot assure you
that sufficient interest will be generated by the mortgage loans to maintain the
required level of overcollateralization.
See "Description of the Certificates" in this prospectus supplement.
SUBORDINATION AND ALLOCATION OF LOSSES
The Class A Certificates will have a payment priority over the mezzanine
certificates and the subordinate certificates. The Class M Certificates will
have a payment priority over the Class B Certificates.
Subordination is designed to provide the holders of certificates with a higher
payment priority protection against losses up to a certain level that are
realized when the unpaid principal balance on a mortgage loan exceeds the
proceeds recovered upon the liquidation of that mortgage loan. Losses will first
be applied to reduce the overcollateralization amount. Thereafter, loss
protection is accomplished by allocating the realized losses first to the
subordinate certificates, until the principal amount of the subordinate
certificates is reduced to zero. Realized losses would then be allocated to the
next most junior class of certificates, the Class M Certificates, until the
principal amount of the Class M Certificates is reduced to zero. Although the
outstanding principal balance of the Class A Certificates will not be reduced as
a result of realized losses, in some circumstances such losses may reduce the
amount of principal ultimately paid to the holders of the Class A Certificates.
See "Description of the Certificates" in this prospectus supplement.
RATINGS
It is a condition of the issuance of the offered certificates that they be
assigned the following ratings by _____________ and _____________.
Rating Rating
Agency Agency
Class Rating Rating
- --------- ------------- ----------
A
M
B
A rating is not a recommendation to buy, sell or hold securities. These ratings
may be lowered or withdrawn at any time by either of the rating agencies.
See "Ratings" in this prospectus supplement.
TAX STATUS
In the opinion of Brown & Wood LLP, for federal income tax purposes the trust
will include [multiple segregated asset pools]. An election will be made to
treat [each] pool as a [separate] "real estate mortgage investment conduit"
("REMIC"). Certain classes of certificates that are designated as the regular
certificates will constitute "regular interests" in the [Master] REMIC. The
Class R Certificates will represent the sole class of "residual interests" in
the [Master] REMIC. [The class of certificates designated as the residual
certificates will represent the sole class of residual interests in each
subsidiary REMIC.]
[The offered certificates will also represent the right to receive payments from
the excess reserve fund account. The excess reserve fund account will be treated
as an "outside reserve fund" and the right to receive payments from such account
will be treated as an interest rate cap agreement for federal income tax
purposes. Beneficial owners of the offered certificates will be treated for
federal income tax purposes as having purchased an undivided beneficial interest
in a regular interest in the [Master] REMIC and as having acquired rights under
an interest rate cap agreement, both to the extent of the owner's proportionate
interest in the offered certificates. A certificateholder generally will
recognize ordinary income equal to such certificateholder's proportionate share
of interest and original issue discount, if any, accrued on the offered
certificates and will take into account a proportionate share of any payments
received under the interest rate cap agreement. A certificateholder's income
derived from payments received under the interest rate cap agreement generally
must be accounted for under the notional principal contract regulations.]
See "Certain Material Federal Income Tax Consequences" in this prospectus
supplement and "Certain Material Federal Income Tax Considerations" in the
prospectus.
ERISA CONSIDERATIONS
It is expected that the Class A Certificates may be purchased by a pension or
other employee benefit plan subject to the Employee Retirement Income Security
Act of 1974 or section 4975 of the Internal Revenue Code of 1986, so long as
certain conditions are met. A fiduciary of an employee benefit plan must
determine that the purchase of a certificate is consistent with its fiduciary
duties under applicable law and does not result in a non-exempt prohibited
transaction under applicable law.
See "ERISA Considerations" in this prospectus supplement and in the prospectus.
LEGAL INVESTMENT
Because certain of the mortgage loans are secured by junior liens, the
certificates will not be "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984.
See "Legal Investment Considerations" in this prospectus supplement and "Legal
Investment" in the prospectus.
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER,
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN
THE CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH
UNDER "RISK FACTORS" IN THE PROSPECTUS.
UNPREDICTABILITY
OF PREPAYMENTS AND
EFFECT ON YIELDS........................Borrowers may prepay their mortgage
loans in whole or in part at any time.
We cannot predict the rate at which
borrowers will repay their mortgage
loans. A prepayment of a mortgage loan
generally will result in a prepayment on
the certificates.
- If you purchase your certificates
at a discount and principal is
repaid slower than you anticipate,
then your yield may be lower than
you anticipate.
- If you purchase your certificates
at a premium and principal is
repaid faster than you anticipate,
then your yield may be lower than
you anticipate.
- The rate of prepayments on the
mortgage loans will be sensitive to
prevailing interest rates.
Generally, if prevailing interest
rates decline significantly below
the interest rates on the
fixed-rate mortgage loans, those
mortgage loans are more likely to
prepay than if prevailing rates
remain above the interest rates on
such mortgage loans. In addition,
if interest rates decline,
adjustable-rate mortgage loan
prepayments may increase due to the
availability of fixed-rate mortgage
loans at lower interest rates.
Conversely, if prevailing interest
rates rise significantly, the
prepayments on fixed-rate and
adjustable-rate mortgage loans are
likely to decrease.
- [____% of the principal balance of
the mortgage loans on [the Cut-off
Date] are "balloon loans." Balloon
loans generally provide for
scheduled monthly payments of
principal up to the ___th month
with a final lump sum payment in
the ___th month. This lump sum
payment is substantially larger
than the previous scheduled
payments. Having balloon loans in
the trust may cause the prepayment
rate to vary more than if there
were no balloon loans, because the
borrower generally must refinance
the mortgage loan or sell the
mortgaged property prior to payment
of the lump sum on the maturity
date.]
[Some of the mortgage loans require the
mortgagor to pay a penalty if the
mortgagor prepays the mortgage loan
during periods ranging from [six
months] to [five years] after the
mortgage loan was originated. A
prepayment penalty may discourage a
borrower from prepaying the mortgage
loan during the applicable period.]
The Seller may be required to purchase
mortgage loans from the trust due to
certain breaches of representations
and warranties that have not been
cured. These purchases will have the
same effect on the holders of the
offered certificates as a prepayment
of the mortgage loans.
So long as the overcollateralization
level remains greater than zero,
liquidations of defaulted mortgage
loans will have the same effect on
holders of the Offered Certificates
as a prepayment of the related
mortgage loans.
If the rate of default and the amount
of losses on the mortgage loans is
higher than you expect, then your
yield may be lower than you expect.
See "Yield, Prepayment and Maturity
Considerations" in this prospectus
supplement for a description of factors
that may influence the rate and timing
of prepayments on the mortgage loans.
POTENTIAL INADEQUACY
OF CREDIT ENHANCEMENT...................The certificates are not insured by any
financial guaranty insurance policy. The
overcollateralization, subordination and
allocation of loss features described in
the summary are intended to enhance the
likelihood that holders of the Class A
Certificates will receive regular
payments of interest and principal.
If delinquencies or defaults occur on
the mortgage loans, neither the Master
Servicer nor any other entity will
advance scheduled monthly payments of
interest and principal on delinquent or
defaulted mortgage loans if such
advances are not likely to be recovered.
We cannot assure you that the applicable
credit enhancement will adequately cover
any shortfalls in cash available to pay
your certificates as a result of such
delinquencies or defaults.
If substantial losses occur as a result
of defaults and delinquent payments on
the mortgage loans, investors,
particularly investors in the
subordinate certificates, may lose their
initial investment.
OVERCOLLATERALIZATION...................Because the weighted average of the
interest rates on the mortgage loans is
expected to be higher than the weighted
average of the interest rates on the
certificates, the mortgage loans are
expected to generate more interest than
is needed to pay interest owed on the
certificates as well as certain fees and
expenses of the trust. Any remaining
interest will then be used to compensate
for losses that occur on the mortgage
loans. After these financial obligations
of the trust are covered, the available
excess interest will be used to create
and maintain overcollateralization. We
cannot assure you, however, that enough
excess interest will be generated to
maintain the overcollateralization level
required by the rating agencies. The
factors described below will affect the
amount of excess interest that the
mortgage loans will generate.
- Every time a mortgage loan is
prepaid, excess interest may be
reduced because the mortgage loan
will no longer be outstanding and
generating interest or, in the case
of a partial prepayment, will be
generating less interest.
- Every time a mortgage loan is
liquidated or written off, excess
interest will be reduced because
such mortgage loans will no longer
be outstanding and generating
interest.
- If the rates of delinquencies,
defaults or losses on the mortgage
loans turn out to be higher than
expected, excess interest will be
reduced by the amount necessary to
compensate for any shortfalls in
cash available on such date to pay
certificateholders.
- The mortgage loans have rates that
are fixed or that adjust based on an
index that is different from the
index used to determine rates on the
certificates. As a result, interest
rates on the certificates may
increase relative to interest rates
on the mortgage loans, requiring
that more of the interest generated
by the mortgage loans be applied to
cover interest on the certificates.
SUBORDINATION...........................When certain classes of certificates
provide credit enhancement for other
classes of certificates, this form of
credit enhancement is referred to as
"subordination." For any particular
class, "related junior class" means the
class that is subordinate to such class.
The order of seniority, beginning with
the most senior class, is Class A, Class
M and Class B.
Credit enhancement is provided for the
certificates first by the right of the
holders of certain classes of
certificates to receive certain payments
of interest prior to the related junior
classes and certain payments of
principal prior to the related junior
classes. This form of credit enhancement
is provided solely from collections on
the mortgage loans otherwise payable to
the holders of the related junior
classes. Credit enhancement also is
provided by the allocation of realized
losses first to the related junior
classes. Accordingly, if the aggregate
principal balance of the related junior
classes were to be reduced to zero,
delinquencies and defaults on the
mortgage loans would reduce the amount
of funds available for monthly payments
to holders of the remaining
certificates.
See "Description of the Certificates" in
this prospectus supplement and "Credit
Enhancement -- Subordination" in the
prospectus.
[RISK OF LIMITATIONS
TO ADJUSTMENTS OF
THE LOAN RATES..........................The offered certificates accrue interest
at pass-through rates based on the
[one-month LIBOR] index plus a specified
margin, but are subject to certain caps.
The caps on interest paid on the
certificates are based on the weighted
average of the interest rates on the
mortgage loans in the trust net of
certain trust expenses. The trust
includes [fixed-rate] and
[adjustable-rate mortgage loans with
rates that are based on the [six-month
LIBOR] index]. The adjustable-rate
mortgage loans have periodic and maximum
limitations on adjustments to the
mortgage loan rate. As a result, the
offered certificates may accrue less
interest than they would accrue if their
rates were based solely on the one-month
LIBOR index plus the specified margin.
If this circumstance occurred, the value
of the offered certificates may be
temporarily or permanently reduced.
A variety of factors could
limit the pass-through rates on the
offered certificates in a rising
interest rate environment. Some of these
factors are described below.
- The trust includes fixed-rate
mortgage loans on which the rate of
interest does not adjust.
- The trust includes fixed-rate
mortgage loans on which the rate of
interest does not adjust.
- The [one-month LIBOR] index used
to calculate the pass-through rates
on the offered certificates is
different from the index used to
calculate the loan rates on the
adjustable-rate mortgage loans in
the trust.
- The pass-through rates adjust
monthly while the loan rates on the
adjustable-rate mortgage loans
adjust less frequently, [and some
adjustable-rate mortgage loans have
initial fixed rate periods of [ ] to
[ ] years following the date of
origination.]
- It is possible that interest rates
on the adjustable-rate mortgage
loans may decline while interest
rates on the certificates are stable
or rising. It is also possible that
interest rates on both the
adjustable-rate mortgage loans and
the certificates may decline or
increase during the same period, but
that the interest rates on the
certificates may decline more slowly
or increase more rapidly.
These factors may adversely affect the
yields to maturity on the offered
certificates.]
PREPAYMENT INTEREST
SHORTFALLS..............................When a mortgage loan is prepaid in full,
the borrower is charged interest only up
to the date on which payment is made,
rather than for an entire month. This
may result in a shortfall in interest
collections available for payment on the
next distribution date. [The Master
Servicer is required to cover a portion
of the shortfall in interest collections
that are attributable to prepayments,
but only up to the Master Servicer's
servicing fee for the related one-month
accrual period.]
UNDERWRITING STANDARDS AND
DEFAULT RISKS...........................The mortgage loans were originated by
[various originators], [none of which is
affiliated with the Depositor]. [The
originators' underwriting standards are
primarily intended to assess the value
of the mortgaged property and the
adequacy of that property as collateral
for the mortgage loan. The originators
provide loans primarily to borrowers who
do not qualify for loans conforming to
Fannie Mae and Freddie Mac guidelines.
Many of the mortgage loans were
originated pursuant to alternative
documentation programs. Consequently,
the mortgage loans in the trust are
likely to experience substantially
higher rates of delinquency, foreclosure
and bankruptcy than mortgage loans
underwritten in a more traditional
manner.]
RISKS OF EARLY DEFAULT..................Defaults on mortgage loans are generally
expected to occur more frequently in the
early years of the terms of mortgage
loans. [Many of] the mortgage loans in
the trust were originated [within twelve
months prior to ________ __, 199_.]
[HIGH LTV RATIOS........................Mortgage loans with higher loan-to-value
ratios or combined loan-to-value ratios
may present a greater risk of loss than
mortgage loans with loan-to-value ratios
of 80% or below. Approximately [_____]%
of the mortgage loans in the trust,
based on the initial pool principal
balance, had a loan-to-value ratio or
combined loan-to-value ratio in excess
of 80% at origination.]
GEOGRAPHIC CONCENTRATION................The following chart reflects the [_____]
states with highest concentrations of
mortgage loans in the trust based on the
initial pool principal balance.
[Table]
In addition, the conditions below will
have a disproportionate impact on the
mortgage loans in general.
- Economic conditions in
[___________] (which may or may not
affect real property values) may
affect the ability of borrowers to
repay their loans on time.
- Declines in the [_______,
________, and _________] residential
real estate markets may reduce the
values of properties located in
those states, which would result in
an increase in the loan-to-value
ratios.
- Any increase in the market value
of properties located in [_______,
________, and _________] would
reduce the loan-to-value ratios and
could, therefore, make alternative
sources of financing available to
the borrowers at lower interest
rates, which could result in an
increased rate of prepayment of the
mortgage loans.
CERTIFICATES MAY NOT BE
APPROPRIATE FOR CERTAIN
INVESTORS...............................The offered certificates may not be an
appropriate investment for investors who
do not have sufficient resources or
expertise to evaluate the particular
characteristics of the applicable class
of offered certificates. This may be the
case because, among other things:
- The yield to maturity of offered
certificates purchased at a price
other than par will be sensitive to
the uncertain rate and timing of
principal prepayments on the
mortgage loans.
- The rate of principal
distributions on and the weighted
average lives of the offered
certificates will be sensitive to
the uncertain rate and timing of
principal prepayments on the
mortgage loans and the priority of
principal payments among the classes
of certificates. Therefore, the
offered certificates may be an
inappropriate investment if you are
an investor that requires a payment
of a particular amount of principal
on a specific date or an otherwise
predictable stream of payments.
- You may be unable to reinvest
amounts received as principal on an
offered certificate at a rate
comparable to the pass-through rate
applicable to the certificate. In
general, principal prepayments are
expected to be greater during
periods of relatively low interest
rates.
- A market for resale of the offered
certificates may not develop or
provide certificateholders with
liquidity of investment.
You should also carefully consider the
further matters discussed under the
heading "Yield, Prepayment and Maturity
Considerations" in this prospectus
supplement and under the heading "Risk
Factors" in the prospectus.
YEAR 2000 SYSTEMS RISK..................In the event that the computer systems
of the Trustee and the Master Servicer
fail to be year 2000 compliant, the
resulting potential disruptions in the
collection or distribution of funds
could adversely affect your investment.
LIQUIDITY...............................Greenwich Capital Markets, Inc. intends
to make a secondary market in the
classes of certificates actually
purchased by it, but it has no
obligation to do so. There is no
assurance that such a secondary market
will develop or, if it develops, that it
will continue. Consequently, you may not
be able to sell your certificates
readily or at prices that will enable
you to realize your desired yield. The
market values of the certificates are
likely to fluctuate; these fluctuations
may be significant and could result in
significant losses to you.
The secondary markets for mortgage
backed securities have experienced
periods of illiquidity and can be
expected to do so in the future.
Illiquidity can have a severely adverse
effect on the prices of securities that
are especially sensitive to prepayment,
credit, or interest rate risk, or that
have been structured to meet the
investment requirements of limited
categories of investors.
THE MORTGAGE POOL
A. GENERAL
[____________] (the "TRUST FUND") will consist of a pool of closed-end,
[fixed-rate and adjustable-rate] mortgage loans (the "MORTGAGE POOL") secured by
conventional, one- to four-family, first or junior lien mortgage loans having
original terms to maturity ranging from [_] to 30 years (the "MORTGAGE Loans").
All Mortgage Loan statistics set forth herein are based on principal balances,
interest rates, terms to maturity, mortgage loan counts and similar statistics
as of __________ ___, 199_ (the "CUTOFF DATE"), unless indicated to the contrary
herein. All weighted averages specified herein are weighted based on the
principal balances of the Mortgage Loans as of the Cut-Off Date (the "CUTOFF
DATE PRINCIPAL BALANCE"). References to percentages of the Mortgage Loans mean
percentages based on the aggregate of the principal balances of the Mortgage
Loans (the "POOL PRINCIPAL BALANCE") as of the Cutoff Date, unless otherwise
specified.
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties (as defined herein) is based upon the Mortgage Pool as
constituted at the close of business on the Cut-off Date, as adjusted for the
principal payments received on or before such date. Prior to the issuance of the
Certificates by the Trust, Mortgage Loans may be removed from the Mortgage Pool
as a result of incomplete documentation or otherwise, if Financial Asset
Securities Corp. (the "DEPOSITOR") deems such removal necessary or desirable,
and may be prepaid at any time. A limited number of other mortgage loans may be
included in the Mortgage Pool prior to the issuance of the Certificates unless
including such mortgage loans would materially alter the characteristics of the
Mortgage Pool as described herein. The Depositor believes that the information
set forth herein will be representative of the characteristics of the Mortgage
Pool as it will be constituted at the time the Certificates are issued, although
the range of the interest rates on the individual Mortgage Loans (the "MORTGAGE
RATES") and maturities and certain other characteristics of the Mortgage Loans
may vary.
B. MORTGAGE LOAN STATISTICS
The Mortgage Pool will consist of approximately [________]
conventional, [fixedrate and adjustable-rate] Mortgage Loans secured by first or
junior liens on residential real property (the "MORTGAGED PROPERTY"). The
Mortgage Loans have original terms to maturity ranging from [___] years to 30
years. The Mortgage Pool consists of [fixed rate Mortgage Loans (the "FIXED RATE
MORTGAGE LOANS")], which will consist of approximately [________] Mortgage Loans
having an aggregate principal balance as of the Cut-off Date of approximately
$[__________] and [adjustablerate Mortgage Loans (the "ADJUSTABLE RATE MORTGAGE
LOANS")], which will consist of approximately [_______] Mortgage Loans having an
aggregate principal balance as of the Cutoff Date of approximately
$[___________], in each case after application of payments of principal due on
or before the Cutoff Date whether or not received, and in each case subject to a
permitted variance of plus or minus [5]%. [Each Adjustable Rate Mortgage Loan
provides for [semiannual] adjustment to the mortgage rate thereon based on
[sixmonth London interbank offered rates for United States dollar deposits] (the
"INDEX") and for corresponding adjustments to the monthly payment amount due
thereon, in each case subject to the limitations described under "--Adjustable
Rate Mortgage Loans" herein; provided that in the case of [_____]% of the
Adjustable Rate Mortgage Loans, the first adjustment for such Mortgage Loan will
occur after an initial period of [___] years, by aggregate principal balance of
the Adjustable Rate Mortgage Loans as of the Cut-off Date (each such Mortgage
Loan described in this proviso, a "DELAYED FIRST ADJUSTMENT MORTGAGE LOAN").]
The Mortgage Loans are secured by first or junior mortgages or deeds of
trust or other similar security instruments (each, a "MORTGAGE") creating first
liens on one to fourfamily residential properties consisting of detached or
semidetached one to fourfamily dwelling units and individual condominium units.
[Approximately [______]% of the Mortgage Loans had a LoantoValue Ratio at
origination in excess of 80%. Approximately [___]% of the Mortgage Loans had a
LoantoValue Ratio at origination exceeding 90.00%.] There can be no assurance
that the LoantoValue Ratio of any Mortgage Loan determined at any time after
origination is less than or equal to its original LoantoValue Ratio. The
Mortgage Loans have scheduled monthly payments due on [the first day of the
month] (with respect to each Mortgage Loan, a "DUE DATE"), [except for
approximately [____]% of the Mortgage Loans which have Due Dates on other dates
during the month.] [Each Mortgage Loan will contain a customary "due-on-sale"
clause.]
[Approximately [_____]% of the Mortgage Loans provide for payment by
the mortgagor of a prepayment charge in limited circumstances on certain
prepayments. Generally, each such Mortgage Loan provides for payment of a
prepayment charge on certain partial prepayments and all prepayments in full
made within [______] from the date of origination of such Mortgage Loan. The
amount of the prepayment charge is provided in the related Mortgage Note and is
generally equal to [______].
[___] Fixed Rate Mortgage Loans comprising approximately [____]% of the
Pool Principal Balance as of the Cutoff Date are balloon payment mortgage loans
(each, a "BALLOON LOAN"). Each Balloon Loan amortizes over [360] months, but the
final payment (the "BALLOON PAYMENT") on each Balloon Loan is due and payable on
the Due Date of the [___]th month. The amount of the Balloon Payment on each
Balloon Loan is substantially in excess of the amount of the scheduled monthly
payment on the Mortgage Loan for the period prior to the Due Date of such
Balloon Payment.
Each Mortgage Loan had a Loan Rate of not less than [___]% per annum
and not more than [_____]% per annum and as of the Cutoff Date the weighted
average Loan Rate was approximately [____]% per annum.
The weighted average remaining term to maturity of the Mortgage Loans
will be approximately [___] months as of the Cutoff Date. [None of the Mortgage
Loans will have a first Due Date prior to __________ __, 19__ or after
___________ __, 199_ or will have a remaining term to maturity of less than
[___] months or greater than 30 years as of the Cutoff Date.] The month of the
latest maturity date of any Mortgage Loan is ___________ 20__].
The average principal balance of the Mortgage Loans at origination was
approximately $[________]. The average principal balance of the Mortgage Loans
as of the Cutoff Date was approximately $[_________].
No Mortgage Loan had a principal balance as of the Cutoff Date of
greater than approximately $[____________] or less than approximately
$[_______]. The Mortgage Loans are expected to have the following
characteristics as of the Cutoff Date (the sum in any column may not equal the
total indicated due to rounding):
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AS OF THE CUTOFF DATE(1)
PRINCIPAL BALANCE ($) NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE LOANS OUTSTANDING AS OF BALANCE OUTSTANDING AS OF
THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ %
--------------- --------------------- ---------------------------
=============== ===================== ===========================
Total................................ $ 100.00%
=============== ===================== ===========================
- ----------------------
(1) The average principal balance of the Mortgage Loans as of the Cut-off Date
was $[______].
</TABLE>
<TABLE>
<CAPTION>
ORIGINAL TERMS TO MATURITY OF THE MORTGAGE LOANS(1)
ORIGINAL TERM (MONTHS) NUMBER PRINCIPAL BALANCE % OF AGGREGATE
OF MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OUTSTANDING AS OF
THE CUT-OFF DATE
- ------------------------------- ------------------- ------------------------ -----------------------
<S> <C> <C> <C>
$ %
------------------- ======================== -----------------------
Total................... $ 100.00%
=================== ======================== =======================
</TABLE>
- -------------------
(1) The weighted average original term to maturity of the Mortgage Loans was
[___] months.
<TABLE>
<CAPTION>
PROPERTY TYPES OF THE MORTGAGE LOANS
PROPERTY TYPE NUMBER PRINCIPAL BALANCE % OF AGGREGATE
OF MORTGAGE OUTSTANDING AS OF PRINCIPAL BALANCE
LOANS THE CUT-OFF DATE OUTSTANDING AS OF
THE CUT-OFF DATE
- ------------------------------- ------------------- ------------------------ -----------------------
<S> <C> <C> <C>
%
2-4 Units.................... $
Condominium..................
Manufactured Housing.........
PUD..........................
Single Family Detached.......
Unknown.....................
------------------- ------------------------ -----------------------
=================== ======================== =======================
Total................... $ 100.00%
=================== ======================== =======================
</TABLE>
<TABLE>
<CAPTION>
OCCUPANCY STATUS OF THE MORTGAGE LOANS
OCCUPANCY STATUS NUMBER PRINCIPAL BALANCE % OF AGGREGATE
OF MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OUTSTANDING AS OF
THE CUT-OFF DATE
- ------------------------------- ------------------- ------------------------- -----------------------
<S> <C> <C> <C>
Investor..................... $ %
Primary......................
Second Home..................
------------------- ------------------------- -----------------------
=================== ========================= =======================
Total................... $ 100.00%
=================== ========================= =======================
</TABLE>
<TABLE>
<CAPTION>
PURPOSE OF THE MORTGAGE LOANS
PURPOSE NUMBER PRINCIPAL BALANCE % OF AGGREGATE
OF MORTGAGE OUTSTANDING AS OF PRINCIPAL BALANCE
LOANS THE CUT-OFF DATE OUTSTANDING AS OF
THE CUT-OFF DATE
- ------------------------------- ------------------- ------------------------ -----------------------
<S> <C> <C> <C>
Equity Refinance............. $ %
Purchase.....................
Rate/Term Refinance..........
------------------- ------------------------ -----------------------
=================== ======================== =======================
Total................... $ 100.00%
=================== ======================== =======================
</TABLE>
<TABLE>
<CAPTION>
LOAN RATES OF THE MORTGAGE LOANS (1)
LOAN RATE (%) NUMBER PRINCIPAL BALANCE % OF AGGREGATE
OF MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OUTSTANDING AS OF
THE CUT-OFF DATE
- ------------------------------- ------------------- ------------------------ -----------------------
<S> <C> <C> <C>
$ %
------------------- ------------------------ -----------------------
=================== ======================== =======================
Total....................... $ 100.00%
=================== ======================== =======================
</TABLE>
- ------------------
(1) The weighted average Loan Rate of the Mortgage Loans as of the Cut-off Date
was [____]%.
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS(1)
ORIGINAL LOAN-TO-VALUE RATIO(%) NUMBER PRINCIPAL BALANCE % OF AGGREGATE
OF MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OUTSTANDING AS OF
THE CUT-OFF DATE
- ------------------------------------------- ------------------ ---------------------- --------------------
<S> <C> <C> <C>
$ %
------------------ ---------------------- --------------------
================== ====================== ====================
Total....................... $ 100.00%
================== ====================== ====================
</TABLE>
- ------------------
(1) The weighted average original Loan-to-Value Ratio of the Mortgage Loans was
[_____]%.
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
LOCATION NUMBER PRINCIPAL BALANCE % OF AGGREGATE
OF MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OUTSTANDING AS OF
THE CUT-OFF DATE
- ------------------------------------------- ------------------ ---------------------- --------------------
<S> <C> <C> <C>
$ %
------------------ ---------------------- --------------------
Total................................... $ 100.00%
================== ====================== ====================
</TABLE>
- -------------------
<TABLE>
<CAPTION>
DOCUMENTATION LEVEL OF THE MORTGAGE LOANS
DOCUMENTATION LEVEL NUMBER PRINCIPAL BALANCE % OF AGGREGATE
OF MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OUTSTANDING AS OF
THE CUT-OFF DATE
- ------------------------------------------- ------------------ ---------------------- --------------------
<S> <C> <C> <C>
Full Documentation....................... $ %
Stated Documentation.....................
Full/ALT Documentation...................
Lite Documentation.......................
Simple Documentation.....................
Unknown..................................
No Income Verification...................
Reduced Documentation....................
No Ratio Verification....................
------------------ ---------------------- --------------------
================== ====================== ====================
Total............................... $ 100.00 %
================== ====================== ====================
</TABLE>
<TABLE>
<CAPTION>
PREPAYMENT CHARGES(1)
MONTHS NUMBER PRINCIPAL BALANCE % OF AGGREGATE
OF MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OUTSTANDING AS OF
THE CUT-OFF DATE
- ------------------------------------------- ------------------ ---------------------- --------------------
<S> <C> <C> <C>
$ %
------------------ ---------------------- --------------------
Total............................... $ 100.00%
================== ====================== ====================
</TABLE>
- --------------------
(1) Prepayment charges are assessed on any Mortgage Loans prepaid in full or in
part within the specified number of months.
<TABLE>
<CAPTION>
LOAN RATES OF THE FIXED RATE MORTGAGE LOANS(1)
LOAN RATE (%) NUMBER PRINCIPAL BALANCE % OF AGGREGATE
OF MORTGAGE OUTSTANDING AS OF PRINCIPAL BALANCE
LOANS THE CUT-OFF DATE OF FIXED RATE
MORTGAGE LOANS
OUTSTANDING AS OF
THE CUT-OFF DATE
- ------------------------------------ ---------------- --------------------------- ------------------------
<S> <C> <C> <C>
$ %
---------------- --------------------------- ------------------------
================ =========================== ========================
Total............................... $ 100.00%
================ =========================== ========================
</TABLE>
- --------------------
(1) The weighted average Loan Rate of the Fixed Rate Mortgage Loans as of the
Cut-off Date was [_______]% per annum.
ADJUSTABLE RATE MORTGAGE LOANS
Each Adjustable Rate Mortgage Loan provides for [semiannual] adjustment
to the Loan Rate thereon and for corresponding adjustments to the monthly
payment amount due thereon, in each case on each adjustment date applicable
thereto (each such date, an "ADJUSTMENT DATE"); provided that the first
adjustment for such Mortgage Loan will occur after an initial period of
[__________] in the case of [____]% of the Adjustable Rate Mortgage Loans, by
aggregate principal balance of the Adjustable Rate Mortgage Loans as of the
Cutoff Date. On each Adjustment Date for each Adjustable Rate Mortgage Loan, the
Loan Rate thereon will be adjusted to equal the sum, [rounded to the nearest
multiple of 0.125%,] of the Index (as described below) and a fixed percentage
amount (the "GROSS MARGIN"); [provided, however, that the Loan Rate on each such
Mortgage Loan generally will not increase or decrease by more than 1.50% per
annum on any related Adjustment Date (the "PERIODIC RATE CAP"), except that each
such Mortgage Loan may increase or decrease by a higher percentage per annum on
the initial Adjustment Date.] Each Loan Rate on each such Mortgage Loan will not
exceed a specified maximum Loan Rate over the life of such Mortgage Loan (the
"MAXIMUM LOAN RATE") or be less than a specified minimum Loan Rate over the life
of such Mortgage Loan (the "MINIMUM LOAN RATE"). The Delayed First Adjustment
Mortgage Loans have a weighted average Periodic Rate Cap of approximately [___]%
per annum. Effective with the first monthly payment due on each Adjustable Rate
Mortgage Loan after each related Adjustment Date, the monthly payment amount
will be adjusted to an amount that will amortize fully the outstanding principal
balance of the related Mortgage Loan over its remaining term, and pay interest
at the Loan Rate as so adjusted. Due to the application of the Periodic Rate
Caps and the Maximum Loan Rates, the Loan Rate on each such Mortgage Loan, as
adjusted on any related Adjustment Date, may be less than the sum of the Index
and the related Gross Margin, rounded as described herein. See "--The Index"
below. None of the Adjustable Rate Mortgage Loans permits the related mortgagor
to convert the adjustable Loan Rate thereon to a fixed Loan Rate.
The Adjustable Rate Mortgage Loans had Loan Rates as of the Cutoff Date
of not less than [______]% per annum and not more than [_____]% per annum and
the weighted average Loan Rate was approximately [_____]% per annum. As of the
Cutoff Date, the Adjustable Rate Mortgage Loans had Gross Margins ranging from
[_______]% to [______]%, Minimum Loan Rates ranging from [_____]% per annum to
[_____]% per annum and Maximum Loan Rates ranging from [_____]% per annum to
[_____]% per annum. As of the Cutoff Date, the weighted average Gross Margin was
approximately [_____]%, the weighted average Minimum Loan Rate was approximately
[_____]% per annum [(exclusive of the Mortgage Loans that do not have a Minimum
Loan Rate)] and the weighted average Maximum Loan Rate was approximately
[_____]% per annum. The latest next Adjustment Date following the Cutoff Date on
any Adjustable Rate Mortgage Loan occurs in [_______ 199_] and the weighted
average next Adjustment Date for all of the Adjustable Rate Mortgage Loans
following the Cutoff Date is [_______ 200_].
The Adjustable Rate Mortgage Loans are expected to have the following
characteristics as of the Cutoff Date (the sum in any column may not equal the
total indicated due to rounding) and the percentages set forth in the tables are
percentages of the Adjustable Rate Mortgage Loans as of the Cut-off Date.
<TABLE>
<CAPTION>
LOAN RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS(1)
LOAN RATE (%) NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OF ADJUSTABLE RATE
MORTGAGE LOANS
OUTSTANDING AS OF
THE CUT-OFF DATE
- ---------------------------------- ------------------- ------------------------ -------------------------
<S> <C> <C> <C>
$ %
------------------- ------------------------ -------------------------
=================== ======================== =========================
Total........................... $ 100.00%
=================== ======================== =========================
</TABLE>
- -------------------
(1)The weighted average Loan Rate of the Adjustable Rate Mortgage Loans
as of the Cut-off Date was [_______]% per annum.
<TABLE>
<CAPTION>
MAXIMUM LOAN RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS(1)
MAXIMUM LOAN RATE (%) NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OF ADJUSTABLE RATE
MORTGAGE LOANS
OUTSTANDING AS OF
THE CUT-OFF DATE
- ------------------------------------- ---------------- ------------------------- ----------------------
<S> <C> <C> <C>
$ %
$ 100.00%
======================== =====================
</TABLE>
- ------------------
(1)The weighted average Maximum Loan Rate of the Adjustable Rate Mortgage Loans
as of the Cutoff Date was approximately [____]% per annum.
<TABLE>
<CAPTION>
MINIMUM LOAN RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS(1)
MINIMUM LOAN RATE (%) NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OF ADJUSTABLE RATE
MORTGAGE LOANS
OUTSTANDING AS OF
THE CUT-OFF DATE
- ------------------------------------- ---------------- ------------------------- ----------------------
<S> <C> <C> <C>
$ %
---------------- ------------------------- ----------------------
================ ========================= ======================
Total.......................... $ 100.00%
================ ========================= ======================
</TABLE>
- --------------------
(1) The weighted average Minimum Loan Rate of the Adjustable Rate Mortgage
Loans as of the Cutoff Date was approximately [___]% per annum.
<TABLE>
<CAPTION>
GROSS MARGINS OF THE ADJUSTABLE RATE MORTGAGE LOANS(1)
GROSS MARGINS (%) NUMBER PRINCIPAL BALANCE % OF AGGREGATE
OF MORTGAGE OUTSTANDING AS OF PRINCIPAL BALANCE
LOANS THE CUT-OFF DATE OF ADJUSTABLE RATE
MORTGAGE LOANS
OUTSTANDING AS OF
THE CUT-OFF DATE
- ----------------------------- ----------------- ------------------------ ------------------------
<S> <C> <C> <C>
$ %
================= ======================== ========================
Total.................. $ 100.00%
================= ======================== ========================
</TABLE>
- ------------------
(1)The weighted average Gross Margin of the Adjustable Rate Mortgage Loans as of
the Cutoff Date was approximately [_____]%.
<TABLE>
<CAPTION>
NEXT ADJUSTMENT DATE FOR THE ADJUSTABLE RATE MORTGAGE LOANS
NEXT ADJUSTMENT DATE NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OF ADJUSTABLE RATE
MORTGAGE LOANS
OUTSTANDING AS OF
THE CUT-OFF DATE
- ----------------------------- ----------------- ----------------------- ------------------------
<S> <C> <C> <C>
$ %
----------------- ----------------------- ------------------------
================= ======================= ========================
Total.................. $ 100.00%
================= ======================= ========================
</TABLE>
<TABLE>
<CAPTION>
INITIAL FIXED TERM/SUBSEQUENT ADJUSTABLE RATE TERM OF THE ADJUSTABLE RATE MORTGAGE LOANS
INITIAL FIXED TERM/SUBSEQUENT NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
ADJUSTABLE RATE TERM MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OF ADJUSTABLE RATE
MORTGAGE LOANS
OUTSTANDING AS OF
THE CUT-OFF DATE
- ------------------------------------------ ----------------- ----------------------- ------------------------
<S> <C> <C> <C>
$ %
----------------- ----------------------- ------------------------
================= ======================= ========================
Total..................................... $ 100.00%
================= ======================= ========================
</TABLE>
<TABLE>
<CAPTION>
INITIAL ADJUSTMENT RATE CAPS OF THE ADJUSTABLE RATE MORTGAGE LOANS(1)
INITIAL PERIODIC RATE CAP (%) NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OF ADJUSTABLE RATE
MORTGAGE LOANS
OUTSTANDING AS OF
THE CUT-OFF DATE
- ------------------------------------------ ----------------- ----------------------- ------------------------
<S> <C> <C> <C>
$ %
--------------- ------------------------- ------------------------
=============== ========================= ========================
Total................................ $ 100.00%
=============== ========================= ========================
</TABLE>
- ------------------
(1) Relates solely to initial rate adjustments.
<TABLE>
<CAPTION>
SUBSEQUENT PERIODIC RATE CAPS OF THE ADJUSTABLE RATE MORTGAGE LOANS(1)
PERIODIC RATE CAP (%) NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
MORTGAGE LOANS OUTSTANDING AS OF PRINCIPAL BALANCE
THE CUT-OFF DATE OF ADJUSTABLE RATE
MORTGAGE LOANS
OUTSTANDING AS OF
THE CUT-OFF DATE
- ------------------------------------------ --------------- ------------------------- ------------------------
<S> <C> <C> <C>
$ %
=============== ========================= ========================
Total............................. $ 100.00%
=============== ========================= ========================
</TABLE>
- ------------------
(1) Relates to all rate adjustments subsequent to initial rate adjustments.
THE INDEX
As of any Adjustment Date, the Index applicable to the determination of
the Loan Rate on each Adjustable Rate Mortgage Loan will be [_______________].
In the event that the Index becomes unavailable or otherwise
unpublished, the Master Servicer will select a comparable alternative index over
which it has no direct control and which is readily verifiable.
UNDERWRITING STANDARDS
All of the Mortgage Loans have been [originated by, or purchased in the
secondary market by], [__________] (the "SELLER") in the ordinary course of its
business. The Mortgage Loans were purchased from [___________], representing
[___]% of the Pool Principal Balance as of the Cut-Off Date. Each entity from
which the Seller purchased the Mortgage Loans has represented and warranted that
each of the Mortgage Loans sold by it was underwritten in accordance with
standards utilized by it or the applicable originator in originating mortgage
loans generally comparable to such Mortgage Loans during the period of
origination. As described herein under "The Pooling and Servicing
Agreement--Assignment of the Mortgage Loans," the Seller, as Seller, will make
certain representations and warranties to the Trustee regarding the Mortgage
Loans. In the event of a breach that materially and adversely affects the
Certificateholders, the Seller will be obligated either to cure such breach or
repurchase or replace each affected Mortgage Loan.
Underwriting standards are applied by or on behalf of a lender to
evaluate a borrower's credit standing and repayment ability, and the value and
adequacy of the related mortgaged property as collateral. In general, a
prospective borrower applying for a loan is required to fill out a detailed
application designed to provide the underwriting officer pertinent credit
information. As part of the description of the borrower's financial condition,
the borrower generally is required to provide a current list of assets and
liabilities and a statement of income and expense, as well as an authorization
to apply for a credit report which summarizes the borrower's credit history with
local merchants and lenders and any record of bankruptcy.
When the Seller [originates or acquires] a mortgage loan, the
borrower's credit report is reviewed. [Generally, each credit report provides a
credit score] for the borrower. The credit score is based upon the credit
evaluation methodology developed by [_______] (the "SCORING COMPANY"), a
consulting firm specializing in creating evaluation predictive models through a
high number of variables components. Scoring Company scores generally range from
[__] to [___] and are available from three major credit bureaus: Experian
(formerly TRW), Equifax and Trans Union. These scores estimate, on a relative
basis, which loans are most likely to default in the future. Lower scores imply
higher default risk relative to a higher score. Scoring Company scores are
empirically derived from historical credit bureau data and represent a numerical
weighing of a borrower's credit characteristics over a two-year period. A
Scoring Company score is generated through the statistical analysis of a number
of credit-related characteristics or variables. Common characteristics include
number of credit lines (trade lines), payment history, past delinquencies,
severity of delinquencies, current levels of indebtedness, types of credit and
length of credit history. Attributes are specific values of each characteristic.
A scorecard (the model) is created with weights or points assigned to each
attribute. An individual loan applicant's credit score is derived by adding
together the attribute weights for the applicant. With respect to the Mortgage
Loans, [_____]% have credit scores for the borrowers and their weighted average
Scoring Company score was [____] at the time of scoring.]
THE MASTER SERVICER
The information set forth in the following paragraphs has been provided
by [_________________]. None of the Depositor, the Trustee, the Underwriter or
any of their respective affiliates has made or will make any representation as
to the accuracy or completeness of such information.
The following table sets forth, for the servicing portfolio serviced by
the Master Servicer as of [December 31, 1996, as of December 31, 1997 and as of
September 30, 1998], certain information relating to the delinquency experience
(including loans in foreclosure included in the Master Servicer's servicing
portfolio (which portfolio does not include mortgage loans that are subserviced
by others)) at the end of the indicated periods. The indicated periods of
delinquency are based on the number of days past due on a contractual basis. No
mortgage loan is considered delinquent for these purposes until it is one month
past due on a contractual basis. The information contained in the monthly
remittance reports which will be sent to investors will be compiled using the
same methodology as that used to compile the information contained in the table
below.
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------------------------- ------------------------------------ ------------------------------------
PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT
BY NO. BY NO. BY BY NO. BY NO. BY BY NO. BY NO. BY
OF BY DOLLAR OF DOLLAR OF BY DOLLAR OF DOLLAR OF BY DOLLAR OF DOLLAR
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio...... 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Period of
Delinquency:
30-59 Days.......
60-89 Days.......
90 Days or more..
Total Delinquent
Loans..............
Loans in
Foreclosure(1).....
</TABLE>
- -------------
(1) Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
The following tables set forth, [December 31, 1996, as of December 31,
1997 and as of September 30, 1998], certain information relating to the
foreclosure, REO and loan loss experience of mortgage loans included in the
Master Servicer's servicing portfolio [(which portfolio does not include
mortgage loans that are subserviced by others)] at the end of the indicated
periods.
<TABLE>
<CAPTION>
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
-----------------------------------------------------------------------------
AS OF AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1997 SEPTEMBER 30, 1998
-----------------------------------------------------------------------------
BY NO. BY BY NO. BY BY NO. BY
OF DOLLAR OF DOLLAR OF DOLLAR
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio............
Foreclosed Loans(1)........
Foreclosed Ratio(2)........
</TABLE>
- -----------
(1) For the purposes of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title to which has
been acquired by the Master Servicer. (2) The Foreclosure Ratio is equal to the
aggregate principal balance or number of Foreclosed Loans divided by the
aggregate principal balance, or number, as applicable, or mortgage loans in the
total portfolio at the end of the indicated period.
<TABLE>
<CAPTION>
LOAN GAIN/(LOSS) EXPERIENCE
(DOLLARS IN THOUSANDS)
---------------------------------------------------------------------
AS OF AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------------- ----------------------- -------------------
<S> <C> <C> <C>
Total Portfolio (1)......................
Net Gains/(Losses) (2)...................
Net Gains/(Losses) as a Percentage of
Total Portfolio..........................
</TABLE>
(1)"Total Portfolio" on the date stated above is the principal balance of the
mortgage loans outstanding on the last day of the period. (2)"Net
Gains/(Losses)" are actual gains or losses incurred on liquidated properties and
shortfall payoffs for each respective period. Gains or losses on liquidated
properties are calculated as net sales proceeds less book value (exclusive of
loan purchase premium or discount). Shortfall payoffs are calculated as the
difference between principal payoff amount and unpaid principal at the time of
payoff.
It is unlikely that the delinquency experience of the Mortgage Loans
comprising the Mortgage Pool will correspond to the delinquency experience of
the Master Servicer's mortgage portfolio set forth in the foregoing tables. The
statistics shown above represent the delinquency experience for the Master
Servicer's mortgage servicing portfolio only for the periods presented, whereas
the aggregate delinquency experience on the Mortgage Loans comprising the
Mortgage Pool will depend on the results obtained over the life of the Mortgage
Pool. There can be no assurance that the Mortgage Loans comprising the Mortgage
Pool will perform consistent with the delinquency or foreclosure experience
described herein. It should be noted that if the residential real estate market
should experience an overall decline in property values, the actual rates of
delinquencies and foreclosures could be higher than those previously experienced
by the Master Servicer. In addition, adverse economic conditions may affect the
timely payment by borrowers of scheduled payments of principal and interest on
the Mortgage Loans and, accordingly, the actual rates of delinquencies and
foreclosures with respect to the Mortgage Pool.
[The Master Servicer is in the process of completing its compliance
goals in connection with the year 2000 issue. The year 2000 issue is the result
of prior computer programs being written using two digits, rather than four
digits, to define the applicable year. Any of the Master Servicer's computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. Any such occurrence could result in
major computer system failure or miscalculations. The Master Servicer is
presently engaged in various procedures to ensure that their computer systems
and software will be year 2000 compliant.
However, in the event that the Master Servicer, or any of its
suppliers, customers, brokers or agents do not successfully and timely achieve
year 2000 compliance, the performance of obligations of the Master Servicer
under the Pooling and Servicing Agreement could be materially adversely
affected.]
THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement, dated as of ____________ __, 199__ (the "POOLING AND SERVICING
AGREEMENT"), among the Depositor, the Seller, the Master Servicer and the
Trustee. The Trust Fund created under the Pooling and Servicing Agreement will
consist of (i) all of the Depositor's right, title and interest in the Mortgage
Loans, the related mortgage notes, Mortgages and other related documents, (ii)
all payments on or collections in respect of the Mortgage Loans due after the
Cutoff Date, together with any proceeds thereof, (iii) any Mortgaged Properties
acquired on behalf of Certificateholders by foreclosure or by deed in lieu of
foreclosure, and any revenues received thereon, (iv) the rights of the Trustee
under all insurance policies required to be maintained pursuant to the Pooling
and Servicing Agreement and (v) the rights of the Depositor under the Mortgage
Loan Purchase Agreement between the Depositor and the Seller. The Offered
Certificates will be transferable and exchangeable at the corporate trust
offices of the Trustee.
ASSIGNMENT OF THE MORTGAGE LOANS
On the Closing Date the Depositor will transfer to the Trust Fund all
of its right, title and interest in and to each Mortgage Loan, the related
mortgage notes, mortgages and other related documents (collectively, the
"RELATED DOCUMENTS"), including all scheduled payments with respect to each such
Mortgage Loan due after the applicable Cutoff Date. The Trustee, concurrently
with such transfer, will deliver the Certificates to the Depositor. Each
Mortgage Loan transferred to the Trust Fund will be identified on a schedule
(the "MORTGAGE LOAN SCHEDULE") delivered to the Trustee pursuant to the Pooling
and Servicing Agreement. Such schedule will include information such as the
Principal Balance of each Mortgage Loan as of the Cutoff Date, its Loan Rate as
well as other information.
The Pooling and Servicing Agreement will require that, within the time
period specified therein, the Seller will deliver or cause to be delivered to
the Trustee (or a custodian, as the Trustee's agent for such purpose) the
Mortgage Loans endorsed to the Trustee on behalf of the Certificateholders and
the Related Documents. In lieu of delivery of original Mortgages, if such
original is not available, the Seller may deliver or cause to be delivered true
and correct copies thereof, together with a lost note affidavit executed by the
Seller.
Within [___] days of the Closing Date, the Trustee will review the
Mortgage Loans and the Related Documents pursuant to the Pooling and Servicing
Agreement and if any Mortgage Loan or Related Document is found to be defective
in any material respect and such defect is not cured within [___] days following
notification thereof to the Seller by the Trustee, the Seller will be obligated
to either (i) substitute for such Mortgage Loan an Eligible Substitute Mortgage
Loan; however, such substitution is permitted only within two years of the
Closing Date and may not be made unless an opinion of counsel is provided to the
effect that such substitution will not [disqualify the Trust Fund as a REMIC or]
result in a prohibited transaction tax under the Code or (ii) purchase such
Mortgage Loan at a price (the "PURCHASE PRICE") equal to the outstanding
Principal Balance of such Mortgage Loan as of the date of purchase, plus all
accrued and unpaid interest thereon, computed at the Loan Rate (net of the
Servicing Fee Rate and the Trustee Fee) through the end of the calendar month in
which the purchase is effected, plus the amount of any unreimbursed Advances and
Servicing Advances made by the Master Servicer. The Purchase Price will be
deposited in the Collection Account on or prior to the next succeeding
Determination Date after such obligation arises. The obligation of the Seller to
repurchase or substitute for a Defective Mortgage Loan is the sole remedy
regarding any defects in the Mortgage Loans and Related Documents available to
the Trustee or the Certificateholders.
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the Seller will be required to deposit in the Collection Account on or
prior to the next succeeding Determination Date after such obligation arises an
amount (the "SUBSTITUTION ADJUSTMENT") equal to the excess of the Principal
Balance of the related Defective Mortgage Loan over the Principal Balance of
such Eligible Substitute Mortgage Loan.
An "ELIGIBLE SUBSTITUTE MORTGAGE LOAN" is a mortgage loan substituted
by the Seller for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance), not in excess of, and not more than 5% less than,
the Principal Balance of the Defective Mortgage Loan; (ii) have a Loan Rate,
with respect to a Fixed Rate Mortgage Loan, not less than the Loan Rate of the
Defective Mortgage Loan and not more than 1% in excess of the Loan Rate of such
Defective Mortgage Loan or, with respect to an Adjustable Rate Mortgage Loan,
have a Maximum Loan Rate and Minimum Loan Rate not less than the respective rate
for the Defective Mortgage Loan and have a Gross Margin equal to or greater than
the Defective Mortgage Loan; (iii) have the same Due Date as the Defective
Mortgage Loan; (iv) have a remaining term to maturity not more than one year
earlier and not later than the remaining term to maturity of the Defective
Mortgage Loan; (v) comply with each representation and warranty as to the
Mortgage Loans set forth in the Pooling and Servicing Agreement (deemed to be
made as of the date of substitution); and (vi) satisfy certain other conditions
specified in the Pooling and Servicing Agreement.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., Cutoff Date Principal Balance
and the Loan Rate). In addition, the Seller will represent and warrant, on the
Closing Date, that, among other things: (i) at the time of transfer to the
Depositor, the Seller has transferred or assigned all of its right, title and
interest in each Mortgage Loan and the Related Documents, free of any lien; and
(ii) each Mortgage Loan complied, at the time of origination, in all material
respects with applicable state and federal laws. Upon discovery of a breach of
any such representation and warranty which materially and adversely affects the
interests of the Certificateholders in the related Mortgage Loan and Related
Documents, the Seller will have a period of [___] days after discovery or notice
of the breach to effect a cure. If the breach cannot be cured within the [_____]
day period, the Seller will be obligated to (i) substitute for such Defective
Mortgage Loan an Eligible Substitute Mortgage Loan or (ii) purchase such
Defective Mortgage Loan from the Trust Fund. The same procedure and limitations
that are set forth above for the substitution or purchase of Defective Mortgage
Loans as a result of deficient documentation relating thereto will apply to the
substitution or purchase of a Defective Mortgage Loan as a result of a breach of
a representation or warranty in the Pooling and Servicing Agreement that
materially and adversely affects the interests of the Certificateholders.
Mortgage Loans required to be transferred to the Seller as described in
the preceding paragraphs are referred to as "DEFECTIVE MORTGAGE LOANS."
Pursuant to the Pooling and Servicing Agreement, the Master Servicer
will service and administer the Mortgage Loans as more fully set forth herein.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Master Servicer shall establish and maintain or cause to be
maintained a separate trust account (the "COLLECTION ACCOUNT") for the benefit
of the holders of the Certificates. The Collection Account will be an Eligible
Account (as defined herein). Upon receipt by the Master Servicer of amounts in
respect of the Mortgage Loans (excluding amounts representing the Servicing Fee,
the Trustee Fee, reimbursement for Advances and Servicing Advances and insurance
proceeds to be applied to the restoration or repair of a Mortgaged Property or
similar items), the Master Servicer will deposit such amounts in the Collection
Account. Amounts so deposited may be invested in Eligible Investments (as
described in the Pooling and Servicing Agreement) maturing no later than one
Business Day prior to the date on which the amount on deposit therein is
required to be deposited in the Distribution Account or on such Distribution
Date if approved by the Rating Agencies. The Trustee will establish an account
(the "DISTRIBUTION ACCOUNT") into which will be deposited amounts withdrawn from
the Collection Account for distribution to Certificateholders on a Distribution
Date. The Distribution Account will be an Eligible Account. Amounts on deposit
therein may be invested in Eligible Investments maturing on or before the
Business Day prior to the related Distribution Date unless such Eligible
Investments are invested in investments managed or advised by the Trustee or an
affiliate thereof, in which case such Eligible Investments may mature on the
related Distribution Date.
An "ELIGIBLE ACCOUNT" is a segregated account that is (i) an account or
accounts maintained with a federal or state chartered depository institution or
trust company the shortterm unsecured debt obligations of which (or, in the case
of a depository institution or trust company that is the principal subsidiary of
a holding company, the shortterm unsecured debt obligations of such holding
company) are rated P1 by Moody's and A1 by Standard & Poor's (or comparable
ratings if Moody's and Standard & Poor's are not the Rating Agencies) at the
time any amounts are held on deposit therein, (ii) an account or accounts the
deposits in which are fully insured by the Federal Deposit Insurance Corporation
(to the limits established by such corporation), the uninsured deposits in which
account are otherwise secured such that, as evidenced by an opinion of counsel
delivered to the Trustee and to each Rating Agency, the Certificateholders will
have a claim with respect to the funds in such account or a perfected first
priority security interest against such collateral (which shall be limited to
Eligible Investments) securing such funds that is superior to claims of any
other depositors or creditors of the depository institution with which such
account is maintained, (iii) a trust account or accounts maintained with the
trust department of a federal or state chartered depository institution,
national banking association or trust company acting in its fiduciary capacity
or (iv) otherwise acceptable to each Rating Agency without reduction or
withdrawal of their then current ratings of the Certificates as evidenced by a
letter from each Rating Agency to the Trustee. Eligible Investments are
specified in the Pooling and Servicing Agreement and are limited to investments
which meet the criteria of the Rating Agencies from time to time as being
consistent with their then current ratings of the Certificates.
ADVANCES
Subject to the following limitations, the Master Servicer will be
obligated to advance or cause to be advanced on or before each Distribution Date
its own funds, or funds in the Collection Account that are not included in the
Available Funds for such Distribution Date, in an amount equal to the aggregate
of all payments of principal and interest, net of the Servicing Fee, and the
Trustee Fee, that were due during the related Due Period on the Mortgage Loans,
other than Balloon Payments, and that were delinquent on the related
Determination Date, plus certain amounts representing assumed payments not
covered by any current net income on the Mortgaged Properties acquired by
foreclosure or deed in lieu of foreclosure, and, with respect to Balloon Loans,
with respect to which the Balloon Payment is not made when due, an assumed
monthly payment that would have been due on the related Due Date based on the
original principal amortization schedule for such Balloon Loan (any such
advance, an "ADVANCE").
Advances are required to be made only to the extent they are deemed by
the Master Servicer to be recoverable from related late collections, insurance
proceeds or liquidation proceeds. The purpose of making such Advances is to
maintain a regular cash flow to the Certificateholders, rather than to guarantee
or insure against losses. The Master Servicer will not be required to make any
Advances with respect to reductions in the amount of the monthly payments on the
Mortgage Loans due to bankruptcy proceedings or the application of the Relief
Act.
All Advances will be reimbursable to the Master Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage Loan
as to which such unreimbursed Advance was made. In addition, any Advances
previously made in respect of any Mortgage Loan that are deemed by the Master
Servicer to be nonrecoverable from related late collections, insurance proceeds
or liquidation proceeds may be reimbursed to the Master Servicer out of any
funds in the Collection Account prior to the distributions on the Certificates.
In the event the Master Servicer fails in its obligation to make any such
advance, the Trustee, in its capacity as successor Master Servicer, will be
obligated to make any such advance, to the extent required in the Pooling and
Servicing Agreement.
In the course of performing its servicing obligations, the Master
Servicer will pay all reasonable and customary "out-of-pocket" costs and
expenses incurred in the performance of its servicing obligations, including,
but not limited to, the cost of (i) the preservation, restoration and protection
of the Mortgaged Properties, (ii) any enforcement or judicial proceedings,
including foreclosures, and (iii) the management and liquidation of Mortgaged
Properties acquired in satisfaction of the related mortgage. Each such
expenditure will constitute a "SERVICING ADVANCE."
The Master Servicer's right to reimbursement for Servicing Advances is
limited to late collections on the related Mortgage Loan, including liquidation
proceeds, released mortgaged property proceeds, insurance proceeds and such
other amounts as may be collected by the Master Servicer from the related
Mortgagor or otherwise relating to the Mortgage Loan in respect of which such
unreimbursed amounts are owed, unless such amounts are deemed to be
nonrecoverable by the Master Servicer, in which event reimbursement will be made
to the Master Servicer from general funds in the Collection Account.
THE TRUSTEE
[__________], a [________], will be named trustee (the "TRUSTEE")
pursuant to the Pooling and Servicing Agreement. The Trustee will initially
serve as custodian of the Mortgage Loans.
The principal compensation (the "TRUSTEE FEE") to be paid to the
Trustee in respect of its obligations under the Pooling and Servicing Agreement
will be equal to [____________]. The Pooling and Servicing Agreement will
provide that the Trustee and any director, officer, employee or agent of the
Trustee will be indemnified by the Trust Fund and will be held harmless against
any loss, liability or expense (not including expenses, disbursements and
advances incurred or made by the Trustee, including the compensation and the
expenses and disbursements of its agents and counsel, in the ordinary course of
the Trustee's performance in accordance with the provisions of the Pooling and
Servicing Agreement) incurred by the Trustee arising out of or in connection
with the acceptance or administration of its obligations and duties under the
Pooling and Servicing Agreement, other than any loss, liability or expense (i)
that constitutes a specific liability of the Trustee under the Pooling and
Servicing Agreement or (ii) incurred by reason of willful misfeasance, bad faith
or negligence in the performance of the Trustee's duties under the Pooling and
Servicing Agreement or as a result of a breach, or by reason of reckless
disregard, of the Trustee's obligations and duties under the Pooling and
Servicing Agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation (the "SERVICING FEE") to be paid to the
Master Servicer in respect of its servicing activities for the Certificates will
be at the "SERVICING FEE RATE" of up to [0.50]% per annum on the Principal
Balance of each Mortgage Loan. The amount resulting from the difference, if any,
between the Servicing Fee Rate for any Mortgage Loan and [0.50]% per annum (the
"EXCESS SERVICING FEE") will be [retained by the Seller]. As additional
servicing compensation, the Master Servicer is entitled to retain all
service-related fees (other than prepayment penalties), including assumption
fees, modification fees, extension fees and late payment charges, to the extent
collected from mortgagors, together with any interest or other income earned on
funds held in the Collection Account and any escrow accounts. [The Master
Servicer is obligated to offset any Prepayment Interest Shortfall on any
Distribution Date (payments made by the Master Servicer in satisfaction of such
obligation, "COMPENSATING INTEREST") by an amount not in excess of its Servicing
Fee for such Distribution Date.] The Master Servicer is obligated to pay certain
insurance premiums and certain ongoing expenses associated with the Mortgage
Pool and incurred by the Master Servicer in connection with its responsibilities
under the Pooling and Servicing Agreement and is entitled to reimbursement
therefor as provided in the Pooling and Servicing Agreement.
The "DETERMINATION DATE" with respect to any Distribution Date will be
the [__]th day of the calendar month in which such Distribution Date occurs or,
if such [___]th day is not a Business Day, the Business Day immediately
following such [___]th day. [With respect to any Determination Date and each
Mortgage Loan as to which a principal prepayment in full or in part was applied
during the related Due Period, the "PREPAYMENT INTEREST SHORTFALL" is an amount
equal to the interest at the applicable Loan Rate (net of the Servicing Fee) on
the amount of such principal prepayment for the number of days commencing on the
date on which the principal prepayment is applied and ending on the last day of
the related Due Period.]
VOTING RIGHTS
With respect to any date of determination, the percentage of all the
voting rights ("VOTING RIGHTS") allocated among holders of the Offered
Certificates shall be the fraction, expressed as a percentage, the numerator of
which is the aggregate Certificate Principal Balance of all the Certificates of
such Class then outstanding and the denominator of which is the aggregate
Certificate Principal Balance of all the Certificates then outstanding. The
Voting Rights allocated to each Class of Offered Certificates shall be allocated
among all holders of each such Class in proportion to the outstanding
Certificate Principal Balance of such Certificates.
AMENDMENT
The Pooling and Servicing Agreement may be amended by the Seller, the
Depositor, the Master Servicer and the Trustee, without the consent of the
holders of the Certificates, for any of the purposes set forth under "The
Agreements--Amendment" in the Prospectus. In addition, the Pooling and Servicing
Agreement may be amended by the Seller, the Depositor, the Master Servicer and
the Trustee and the holders of a majority in interest of any Class of Offered
Certificates affected thereby for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Pooling and
Servicing Agreement or of modifying in any manner the rights of the holders of
Offered Certificates; provided, however, that no such amendment may (i) reduce
in any manner the amount of, or delay the timing of, distributions required to
be made on any Offered Certificate without the consent of the holder of such
Certificate; (ii) adversely affect in any material respect the interests of the
holders of any Class of the Offered Certificates in a manner other than as
described in clause (i) above, without the consent of the holders of Offered
Certificates of such Class evidencing percentage interests aggregating at least
66%; or (iii) reduce the aforesaid percentage of aggregate outstanding principal
amounts of Offered Certificates, the holders of which are required to consent to
any such amendment, without the consent of the holders of all such Certificates.
TERMINATION
The holder of the majority interest in the Residual Certificate (or if
such holder does not exercise such option, the Master Servicer) will have the
right to repurchase all remaining Mortgage Loans and REO Properties and thereby
effect the early retirement of the Certificates, on any Distribution Date
following the Due Period during which the aggregate principal balance of the
Mortgage Loans and any real estate owned by the Trust is less than or equal to
10% of the Pool Principal Balance as of the Cut-off Date. In the event that the
option is exercised, the repurchase will be made at a price generally equal to
par plus accrued interest for each Mortgage Loan at the related Loan Rate to but
not including the first day of the month in which such repurchase price is
distributed plus the amount of any unreimbursed Advances and Servicing Advances
made by the Master Servicer. Proceeds from such repurchase will be included in
Available Funds and will be distributed to the holders of the Certificates in
accordance with the Pooling and Servicing Agreement. Any such repurchase of the
Mortgage Loans and REO Properties will result in the early retirement of the
Certificates.
[OPTIONAL PURCHASE OF DEFAULTED LOANS
As to any Mortgage Loan which is delinquent in payment by [__] days or
more, the Master Servicer may, at its option, purchase such Mortgage Loan from
the Trust Fund at the Purchase Price for such Mortgage Loan.]
EVENTS OF DEFAULT
Events of Default will consist, among other things, of: (i) (a) any
failure by the Master Servicer to make an Advance and (b) any other failure by
the Master Servicer to deposit in the Collection Account or Distribution Account
the required amounts or remit to the Trustee any payment which continues
unremedied for one Business Day following written notice to the Master Servicer;
(ii) any failure of the Master Servicer to make any Advance or to cover any
Prepayment Interest Shortfalls, as described herein, which failure continues
unremedied for one Business Day; (iii) any failure by the Master Servicer to
observe or perform in any material respect any other of its covenants or
agreements in the Pooling and Servicing Agreement, which continues unremedied
for 30 days after the first date on which (x) the Master Servicer has knowledge
of such failure or (y) written notice of such failure is given to the Master
Servicer; (iv) insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings, and certain actions by or on behalf of the
Master Servicer indicating its insolvency or inability to pay its obligations or
(v) cumulative Realized Losses as of any Distribution Date exceed the amount
specified in the Pooling and Servicing Agreement.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default under the Pooling and Servicing
Agreement remains unremedied, the Trustee at the direction of the holders of
Offered Certificates evidencing not less than 51% of the Voting Rights may
terminate all of the rights and obligations of the Master Servicer in its
capacity as servicer with respect to the Mortgage Loans, as provided in the
Pooling and Servicing Agreement, whereupon the Trustee will succeed to all of
the responsibilities and duties of the Master Servicer under the Pooling and
Servicing Agreement, including the obligation to make Advances. No assurance can
be given that termination of the rights and obligations of the Master Servicer
under the Pooling and Servicing Agreement would not adversely affect the
servicing of the related Mortgage Loans, including the delinquency experience of
such Mortgage Loans.
No holder of an Offered Certificate, solely by virtue of such holder's
status as a holder of an Offered Certificate, will have any right under the
Pooling and Servicing Agreement to institute any proceeding with respect
thereto, unless such holder previously has given to the Trustee written notice
of default and unless the holders of Offered Certificates having not less than
51% of the Voting Rights evidenced by the Offered Certificates so agree and have
offered reasonable indemnity to the Trustee.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Offered Certificates will be issued pursuant to a Pooling and
Servicing Agreement. Set forth below are summaries of the specific terms and
provisions pursuant to which the Offered Certificates will be issued. The
following summaries do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, the provisions of the Pooling and
Servicing Agreement. When particular provisions or terms used in the Pooling and
Servicing Agreement are referred to, the actual provisions (including
definitions of terms) are incorporated by reference.
[_______________________] will issue the Class A Certificates (the
"SENIOR CERTIFICATES"), (ii) the Class M Certificates (the "MEZZANINE
Certificates"), (iii) the Class B Certificates (the "SUBORDINATE CERTIFICATES")
and (iv) the Class R Certificates (the "RESIDUAL CERTIFICATES"). The Senior
Certificates, the Mezzanine Certificates and the Subordinate Certificates
(collectively, the "OFFERED CERTIFICATES") and the Residual Certificates are
collectively referred to herein as the "CERTIFICATES." Only the Offered
Certificates are offered hereby.
The Class A, the Class M and the Class B Certificates will have the
respective Original Certificate Principal Balances specified on the cover
hereof. The aggregate of the Original Certificate Principal Balances of the
Offered Certificates is approximately $[_____________].
The Class R Certificates will have an Original Certificate Principal
Balance of $[___] and will [not] bear interest.
The Offered Certificates will be issued in book-entry form as described
below. The Offered Certificates will be issued in minimum dollar denominations
of $[______] and integral multiples of $[_______] in excess thereof (except that
one Certificate of each Class may be issued in a denomination which is not an
integral multiple thereof). The assumed final maturity date for each Class of
Offered Certificates is the Distribution Date occurring in [___________ 20__].
Distributions on the Offered Certificates will be made by the Trustee
on the [__]th day of each month, or if such day is not a Business Day, on the
first Business Day thereafter, commencing on _________ __, 199_ (each, a
"DISTRIBUTION DATE"), to the persons in whose names such Certificates are
registered at the close of business on the Business Day immediately preceding
such Distribution Date (each, a "RECORD DATE").
BOOK-ENTRY CERTIFICATES
The Offered Certificates will be bookentry Certificates (the "BOOK-ENTRY
CERTIFICATES"). Persons acquiring beneficial ownership interests in the Offered
Certificates ("CERTIFICATE OWNERS") will hold their Offered Certificates through
The Depository Trust Company ("DTC") [in the United States, or Cedel Bank,
societe anonyme ("CEDEL"), or Euroclear (in Europe)] if they are participants of
such system[s], or indirectly through organizations which are participants in
such system[s]. The BookEntry Certificates will be issued in one or more
certificates which equal the aggregate principal balance of the Offered
Certificates and will initially be registered in the name of Cede & Co.,
("CEDE"), the nominee of DTC. [Cedel and Euroclear will hold omnibus positions
on behalf of their participants through customers' securities accounts in
Cedel's and Euroclear's names on the books of their respective depositaries
which in turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank will act as depositary for
Cedel and The Chase Manhattan Bank will act as depositary for Euroclear (in such
capacities, individually the "RELEVANT DEPOSITARY" and collectively the
"EUROPEAN DEPOSITARIES").] Investors may hold such beneficial interests in the
BookEntry Certificates in minimum denominations of $50,000. Except as described
below, no person acquiring a BookEntry 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, 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 BookEntry 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 BookEntry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC if
the beneficial owner's Financial Intermediary is not a DTC participant [and on
the records of Cedel or Euroclear, as appropriate]).
Certificate Owners will receive all distributions of principal of and
interest on the Offered Certificates from the Trustee through DTC and DTC
participants. While the Offered Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "RULES"), DTC is required to
make bookentry transfers among participants on whose behalf it acts with respect
to the Offered Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Offered Certificates.
Participants and indirect participants with which Certificate Owners have
accounts with respect to Offered Certificates are similarly required to make
bookentry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates representing their respective interests in the
Offered Certificates, the Rules provide a mechanism by which Certificate Owners
will receive distributions and will be able to transfer their interest.
Certificateholders will not receive or be entitled to receive
certificates representing their respective interests in the Offered
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Certificateholders which are not DTC
participants may transfer ownership of Offered Certificates only through
participants and indirect participants by instructing such participants and
indirect participants to transfer Offered Certificates, by bookentry transfer,
through DTC for the account of the purchasers of such Offered Certificates,
which account is maintained with their respective participants. Under the Rules
and in accordance with DTC's normal procedures, transfers of ownership of
Offered Certificates will be executed through DTC and the accounts of the
respective participants at DTC will be debited and credited. Similarly, the
participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing
Certificateholders.
[Because of time zone differences, credits of securities received in
Cedel or Euroclear as a result of a transaction with a DTC participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedel Participants on such business day. Cash received in Cedel or
Euroclear as a result of sales of securities by or through a Cedel Participant
(as defined below) or Euroclear Participant (as defined below) to a DTC
participant will be received with value on the DTC settlement date but will be
available in the relevant Cedel or Euroclear cash account only as of the
business day following settlement in DTC. For information with respect to tax
documentation procedures relating to the Certificates, see "Certain Material
Federal Income Tax Considerations--Miscellaneous Tax Aspects--Backup
Withholding" and "--Tax Treatment of Foreign Investors" 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 DTC participants will occur in accordance with the
Rules. [Transfers between Cedel Participants and Euroclear Participants will
occur in accordance with their respective rules and operating procedures.]
[Crossmarket 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 the Rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.]
DTC which is a New Yorkchartered 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 BookEntry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of BookEntry Certificates will be
subject to the Rules, as in effect from time to time.
[Cedel Bank, societe anonyme, 67 Bd GrandeDuchesse Charlotte, L1331
Luxembourg, was incorporated in 1970 as a limited company under Luxembourg law.
Cedel is owned by banks, securities dealers and financial institutions, and
currently has about 100 shareholders, including U.S. financial institutions or
their subsidiaries. No single entity may own more than five percent of Cedel's
stock.]
[Cedel is registered as a bank in Luxembourg, and as such is subject to
regulation by the Institut Monetaire Luxembourgeois (i.e., the Luxembourg
Monetary Authority), which supervises Luxembourg banks.]
[Cedel holds securities for its customers ("CEDEL PARTICIPANTS") and
facilitates the clearance and settlement of securities transactions by
electronic bookentry transfers between their accounts. Cedel provides various
services, including safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing. Cedel
also deals with domestic securities markets in several countries through
established depository and custodial relationships. Cedel has established an
electronic bridge with Morgan Guaranty Trust as the Euroclear Operator in
Brussels to facilitate settlement of trades between systems. Cedel currently
accepts over 70,000 securities issues on its books.]
[Cedel's customers are worldwide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Cedel's United States customers are limited to securities
brokers and dealers and banks. Currently, Cedel has approximately 3,000
customers located in over 60 countries, including all major European countries,
Canada, and the United States. Indirect access to Cedel is available to other
institutions which clear through or maintain a custodial relationship with an
account holder of Cedel.]
[Euroclear was created in 1968 to hold securities for its participants
("EUROCLEAR PARTICIPANTS") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic bookentry 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 crossmarket transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "EUROCLEAR OPERATOR"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"COOPERATIVE"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.]
[The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.]
[Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "TERMS AND CONDITIONS"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.]
Distributions on the Book-Entry Certificates will be made on each
Remittance Date by the Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC participants in
accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
BookEntry 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 BookEntry Certificates that it
represents.
Under a book-entry format, beneficial owners of the BookEntry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. [Distributions with respect
to Certificates held through Cedel or Euroclear will be credited to the cash
accounts of Cedel Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. See "Certain Material
Federal Income Tax Considerations-- Miscellaneous Tax Aspects--Backup
Withholding" and "--Tax Treatment of Foreign Investors" in the Prospectus.]
Because DTC can only act on behalf of Financial Intermediaries, the ability of a
beneficial owner to pledge BookEntry Certificates to persons or entities that do
not participate in DTC, or otherwise take actions in respect of such BookEntry
Certificates, may be limited due to the lack of physical certificates for such
BookEntry Certificates. In addition, issuance of the BookEntry Certificates in
bookentry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust will be provided to Cede, as
nominee of DTC, and may be made available by Cede to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the BookEntry 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 BookEntry Certificates under the Agreement only at the direction
of one or more Financial Intermediaries to whose DTC accounts the BookEntry
Certificates are credited, to the extent that such actions are taken on behalf
of Financial Intermediaries whose holdings include such BookEntry Certificates.
[Cedel or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Certificateholder under the Agreement on behalf of a
Cedel Participant or Euroclear Participant only in accordance with its relevant
rules and procedures and subject to the ability of the Relevant Depositary to
effect such actions on its behalf through DTC.] DTC may take actions, at the
direction of the related participants, with respect to some Offered Certificates
which conflict with actions taken with respect to other Offered Certificates.
Definitive Certificates will be issued to beneficial owners of the
BookEntry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or [______________] 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 BookEntry Certificates and [________________]
or the Trustee is unable to locate a qualified successor, (b)
[_________________], at its sole option, with the consent of the Trustee, elects
to terminate a bookentry 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 BookEntry Certificates advise the Trustee and DTC through
the Financial Intermediaries and the DTC participants in writing that the
continuation of a bookentry 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 BookEntry Certificates and instructions for
reregistration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Agreement.
Although DTC [, Cedel and Euroclear] have agreed to the foregoing
procedures in order to facilitate transfers of Offered Certificates among
participants of DTC, [Cedel and Euroclear,] they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
None of [_________], the Master Servicer 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 BookEntry Certificates held by
Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
PRIORITY OF DISTRIBUTIONS AMONG CERTIFICATES
As more fully described herein, distributions on the Certificates will
be made on each Distribution Date from Available Funds and will be made to the
Classes of Certificates (subject to the prior payment of principal distributions
to the Class R Certificates on the first Distribution Date as described herein)
in the following order of priority: (i) to interest on each Class of Offered
Certificates in the priority and subject to the limitations described under
"--Allocations of Available Funds" below; (ii) to current principal of the
Classes of Certificates then entitled to receive distributions of principal, in
the order and subject to the priorities set forth herein under "--Allocation of
Available Funds"; (iii) to principal of the Classes of Certificates then
entitled to receive distributions of principal in order to maintain the
Overcollateralization Target Amount; (iv) to unpaid interest and the Loss
Reimbursement Entitlement in the order and subject to the priorities described
herein under "--Allocation of Available Funds"; (v) to the Class OC Certificates
for deposit into the Excess Reserve Fund Account first to cover any Basis Risk
Shortfall Amount and then to cover any Required Reserve Amount, and then to be
released to the Class OC Certificates, in each case subject to certain
limitations set forth herein under "--Allocation of Available Funds"; and (vi)
any remaining amounts to the holders of the Class R Certificates.
ALLOCATION OF AVAILABLE FUNDS
Distributions to holders of each Class of Offered Certificates will be
made on each Distribution Date from Available Funds. "AVAILABLE FUNDS" for any
Distribution Date is equal to the sum, net of amounts reimbursable therefrom to
the Master Servicer, of (i) the aggregate amount of monthly payments on the
related Mortgage Loans due on the related Due Date and received by the Trustee
on or prior to the related Determination Date, after deduction of the Servicing
Fee, the Excess Servicing Fee and the Trustee Fee, (ii) certain unscheduled
payments in respect of the Mortgage Loans, including prepayments, insurance
proceeds, Net Liquidation Proceeds and proceeds from repurchases of and
substitutions for such Mortgage Loans occurring during the related Prepayment
Period [,excluding prepayment penalties] and (iii) all Advances with respect to
the related Mortgage Loans received by the Trustee for such Distribution Date.
The "PREPAYMENT PERIOD" with respect to any Distribution Date is the
period commencing on the Determination Date in the month preceding the month in
which such Distribution Date occurs (or, in the case of the first Distribution
Date, the day following the Cutoff Date) and ending on the Determination Date
relating to such Distribution Date.
On each Distribution Date, the Trustee will withdraw from the
Distribution Account all Available Funds then on deposit therein and will
distribute the same in the following order of priority (provided, however, on
the first Distribution Date, the Trustee will first distribute all principal due
to the Class R Certificates):
(i) on account of interest to the holders of each Class of Offered Certificates
in the following order of priority:
(a) to the Class A Certificates, the Interest Distributable Amount for such
Class for such Distribution Date; and
(b) sequentially, to the Class M and Class B Certificates, in that order, the
related Monthly Interest Distributable Amount for such Distribution Date;
(ii) from the Principal Distribution Amount (giving effect first to the
component of the Principal Distribution Amount equal to the Basic Principal
Distribution Amount and then to the component of the Principal Distribution
Amount equal to the Extra Principal Distribution Amount pursuant to clause
(iii)(a) below):
(a) on each Distribution Date (1) before the Stepdown Date or (2) with respect
to which a Trigger Event is in effect, sequentially to the holders of the Class
A, Class M and Class B Certificates, in that order, the respective Class
Principal Distribution Amount; or
(b) on each Distribution Date (1) on or after the Stepdown Date and (2) as long
as a Trigger Event is not in effect, to the holders of the Class or Classes of
Offered Certificates then entitled to distribution of principal, in an amount
equal to in the aggregate the Principal Distribution Amount in the following
amounts and order of priority:
(1) the lesser of (x) the Principal Distribution Amount and (y) the Class A
Principal Distribution Amount to the Class A Certificateholders, until the
Certificate Principal Balance thereof is reduced to zero;
(2) the lesser of (x) the excess of (i) the Principal Distribution Amount over
(ii) the amount distributed to the Class A Certificateholders in clause
(ii)(b)(1) above and (y) the Class M Principal Distribution Amount, to the Class
M Certificateholders, until the Certificate Principal Balance thereof is reduced
to zero;
(3) the lesser of (x) the excess of (i) the Principal Distribution Amount over
(ii) the sum of the amounts distributed to the Class A Certificateholders in
clause (ii)(b)(1) above and the amount distributed to the Class M
Certificateholders in clause (ii)(b)(2) above and (y) the Class B Principal
Distribution Amount, to the Class B Certificateholders, until the Certificate
Principal Balance thereof is reduced to zero;
(iii) any amounts remaining after the distributions in clauses (i) through
(ii) above shall be distributed in the following order of priority:
(a) to fund the Extra Principal Distribution Amount for such Distribution Date
to be paid as a component of the Principal Distribution Amount in the same order
of priority described in clause (ii) above;
(b) to the Class M Certificateholders, the related Unpaid Interest Shortfall
Amount for such Distribution Date and then the related Loss Reimbursement
Entitlement, if any, for such Distribution Date;
(c) to the Class B Certificateholders, the related Unpaid Interest Shortfall
Amount for such Distribution Date and then the related Loss Reimbursement
Entitlement, if any, for such Distribution Date; and
(d) to the holders of the Class OC Certificates for deposit into the Excess
Reserve Fund Account first to cover any Basis Risk Shortfall Amount and then to
cover any Required Reserve Amount, and then to be released to the holders of the
Class OC Certificates, such amounts, if any, as described in the Pooling and
Servicing Agreement; and
(iv) to the holders of the Class R Certificates, the remaining amount.
On each Distribution Date, all amounts representing prepayment
penalties received during the related Due Period will be distributed to the
holders of the Class OC Certificates.
DEFINITIONS
The "ACCRUAL PERIOD" for the Offered Certificates for a given
Distribution Date will be the actual number of days (based on a 360-day year)
included in the period commencing on the immediately preceding Distribution Date
and ending on the day immediately preceding the current Distribution Date;
provided, however, that the initial Accrual Period for the Offered Certificates
will be the actual number of days included in the period commencing on the
Closing Date and ending on ________ __, 199__.
The "ALLOCABLE LOSS AMOUNT" with respect to each Distribution Date
means the excess, if any, of (a) the aggregate of the Certificate Principal
Balances of all Classes of Offered Certificates (after giving effect to all
distributions on such Distribution Date) over (b) the Pool Principal Balance as
of the end of the preceding Due Period.
The "BASIC PRINCIPAL DISTRIBUTION AMOUNT" means with respect to any
Distribution Date the excess of (i) the Principal Remittance Amount for such
Distribution Date over (ii) the Overcollateralization Release Amount, if any,
for such Distribution Date.
The "CALL OPTION DATE" is the first Distribution Date on which the Pool
Principal Balance is less than or equal to 10% of the Pool Principal Balance as
of the Cut-off Date.
The "CERTIFICATE PRINCIPAL BALANCE" of any Class of Offered
Certificates, as of any Distribution Date, will be equal to the Certificate
Principal Balance thereof on the Closing Date (the "ORIGINAL CERTIFICATE
PRINCIPAL BALANCE") reduced by the sum of (i) all amounts actually distributed
in respect of principal of such Class on all prior Distribution Dates and (ii)
with respect to any Mezzanine Certificates and the Class B Certificates, all
related Allocable Loss Amounts applied in reduction of principal of such
Certificates on all prior Distribution Dates.
"CLASS A PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution
Date (a) prior to the Stepdown Date or with respect to which a Trigger Event is
in effect, the lesser of (i) 100% of the Principal Distribution Amount and (ii)
the aggregate Certificate Principal Balance of the Class A Certificates and (b)
on or after the Stepdown Date and as long as a Trigger Event is not in effect,
the positive difference, if any, of the excess of (x) the aggregate Certificate
Principal Balance of the Class A Certificates immediately prior to such
Distribution Date over (y) the lesser of (A) the product of (i) approximately
[____]% and (ii) the aggregate Principal Balance of the Mortgage Loans as of the
last day of the related Due Period and (B) the aggregate Principal Balance of
the Mortgage Loans as of the last day of the related Due Period minus
approximately $[________].
"CLASS M PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution
Date (a) prior to the Stepdown Date or with respect to which a Trigger Event is
in effect, the lesser of (i) 100% of the Principal Distribution Amount and (ii)
the aggregate Certificate Principal Balance of the Class M Certificates and (b)
on or after the Stepdown Date and as long as a Trigger Event is not in effect,
the positive difference, if any, of the excess of (x) the sum of (i) the
aggregate Certificate Principal Balance of the Class A Certificates (after
taking into account the payment of the Class A Principal Distribution Amount on
such Distribution Date) and (ii) the Certificate Principal Balance of the Class
M Certificates immediately prior to such Distribution Date over (y) the lesser
of (A) the product of (i) approximately [____]% and (ii) the aggregate Principal
Balance of the Mortgage Loans as of the last day of the related Due Period and
(B) the aggregate Principal Balance of the Mortgage Loans as of the last day of
the related Due Period minus approximately $[__________].
"CLASS B PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution
Date (a) prior to the Stepdown Date or with respect to which a Trigger Event is
in effect, the lesser of (i) 100% of the Principal Distribution Amount and (ii)
the aggregate Certificate Principal Balance of the Class B Certificates and (b)
on or after the Stepdown Date and as long as a Trigger Event is not in effect,
the positive difference, if any, of the excess of (x) the sum of (i) the
aggregate Certificate Principal Balance of the Class A Certificates (after
taking into account the payment of the Class A Principal Distribution Amount on
such Distribution Date), (ii) the Certificate Principal Balance of the Class M
Certificates (after taking into account the payment of the Class M Principal
Distribution Amount on such Distribution Date) and (iii) the Certificate
Principal Balance of the Class B Certificates immediately prior to such
Distribution Date over (y) the lesser of (A) the product of (i) approximately
[_____]% and (ii) the aggregate Principal Balance of the Mortgage Loans as of
the last day of the related Due Period and (B) the aggregate Principal Balance
of the Mortgage Loans as of the last day of the related Due Period minus
approximately $[___________].
The "DELINQUENCY PERCENTAGE," with respect to any Distribution Date and
the related Due Period, is the fraction, expressed as a percentage, the
numerator of which is the aggregate of the Principal Balances of all Mortgage
Loans that are 60 or more days Delinquent, in foreclosure or relating to REO
Properties as of the close of business on the last day of the related Due Period
and the denominator of which is the Pool Principal Balance as of the close of
business on the last day of such Due Period.
A Mortgage Loan is "DELINQUENT" if any monthly payment due thereon is
not made by the close of business on the day such monthly payment is scheduled
to be due. A Mortgage Loan is "30 days Delinquent" if such monthly payment has
not been received by the close of business on the corresponding day of the month
immediately succeeding the month in which such monthly payment was due or, if
there was no such corresponding day (e.g., as when a 30-day month follows a
31-day month in which a payment was due on the 31st day of such month), then on
the last day of such immediately succeeding month; and similarly for "60 days
Delinquent", etc.
A "DUE PERIOD" with respect to the any Distribution Date is the period
commencing on the [second] day of the month preceding the month in which such
Distribution Date occurs and ending on the [first] day of the month in which
such Distribution Date occurs.
The "EXTRA PRINCIPAL DISTRIBUTION AMOUNT" for any Distribution Date, is
the lesser of (x) the General Excess Available Amount for such Distribution Date
and (y) Overcollateralization Deficiency Amount for such Distribution Date.
The "GENERAL EXCESS AVAILABLE AMOUNT" means with respect to each
Distribution Date is the amount, if any, by which the Available Funds for such
Distribution Date exceeds the aggregate amount distributed on such Distribution
Date pursuant to clauses (i) and (ii) under "--Allocation of Available Funds"
above (other than the Extra Principal Distribution Amount).
The "INTEREST DISTRIBUTABLE AMOUNT" for any Distribution Date and each
Class of Offered Certificates equals the sum of (i) the Monthly Interest
Distributable Amount for such Class for such Distribution Date and (ii) the
Unpaid Interest Shortfall Amount for such Class for such Distribution Date.
"LOSS REIMBURSEMENT ENTITLEMENT" means, with respect to any
Distribution Date and the Class M Certificates or Class B Certificates, the
amount of Allocable Loss Amounts applied to the reduction of the Certificate
Principal Balance of such Class and not reimbursed pursuant to "--Allocation of
Available Funds" above as of such Distribution Date.
The "MONTHLY INTEREST DISTRIBUTABLE AMOUNT" for any Distribution Date
and each Class of Offered Certificates equals the amount of interest accrued
during the related Accrual Period at the related Pass-Through Rate on the
Certificate Principal Balance of such Class immediately prior to such
Distribution Date (or, in the case of the first Distribution Date, from the
Closing Date).
An "OVERCOLLATERALIZATION DEFICIENCY AMOUNT" with respect to any
Distribution Date equals the amount, if any, by which the Overcollateralization
Target Amount exceeds the related Overcollateralized Amount on such Distribution
Date (after giving effect to distributions in respect of the Basic Principal
Distribution Amount but without giving effect to any Allocable Loss Amounts on
such Distribution Date).
"OVERCOLLATERALIZATION RELEASE AMOUNT" means, with respect to any
Distribution Date on or after the Stepdown Date on which an
Overcollateralization Stepdown Trigger Event is not in effect, the lesser of (x)
the Principal Remittance Amount for such Distribution Date and (y) the excess,
if any, of (i) the Overcollateralized Amount for such Distribution Date,
assuming that 100% of the Principal Remittance Amount is applied to as a
principal payment on the Offered Certificates on such Distribution Date over
(ii) the Overcollateralization Target Amount for such Distribution Date.
The "OVERCOLLATERALIZATION TARGET AMOUNT" means with respect to (a) any
Distribution Date occurring prior to the Stepdown Date, an amount equal to
[____]% of the Pool Principal Balance as of the Cut-off Date; and (b) with
respect to any Distribution Date on or after the Stepdown Date and (A) as long
as an Overcollateralization Stepdown Trigger Event is not in effect, an amount
equal to the greater of (x) [____]% of the Pool Principal Balance as of the end
of the related Due Period and (y) approximately $[_________] or (B) for so long
as an Overcollateralization Stepdown Trigger Event is in effect, the
Overcollateralization Target Amount for the preceding Distribution Date.
The "OVERCOLLATERALIZED AMOUNT" for any Distribution Date is the
amount, if any, by which (i) the Pool Principal Balance on the last day of the
immediately preceding Due Period exceeds (ii) the aggregate Certificate
Principal Balance of the Offered Certificates as of such Distribution Date after
giving effect to distributions to be made on such Certificates on such
Distribution Date.
The "PRINCIPAL DISTRIBUTION AMOUNT" for any Distribution Date will
equal the sum of (i) the Basic Principal Distribution Amount and (ii) the Extra
Principal Distribution Amount for such Distribution Date.
A "PRINCIPAL PREPAYMENT" with respect to any Distribution Date is any
mortgagor payment or other recovery of principal on a Mortgage Loan that is
received in advance of its scheduled Due Date and is not accompanied by an
amount representing scheduled interest due on any date or dates in any month or
months subsequent to the month of prepayment.
The "PRINCIPAL REMITTANCE AMOUNT" means with respect to any
Distribution Date, the sum of (i) each scheduled payment of principal collected
on the Mortgage Loans by the Master Servicer in the related Due Period, (ii) the
principal portion of all partial and full principal prepayments of such Mortgage
Loans applied by the Master Servicer during such Due Period, (iii) the principal
portion of all Net Liquidation Proceeds and Insurance Proceeds received during
such Due Period, (iv) that portion of the Purchase Price, representing principal
of any repurchased Mortgage Loan, required to be deposited to the Collection
Account during such Due Period, (v) the principal portion of any Substitution
Adjustments required to be deposited in the Collection Account during such Due
Period, and (vi) on the Distribution Date on which the Trust Fund is to be
terminated in accordance with the Pooling and Servicing Agreement, that portion
of the Termination Price, in respect of principal.
A "REALIZED LOSS" with respect to any defaulted Mortgage Loan that is
finally liquidated (a "LIQUIDATED MORTGAGE LOAN") is (i) the amount of loss
realized equal to the portion of the Principal Balance remaining unpaid after
application of all liquidation proceeds net of amounts reimbursable to the
Master Servicer for related Advances, Servicing Advances and Servicing Fees
(such amount, the "NET LIQUIDATION PROCEEDS") in respect of such Mortgage Loan
and (ii) with respect to certain Mortgage Loans the principal balances or the
scheduled payments of principal and interest of which have been reduced in
connection with bankruptcy proceedings, (a) in the case of a reduction of the
principal balance of a Mortgage Loan, the amount of such principal reduction,
and (b) in the case of a reduction in the scheduled payments of principal and
interest of a Mortgage Loan, the net present value (using as the discount rate
the higher of the Loan Rate on such Mortgage Loan or the rate of interest, if
any, specified by the court in such order) of the scheduled payments as so
modified or restructured.
The "ROLLING DELINQUENCY PERCENTAGE" means, with respect to any
Distribution Date, the average of the Delinquency Percentages with respect to
the last day of each of the three immediately preceding Due Periods.
The "SENIOR CREDIT ENHANCEMENT PERCENTAGE," with respect to any
Distribution Date, is the percentage obtained by dividing (i) the sum of (a) the
aggregate of the Certificate Principal Balances of the Mezzanine Certificates
and the Class B Certificates and (b) the Overcollateralized Amount, in each case
after giving effect to the distributions of principal on such Distribution Date,
by (ii) the Pool Principal Balance as of the end of the related Due Period.
The "SENIOR SPECIFIED ENHANCEMENT PERCENTAGE" on any date of
determination thereof means [_____]%.
The "STEPDOWN DATE" means the earlier of (A) the Distribution Date on
which the Certificate Principal Balance of the Senior Certificates equals zero
and (B) the later to occur of (x) the Distribution Date in ______________ 200_
and (y) the first Distribution Date on which the Senior Credit Enhancement
Percentage (calculated for this purpose only using the Pool Principal Balance as
of the end of the related Due Period but prior to any application of Principal
Distribution Amount to the Certificates) is greater than or equal to the Senior
Specified Enhancement Percentage.
A "TRIGGER EVENT" has occurred on any Distribution Date, if the Rolling
Delinquency Percentage exceeds [__]% of the Senior Credit Enhancement Percentage
for such Distribution Date.
An "OVERCOLLATERALIZATION STEPDOWN TRIGGER EVENT" means the occurrence
on any Distribution Date of either of the following: (i) the Cumulative Loss
Trigger has occurred or (ii) the Trigger Event has occurred.
The "CUMULATIVE LOSS TRIGGER" has occurred on a Distribution Date if
cumulative Realized Losses as of such Distribution Date exceed the percentages
of the Pool Principal Balance as of the Cut-off Date set forth below with
respect to such Distribution Date.
PERCENTAGE OF
THE POOL PRINCIPAL
BALANCE AS OF THE
DISTRIBUTION DATE CUT-OFF DATE
----------------- ------------------
The "UNPAID INTEREST SHORTFALL AMOUNT" means (i) for each Class of
Offered Certificates and the first Distribution Date, zero, and (ii) with
respect to each Class of Offered Certificates and any Distribution Date after
the first Distribution Date, the amount, if any, by which (a) the sum of (1) the
Monthly Interest Distributable Amount for such Class for the immediately
preceding Distribution Date and (2) the outstanding Unpaid Interest Shortfall
Amount, if any, for such Class for such preceding Distribution Date exceeds (b)
the aggregate amount distributed on such Class in respect of interest pursuant
to clause (a) of this definition on such preceding Distribution Date, plus
interest on the amount of interest due but not paid on the Certificates of such
Class on such preceding Distribution Date, to the extent permitted by law, at
the Pass-Through Rate for such Class for the related Accrual Period.
PASS-THROUGH RATES
The Pass-Through Rate for the Class A, the Class M and the Class B
Certificates for a particular Distribution Date is a per annum rate equal to
[the lesser of (a) the sum of (i) One-Month LIBOR on the related LIBOR
Determination Date (as defined herein) and (ii) the related Pass-Through Margin
and (b) the Available Funds Cap]. The Pass-Through Margins for the Class A, the
Class M-1 and Class B Certificates will be equal to [___]% ([__] basis points),
[___]% ([__] basis points) and [___]% ([___] basis points), respectively, until
the first Distribution Date following the Call Option Date, and [____]% ([___]
basis points), [___]% ([___] basis points) and [___]% ([___] basis points),
respectively, on and after such Distribution Date]. [As to any Distribution
Date, the "Available Funds Cap" is a rate per annum equal to the weighted
average of the Loan Rates on the Mortgage Loans outstanding as of the first day
of the related Due Period, net of [___]% in fees.]
[If on any Distribution Date, the Pass-Through Rate for any Class of
Offered Certificates is based upon the Available Funds Cap, the excess of (i)
the amount of interest such Class of Certificates would have been entitled to
receive on such Distribution Date had such Pass-Through Rate not been subject to
the Available Funds Cap, up to the Maximum Cap, over (ii) the amount of interest
such Class of Offered Certificates received on such Distribution Date based on
the Available Funds Cap, together with the unpaid portion of any such excess
from prior Distribution Dates (and interest accrued thereon at the then
applicable Pass-Through Rate on such Class of Offered Certificates, without
giving effect to the Available Funds Cap) is the "BASIS RISK SHORTFALL AMOUNT"
for such Class of Offered Certificates. Any Basis Risk Shortfall Amount on any
Class of Offered Certificates will be paid on future Distribution Dates from and
to the extent of funds available therefor in the Excess Reserve Fund Account (as
described herein). The ratings on the Offered Certificates do not address the
likelihood of the payment of any Basis Risk Shortfall Amount.]
The "MAXIMUM CAP" for any Distribution Date is [___]% per annum.
CALCULATION OF [ONE-MONTH LIBOR]
[On the second LIBOR Business Day (as defined below) preceding the
commencement of each Accrual Period following the initial Accrual Period (each
such date, a "LIBOR DETERMINATION DATE"), the Trustee (except for the first
Accrual Period) will determine the London interbank offered rate for one-month
United States dollar deposits ("ONE-MONTH LIBOR") for such Accrual Period for
the Offered Certificates on the basis of the offered rates of the Reference
Banks for one-month United States dollar deposits, as such rates appear on the
Telerate Page 3750, as of 11:00 a.m. (London time) on such LIBOR Determination
Date. As used in this section, "LIBOR BUSINESS DAY" means a day on which banks
are open for dealing in foreign currency and exchange in London and New York
City; "TELERATE PAGE 3750" means the display page currently so designated on the
Dow Jones Telerate Service (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices); and
"REFERENCE BANKS" means leading banks selected by the Trustee and engaged in
transactions in Eurodollar deposits in the international Eurocurrency market (i)
with an established place of business in London, (ii) whose quotations appear on
the Telerate Page 3750 on the LIBOR Determination Date in question, (iii) which
have been designated as such by the Trustee and (iv) not controlling, controlled
by or under common control with, the Depositor, the Master Servicer or any
successor Master Servicer.
On each LIBOR Determination Date, One-Month LIBOR for the related
Accrual Period for the Offered Certificates will be established by the Trustee
as follows:
(a) If on such LIBOR Determination Date two or more Reference Banks provide such
offered quotations, One-Month LIBOR for the related Accrual Period will be the
arithmetic mean of such offered quotations (rounded upwards if necessary to the
nearest whole multiple of 0.0625%).
(b) If on such LIBOR Determination Date fewer than two Reference Banks provide
such offered quotations, One-Month LIBOR for the related Accrual Period will be
the higher of (x) One-Month LIBOR as determined on the previous LIBOR
Determination Date and (y) the Reserve Interest Rate. The "RESERVE INTEREST
RATE" will be the rate per annum that the Trustee determines to be either (i)
the arithmetic mean (rounded upwards if necessary to the nearest whole multiple
of 0.0625%) of the one-month United States dollar lending rates which New York
City banks selected by the Trustee are quoting on the relevant LIBOR
Determination Date to the principal London offices of leading banks in the
London interbank market or (ii) in the event that the Trustee can determine no
such arithmetic mean, the lowest one-month United States dollar lending rate
which New York City banks selected by the Trustee are quoting on such LIBOR
Determination Date to leading European banks.
The establishment of One-Month LIBOR on each LIBOR Determination Date
by the Trustee and the Trustee's calculation of the rate of interest applicable
to the Offered Certificates for the related Accrual Period will (in the absence
of manifest error) be final and binding.]
APPLICATION OF ALLOCABLE LOSS AMOUNTS
Following any reduction of the Overcollateralized Amount to zero, any
Allocable Loss Amounts will be applied, sequentially, in reduction of the
Certificate Principal Balances of the Class B Certificates and the Class M
Certificates, in that order, until their respective Certificate Principal
Balances have been reduced to zero. The Certificate Principal Balance of the
Class A Certificates will not be reduced by any application of Allocable Loss
Amounts. However, if the Subordinate and Mezzanine Certificates are reduced to
zero, such losses may ultimately reduce the amount of principal ultimately paid
to the holders of the Class A Certificates. The reduction of the Certificate
Principal Balance of any applicable Class of Offered Certificates by the
application of Allocable Loss Amounts entitles such Class to reimbursement in an
amount equal to the Loss Reimbursement Entitlement. Each such Class of Offered
Certificates will be entitled to receive its Loss Reimbursement Entitlement, or
any portion thereof, in accordance with the payment priorities specified herein.
Payment in respect of Loss Reimbursement Entitlements will not reduce the
Certificate Principal Balance of the related Class or Classes.
[EXCESS RESERVE FUND ACCOUNT
The Pooling and Servicing Agreement establishes an account (the "EXCESS
RESERVE FUND ACCOUNT"), which is held in trust, as part of the Trust Fund, by
the Trustee on behalf of the Offered Certificateholders. The Excess Reserve Fund
Account will not be an asset of any REMIC. Certificateholders of each Class of
Offered Certificates in the order of their priority of payment will be entitled
to receive payments from the Excess Reserve Fund Account to the extent of
amounts on deposit therein in an amount equal to any Basis Risk Shortfall Amount
for such Class of Certificates. On the Closing Date, $[_____] will be deposited
into the Excess Reserve Fund Account. Thereafter, if the Available Funds Cap
does not exceed One-Month LIBOR by at least [____]%, the amount to be held in
the Excess Reserve Fund Account (the "REQUIRED RESERVE AMOUNT") on any
Distribution Date thereafter will equal the greater of (i) [____]% of the
outstanding Class Certificate Balance of the Offered Certificates as of such
Distribution Date and (ii) $[_____] and will be funded from amounts otherwise to
be paid to the Class OC Certificates. If the Available Funds Cap does exceed
One-Month LIBOR by [_____]% or more, the Required Reserve Amount will be
$[_____]. Any distribution by the Trustee from amounts in the Excess Reserve
Fund Account shall be made on the applicable Distribution Date.
Amounts on deposit in the Excess Reserve Fund Account in excess of
$[_____] will be released therefrom and distributed to the holders of the Class
OC Certificates on any Distribution Date on which the Available Funds Cap
exceeds One-Month LIBOR by [____]% or more.]
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will forward to each holder of a
Certificate and the Rating Agency a statement generally setting forth:
the amount of the distributions, separately identified, with respect to each
Class of the Offered Certificates;
the amount of such distributions set forth in clause (i) allocable to principal,
separately identifying the aggregate amount of any Principal Prepayments or
other unscheduled recoveries of principal included therein;
the amount of such distributions set forth in clause (i) allocable to interest
and the calculation thereof;
the amount of any Unpaid Interest Shortfall Amount with respect to each Class of
Certificates, separately identified;
the Overcollateralization Target Amount and Overcollateralized Amount as of such
Distribution Date;
the Certificate Principal Balance of each Class of Offered Certificates after
giving effect to the distribution of principal on such Distribution Date;
the Pool Principal Balance at the end of the related Due Period;
the amount of the Servicing Fee paid to or retained by the Master Servicer;
the amount of the Trustee Fee paid to the Trustee;
the amount of Advances for the related Due Period;
the number and aggregate Principal Balance of Mortgage Loans that were (A)
delinquent (exclusive of Mortgage Loans in foreclosure) (1) 30 to 59 days, (2)
60 to 89 days and (3) 90 or more days, (B) in foreclosure and delinquent (1) 30
to 59 days, (2) 60 to 89 days and (3) 90 or more days and (C) in bankruptcy as
of the close of business on the last day of the calendar month preceding such
Distribution Date;
with respect to any Mortgage Loan that became an REO Property during the
preceding calendar month, the loan number, the Principal Balance of such
Mortgage Loan as of the close of business on the last day of the related Due
Period and the date of acquisition thereof;
the total number and principal balance of any REO Properties as of the close of
business on the last day of the preceding Due Period;
the aggregate amount of Realized Losses incurred during the preceding calendar
month;
the cumulative amount of Realized Losses;
any Overcollateralization Deficiency Amount after giving effect to the
distribution of principal on such Distribution Date;
the Allocable Loss Amounts, if any, allocated to the Mezzanine and Subordinate
Certificates and the Loss Reimbursement Entitlement owing to the Mezzanine and
Subordinate Certificates outstanding after giving effect to distributions
thereof on such Distribution Date;
whether a Trigger Event or Overcollateralization Stepdown Trigger Event has
occurred and is continuing;
the amount of the Extra Principal Distribution Amount;
the Pass-Through Rate for the Class A, the Class M and Class B Certificates for
such Distribution Date;
and the amount on deposit in the Excess Reserve Fund Account on such
Distribution Date and the Basis Risk Shortfall Amount owing to each Class of
Offered Certificates after giving effect to distributions thereof on such
Distribution Date.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each holder of a
Certificate of record during the previous calendar year a statement containing
information necessary to enable holders of the Certificates to prepare their tax
returns. Such statements will not have been examined and reported upon by an
independent public accountant.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity of the Offered Certificates, and particularly the
Subordinate Certificates, will be sensitive to defaults on the Mortgage Loans.
If a purchaser of an Offered Certificate calculates its anticipated yield based
on an assumed rate of default and amount of losses that is lower than the
default rate and amount of losses actually incurred, its actual yield to
maturity will be lower than that so calculated. Certificateholders of the
Offered Certificates may not receive reimbursement for Realized Losses in the
month following the occurrence of such losses. In general, the earlier a loss
occurs, the greater is the effect on an investor's yield to maturity. There can
be no assurance as to the delinquency, foreclosure or loss experience with
respect to the Mortgage Loans. Because the Mortgage Loans were underwritten in
accordance with standards less stringent than those generally acceptable to FNMA
and FHLMC with regard to a borrower's credit standing and repayment ability, the
risk of delinquencies with respect to, and losses on, the Mortgage Loans will be
greater than that of mortgage loans underwritten in accordance with FNMA and
FHLMC standards.
The rate of principal payments on the Offered Certificates, the
aggregate amount of distributions on the Offered Certificates and the yields to
maturity of the Offered Certificates will be related to the rate and timing of
payments of principal on the Mortgage Loans. The rate of principal payments on
the Mortgage Loans will in turn be affected by the amortization schedules of the
Mortgage Loans and by the rate of principal prepayments (including for this
purpose prepayments resulting from refinancing, liquidations of the Mortgage
Loans due to defaults, casualties or condemnations and repurchases by the Seller
or Master Servicer). [Because certain of the Mortgage Loans contain prepayment
penalties, the rate of principal payments may be less than the rate of principal
payments for mortgage loans which did not have prepayment penalties.] The
Mortgage Loans are subject to the "due-on-sale" provisions included therein. See
"The Mortgage Pool" herein.
Prepayments, liquidations and purchases of the Mortgage Loans
(including any optional purchase) will result in distributions on the Offered
Certificates of principal amounts which would otherwise be distributed over the
remaining terms of the Mortgage Loans. Since the rate of payment of principal on
the Mortgage Loans will depend on future events and a variety of other factors,
no assurance can be given as to such rate or the rate of principal prepayments.
The extent to which the yield to maturity of a Class of Offered Certificates may
vary from the anticipated yield will depend upon the degree to which such
Offered Certificate is purchased at a discount or premium, and the degree to
which the timing of payments thereon is sensitive to prepayments, liquidations
and purchases of the Mortgage Loans. Further, an investor should consider the
risk that, in the case of any Offered Certificate purchased at a discount, a
slower than anticipated rate of principal payments (including prepayments) on
the Mortgage Loans could result in an actual yield to such investor that is
lower than the anticipated yield and, in the case of any Offered Certificate
purchased at a premium, a faster than anticipated rate of principal payments on
the Mortgage Loans could result in an actual yield to such investor that is
lower than the anticipated yield.
The rate of principal payments (including prepayments) on pools of
mortgage loans may vary significantly over time and may be influenced by a
variety of economic, geographic, social and other factors, including changes in
borrowers' housing needs, job transfers, unemployment, mortgagors' net equity in
the mortgaged properties and servicing decisions. In general, if prevailing
interest rates were to fall significantly below the Loan Rates on the Fixed Rate
Mortgage Loans, such Mortgage Loans could be subject to higher prepayment rates
than if prevailing interest rates were to remain at or above the Loan Rates on
such Mortgage Loans. Conversely, if prevailing interest rates were to rise
significantly, the rate of prepayments on such Mortgage Loans would generally be
expected to decrease. As is the case with the Fixed Rate Mortgage Loans, the
Adjustable Rate Mortgage Loans may be subject to a greater rate of principal
prepayments in a low interest rate environment. For example, if prevailing
interest rates were to fall, borrowers with Adjustable Rate Mortgage Loans may
be inclined to refinance their Adjustable Rate Mortgage Loans with a fixed rate
loan to "lock in" a lower interest rate. The existence of the applicable
Periodic Rate Cap and Maximum Rate also may affect the likelihood of prepayments
resulting from refinancings. No assurances can be given as to the rate of
prepayments on the Mortgage Loans in stable or changing interest rate
environments. In addition, the delinquency and loss experience of the Adjustable
Rate Mortgage Loans may differ from that on the Fixed Rate Mortgage Loans
because the amount of the monthly payments on the Adjustable Rate Mortgage Loans
are subject to adjustment on each Adjustment Date. [In addition, many of the
Adjustable Rate Mortgage Loans will not have their initial Adjustment Date for
[__________] after the origination thereof. The prepayment experience of the
Delayed First Adjustment Mortgage Loans may differ from that of the other
Adjustable Rate Mortgage Loans. The Delayed First Adjustment Mortgage Loans may
be subject to greater rates of prepayments as they approach their initial
Adjustment Dates even if market interest rates are only slightly higher or lower
than the Loan Rates on the Delayed First Adjustment Mortgage Loans as borrowers
seek to avoid changes in their monthly payments.]
OVERCOLLATERALIZATION PROVISIONS
The operation of the overcollateralization provisions of the Pooling
and Servicing Agreement will affect the weighted average lives of the Offered
Certificates and consequently the yields to maturity of such Certificates.
Unless and until the Overcollateralized Amount equals the Overcollateralization
Target Amount, the General Excess Available Spread will be applied as
distributions of principal of the Class or Classes of Certificates then entitled
to distributions of principal, thereby reducing the weighted average lives
thereof. The actual Overcollateralized Amount may change from Distribution Date
to Distribution Date producing uneven distributions of the General Excess
Available Spread. There can be no assurance as to when or whether the
Overcollateralized Amount will equal the Overcollateralization Target Amount.
The General Excess Available Spread generally is equal to the excess of
(x) interest collected or advanced on the Mortgage Loans over (y) the sum of
required interest on the Offered Certificates plus the Trustee Fee, the
Servicing Fee Rate and, if applicable, the Excess Servicing Fee. Mortgage Loans
with higher Loan Rates will contribute more interest to the General Excess
Available Spread. Mortgage Loans with higher Loan Rates may prepay faster than
Mortgage Loans with relatively lower Loan Rates in response to a given change in
market interest rates. Any such disproportionate prepayments of Mortgage Loans
with higher Loan Rates may adversely affect the amount of the General Excess
Available Spread available to make accelerated payments of principal of the
Offered Certificates.
As a result of the interaction of the foregoing factors, the effect of
the overcollateralization provisions on the weighted average lives of the
Offered Certificates may vary significantly over time and from Class to Class.
[ADDITIONAL INFORMATION
The Depositor has filed certain yield tables and other computational
materials with respect to certain Classes of the Offered Certificates with the
Commission in a report on Form 8-K and may file certain additional yield tables
and other computational materials with respect to one or more Classes of Offered
Certificates with the Commission in a report on Form 8-K. Such tables and
materials were prepared by the Underwriter at the request of certain prospective
investors, based on assumptions provided by, and satisfying the special
requirements of, such prospective investors. Such tables and assumptions may be
based on assumptions that differ from the Structuring Assumptions. Accordingly,
such tables and other materials may not be relevant to or appropriate for
investors other than those specifically requesting them.]
WEIGHTED AVERAGE LIVES
The timing of changes in the rate of Principal Prepayments on the
Mortgage Loans may significantly affect an investor's actual yield to maturity,
even if the average rate of Principal Prepayments is consistent with such
investor's expectation. In general, the earlier a Principal Prepayment on the
Mortgage Loans occurs, the greater the effect of such Principal Prepayment on an
investor's yield to maturity. The effect on an investor's yield of Principal
Prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the Offered
Certificates may not be offset by a subsequent like decrease (or increase) in
the rate of Principal Prepayments.
The projected weighted average life of any Class of Offered
Certificates is the average amount of time that will elapse from __________ __,
199_ (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 Pool as set forth herein under "The Mortgage
Pool--Mortgage Loan Statistics".
The "ASSUMED FINAL MATURITY DATE" for each Class of Offered
Certificates is as set forth herein under "Description of the
Certificates--General". The Assumed Final Maturity Date for each Class of
Offered Certificates is the __th Distribution Date following the Due Period in
which the Principal Balances of all the Mortgage Loans have been reduced to
zero, assuming that the Mortgage Loans pay in accordance with their terms. The
weighted average life of each Class of Offered Certificates is likely to be
shorter than would be the case if payments actually made on the Mortgage Loans
conformed to the foregoing assumptions, and the final Distribution Date with
respect to the Offered Certificates could occur significantly earlier than the
related Assumed Final Maturity Date because (i) prepayments are likely to occur,
(ii) excess cashflow, if any, will be applied as principal of the Offered
Certificates as described herein, (iii) the Overcollateralization Target Amount
is as defined herein and (iv) the Majority Residual Interestholder or the Master
Servicer may cause a termination of the Trust Fund as provided herein.
The model used in this Prospectus Supplement (the "PREPAYMENT
ASSUMPTION") represents an assumed rate of prepayment each month relative to the
then outstanding principal balance of a pool of mortgage loans for the life of
such mortgage loans. The Prepayment Assumption does not purport to be a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans.
Each of the Prepayment Scenarios in the table on page S-[ ] assumes the
respective percentages of the applicable Prepayment Assumption described
thereunder.
The tables on pages S-[ ] through S-[ ] 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-[ ] through S-[ ]. 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-[ ]
through S-[ ] were determined on the basis of the following structuring
assumptions (the "STRUCTURING ASSUMPTIONS"):
[list of structuring assumptions]
Nothing contained in the foregoing assumptions should be construed as a
representation that the Mortgage Loans will not experience delinquencies or
losses.
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.
[TABULAR INFORMATION]
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates against the purchase price of the Mortgage Loans transferred to the
Trust Fund.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The Pooling and Servicing Agreement provides that the Trust Fund[,
exclusive of the assets held in the Excess Reserve Fund Account, ]will comprise
[several Subsidiary REMICs and] a [Master] REMIC organized in a [tiered] "real
estate mortgage investment conduit" ("REMIC") structure. [Each Subsidiary REMIC
will issue uncertificated regular interests and those interests will be held
entirely by the REMIC immediately above it in the tiered structure. Each of the
Subsidiary REMICs and] the [Master] REMIC will designate a single class of
interests as the residual interest in that REMIC. The Class R Certificates will
represent ownership of the residual interests in [each of] the REMIC[s].
Election[s] will be made to treat [each Subsidiary REMIC and] the [Master] REMIC
as a REMIC for federal income tax purposes.
Each Class of Offered Certificates will represent beneficial ownership
of regular interests issued by the [Master] REMIC. [In addition, each of the
Offered Certificates will represent a beneficial interest in the right to
receive payments from the Excess Reserve Fund Account.]
Upon the issuance of the Offered Certificates, Brown & Wood LLP ("TAX
COUNSEL"), will deliver its opinion concluding, assuming compliance with the
Pooling and Servicing Agreement, that for federal income tax purposes [each
Subsidiary REMIC and] the [Master] REMIC will qualify as a REMIC within the
meaning of section 860D of the Internal Revenue Code of 1986, as amended (the
"CODE"). [In addition, Tax Counsel will deliver an opinion concluding that the
Excess Reserve Fund Account is an "outside reserve fund" that is beneficially
owned by the Certificateholders of the Class [__] Certificates]. [Moreover, Tax
Counsel will deliver an opinion concluding that the rights of the
Certificateholders of the Offered Certificates to receive payments from the
Excess Reserve Fund Account represent, for federal income tax purposes,
interests in an interest rate cap contract.]
TAXATION OF REGULAR INTERESTS
A Certificateholder of a Class of Offered Certificates will be treated
for federal income tax purposes as owning an interest in regular interests in
the [Master] REMIC
Upon the sale, exchange, or other disposition of an Offered
Certificate, assuming that an Offered Certificate is held as a "capital asset"
within the meaning of section 1221 of the Code, gain or loss on the disposition
of an Offered Certificate should, subject to the limitation described below, be
capital gain or loss. However, gain attributable to an Offered Certificate will
be treated as ordinary income to the extent such gain does not exceed the
excess, if any, of (i) the amount that would have been includible in the
Certificateholder's gross income with respect to the regular interest component
had income thereon accrued at a rate equal to 110% of the applicable federal
rate as defined in section 1274(d) of the Code determined as of the date of
purchase of the Offered Certificate over (ii) the amount actually included in
such Certificateholder's income.
Interest on a REMIC regular interest must be included in income by a
Certificateholder under the accrual method of accounting, regardless of the
Certificateholder's regular method of accounting. In addition, a regular
interest could be considered to have been issued with original issue discount
("OID"). See "Certain Material Federal Income Tax Considerations --Taxation of
the REMIC" in the Prospectus. The prepayment assumption that will be used to in
determining the accrual of any OID, market discount, or bond premium, if any,
will equal the rate described above under "Yield, Prepayment and Maturity
Considerations--Weighted Average Lives" for Scenario [___]. No representation is
made that the Mortgage Loans will prepay at such a rate or at any other rate.
OID must be included in income as it accrues on a constant yield method,
regardless of whether the Certificateholder receives currently the cash
attributable to such OID.
STATUS OF THE OFFERED CERTIFICATES
The regular interest component of the Offered Certificates will be
treated as assets described in section 7701(a)(19)(C) of the Code, and as "real
estate assets" under section 856(c)(5)(B) of the Code, generally, in the same
proportion that the assets of the Trust Fund[, exclusive of the Excess Reserve
Fund Account,] would be so treated. In addition, to the extent a regular
interest represents real estate assets under section 856(c)(5)(B) of the Code,
the interest derived from that component would be interest on obligations
secured by interests in real property for purposes of section 856(c)(3) of the
Code.
NON-U.S. PERSONS
Interest paid to or accrued by a Certificateholder who is a Non-U.S.
Person will be considered "portfolio interest", and will not be subject to U.S.
federal income tax and withholding tax, if the interest is not effectively
connected with the conduct of a trade or business within the United States by
the Non-U.S. Person and the Non-U.S. Person (i) is not actually or
constructively a "10 percent shareholder" of the Trust Fund or a "controlled
foreign corporation" with respect to which the Trust Fund is a "related person"
within the meaning of the Code and (ii) provides the Trust Fund or other person
who is otherwise required to withhold U.S. tax with respect to the Offered
Certificates with an appropriate statement (on Form W8 or a similar form),
signed under penalties of perjury, certifying that the beneficial owner of the
Offered Certificate is a Non-U.S. Person and providing the Non-U.S. Person's
name and address. If an Offered Certificate is held through a securities
clearing organization or certain other financial institutions, the organization
or institution may provide the relevant signed statement to the withholding
agent; in that case, however, the signed statement must be accompanied by a Form
W8 or substitute form provided by the Non-U.S. Person that owns the Certificate.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of an Offered Certificate by a Non-U.S. Person will be
exempt from United States federal income and withholding tax, provided that (i)
such gain is not effectively connected with the conduct of a trade or business
in the United States by the Non-U.S. Person and (ii) in the case of an
individual, the individual is not present in the United States for 183 days or
more in the taxable year.
For purposes of the foregoing discussion, the term "NON-U.S. PERSON"
means any person other than (i) a citizen or resident of the United States; (ii)
a corporation (or entity treated as a corporation for tax purposes) created or
organized in the United States or under the laws of the United States or of any
state thereof, including, for this purpose, the District of Columbia; (iii) a
partnership (or entity treated as a partnership for tax purposes) organized in
the United States or under the laws of the United States or of any state
thereof, including, for this purpose, the District of Columbia (unless provided
otherwise by future Treasury regulations); (iv) an estate whose income is
includible in gross income for United States income tax purposes regardless of
its source; or (v) a trust, if a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more U.S. Persons have authority to control all substantial decisions of the
trust. Notwithstanding the last clause of the preceding sentence, to the extent
provided in Treasury regulations, certain trusts in existence on August 20,
1996, and treated as U.S. Persons prior to such date, may elect to continue to
be U.S. Persons.
PROHIBITED TRANSACTIONS TAX AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100% of the net income
derived from "prohibited transactions" (the "PROHIBITED TRANSACTIONS TAX"). In
general, subject to certain specified exceptions, a prohibited transaction means
the disposition of a Mortgage Loan, the receipt of income from a source other
than a Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the Certificates. It is not anticipated that the Trust Fund will
engage in any prohibited transactions in which it would recognize a material
amount of net income.
In addition, certain contributions to a trust fund that elects to be
treated as a REMIC made after the day on which such trust fund issues all of its
interests could result in the imposition of a tax on the trust fund equal to
100% of the value of the contributed property (the "CONTRIBUTIONS TAX"). The
Trust Fund will not accept contributions that would subject it to such tax.
In addition, a trust fund that elects to be treated as a REMIC may also
be subject to federal income tax at the highest corporate rate on "net income
from foreclosure property," determined by reference to the rules applicable to
real estate investment trusts. "Net income from foreclosure property" generally
means gain from the sale of a foreclosure property other than qualifying rents
and other qualifying income for a real estate investment trust. It is not
anticipated that the Trust Fund will recognize net income from foreclosure
property subject to federal income tax.
BACKUP WITHHOLDING
Certain Certificate Owners may be subject to backup withholding at the
rate of 31% with respect to interest paid on the Offered Certificates if the
Certificate Owners, upon issuance, fail to supply the Trustee or their broker
with their taxpayer identification number, furnish an incorrect taxpayer
identification number, fail to report interest, dividends, or other "reportable
payments" (as defined in the Code) properly, or, under certain circumstances,
fail to provide the Trustee or their broker with a certified statement, under
penalty of perjury, that they are not subject to backup withholding.
The Trustee will be required to report annually to the Internal Revenue
Service (the "IRS"), and to each Certificateholder of record, the amount of
interest paid (and OID accrued, if any) on the Offered Certificates (and the
amount of interest withheld for federal income taxes, if any) for each calendar
year, except as to exempt holders (generally, holders that are corporations,
certain tax-exempt organizations or nonresident aliens who provide certification
as to their status as nonresidents). As long as the only holder of record of a
Class of Offered Certificates is Cede, as nominee of DTC, the IRS and
Certificate Owners of such Class will receive tax and other information,
including the amount of interest paid on such Certificates owned, from
Participants and Financial Intermediaries rather than from the Trustee. (The
Trustee, however, will respond to requests for necessary information to enable
Participants, Financial Intermediaries and certain other persons to complete
their reports.) Each non-exempt Certificate Owner will be required to provide,
under penalty of perjury, a certificate on IRS form W-9 containing his or her
name, address, correct federal taxpayer identification number and a statement
that he or she is not subject to backup withholding. Should a nonexempt
Certificate Owner fail to provide the required certification, the Participants
or Financial Intermediaries (or the Paying Agent) will be required to withhold
31% of the interest (and principal) otherwise payable to the holder, and remit
the withheld amount to the IRS as a credit against the holder's federal income
tax liability.
Such amounts will be deemed distributed to the affected Certificate
Owner for all purposes of the related Certificates and the Pooling and Servicing
Agreement.
STATE TAXES
The Depositor makes no representations regarding the tax consequences
of purchase, ownership or disposition of the Offered Certificates under the tax
laws of any state. Investors considering an investment in the Offered
Certificates should consult their own tax advisors regarding such tax
consequences.
All investors should consult their own tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Offered Certificates.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), prohibits "parties in interest" with respect to an employee
benefit plan subject to ERISA and/or a plan or other arrangement subject to the
excise tax provisions set forth under section 4975 of the Code (each of the
foregoing, a "PLAN") from engaging in certain transactions involving such Plan
and its assets unless a statutory, regulatory or administrative exemption
applies to the transaction. Section 4975 of the Code imposes certain excise
taxes on prohibited transactions involving plans described under that section;
ERISA authorizes the imposition of civil penalties for prohibited transactions
involving plans not covered under section 4975 of the Code. Any Plan fiduciary
which proposes to cause a Plan to acquire any of the Offered Certificates should
consult with its counsel with respect to the potential consequences under ERISA
and the Code of the Plan's acquisition and ownership of such Certificates. See
"ERISA Considerations" in the Prospectus.
Certain employee benefit plans, including governmental plans and
certain church plans, are not subject to ERISA's requirements. Accordingly,
assets of such plans may be invested in the Offered Certificates without regard
to the ERISA considerations described herein and in the Prospectus, subject to
the provisions of other applicable federal and state law. Any such plan which is
qualified and exempt from taxation under sections 401(a) and 501(a) of the Code
may nonetheless be subject to the prohibited transaction rules set forth in
section 503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's
general fiduciary requirements, including the requirement of investment prudence
and diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary which decides to
invest the assets of a Plan in the Offered Certificates should consider, among
other factors, the extreme sensitivity of the investments to the rate of
principal payments (including prepayments) on the Mortgage Loans.
The U.S. Department of Labor (the "DOL") has granted to Greenwich
Capital Markets, Inc. an administrative exemption (Prohibited Transaction
Exemption 9059; Exemption Application No. D8374) (the "EXEMPTION") from certain
of the prohibited transaction rules of ERISA and the related excise tax
provisions of Section 4975 of the Code with respect to the initial purchase, the
holding and the subsequent resale by Plans of certificates in pass-through
trusts that consist of certain receivables, loans and other obligations that
meet the conditions and requirements of the Exemption. The Exemption applies to
mortgage loans such as the Mortgage Loans in the Trust Fund.
Among the conditions that must be satisfied for the Exemption to apply
are the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as favorable to the
Plan as they would be in an arm's length transaction with an unrelated party;
(2) the rights and interest evidenced by the certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by other
certificates of the trust fund;
(3) the certificates acquired by the Plan have received a rating at the
time of such acquisition that is one of the three highest generic rating
categories from Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P"), Moody's Investors Service, Inc. ("MOODY'S"), Duff & Phelps Credit
Rating Co. ("DCR") or Fitch IBCA, Inc. ("FITCH" and, together with S&P, Moody's
and DCR, the "EXEMPTION RATING AGENCIES");
(4) the trustee must not be an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the underwriters in
connection with the distribution of the certificates represents not more than
reasonable compensation for underwriting the certificates; the sum of all
payments made to and retained by the seller pursuant to the assignment of the
loans to the trust fund represents not more than the fair market value of such
loans; the sum of all payments made to and retained by the servicer and any
other servicer represents not more than reasonable compensation for such
person's services under the agreement pursuant to which the loans are pooled and
reimbursements of such person's reasonable expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933.
The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets of the type that
have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated in one of
the three highest generic rating categories by an 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 is acquired by
persons independent of the Restricted Group; (ii) such fiduciary (or its
affiliate) is an obligor with respect to five percent (5%) or less of the fair
market value of the obligations contained in the trust; (iii) the Plan's
investment in certificates of any class does not exceed twenty-five percent
(25%) of all of the certificates of that class outstanding at the time of the
acquisition; and (iv) immediately after the acquisition, no more than
twenty-five percent (25%) of the assets of any Plan with respect to which such
person is a fiduciary are invested in certificates representing an interest in
one or more trusts containing assets sold or serviced by the same entity. The
Exemption does not apply to Plans sponsored by the Underwriter, the Trustee, the
Master Servicer, any obligor with respect to Mortgage Loans included in the
Trust Fund constituting more than five percent of the aggregate unamortized
principal balance of the assets in the Trust Fund, or any affiliate of such
parties (the "RESTRICTED GROUP").
It is expected that the Exemption will apply to the acquisition and
holding by Plans of the Senior Certificates and that all conditions of the
Exemption other than those within the control of the investors will be met.
BECAUSE THE CHARACTERISTICS OF THE CLASS M AND THE CLASS B
CERTIFICATES MAY NOT MEET THE REQUIREMENTS OF PTCE 83-1, THE EXEMPTION OR ANY
OTHER ISSUED EXEMPTION UNDER ERISA, THE PURCHASE AND HOLDING OF CLASS M AND
CLASS B CERTIFICATES BY A PLAN OR BY INDIVIDUAL RETIREMENT ACCOUNTS OR OTHER
PLANS SUBJECT TO SECTION 4975 OF THE CODE MAY RESULT IN PROHIBITED
TRANSACTIONS OR THE IMPOSITION OF EXCISE TAXES OR CIVIL PENALTIES.
CONSEQUENTLY, INITIAL ACQUISITIONS AND TRANSFERS OF THE CLASS M AND CLASS B
CERTIFICATES WILL NOT BE REGISTERED BY THE TRUSTEE UNLESS THE TRUSTEE
RECEIVES: (I) A REPRESENTATION FROM THE ACQUIROR OR TRANSFEREE OF SUCH
CERTIFICATE, TO THE EFFECT THAT SUCH TRANSFEREE IS NOT AN EMPLOYEE BENEFIT
PLAN SUBJECT TO SECTION 406 OF ERISA OR A PLAN OR ARRANGEMENT SUBJECT TO
SECTION 4975 OF THE CODE, NOR A PERSON ACTING ON BEHALF OF ANY SUCH PLAN OR
ARRANGEMENT NOR USING THE ASSETS OF ANY SUCH PLAN OR ARRANGEMENT TO EFFECT
SUCH TRANSFER OR (II) IF THE PURCHASER IS AN INSURANCE COMPANY, A
REPRESENTATION THAT THE PURCHASER IS AN INSURANCE COMPANY WHICH IS PURCHASING
SUCH CERTIFICATES WITH FUNDS CONTAINED IN AN "INSURANCE COMPANY GENERAL
ACCOUNT" (AS SUCH TERM IS DEFINED IN SECTION V(E) OF PROHIBITED TRANSACTION
CLASS EXEMPTION 95-60 ("PTCE 95-60")) AND THAT THE PURCHASE AND HOLDING OF
SUCH CERTIFICATES ARE COVERED UNDER SECTION I AND II OF PTCE 95-60. SUCH
REPRESENTATION AS DESCRIBED ABOVE SHALL BE DEEMED TO HAVE BEEN MADE TO THE
TRUSTEE BY THE ACQUIROR OR TRANSFEREE'S ACCEPTANCE OF A CLASS M OR CLASS B
CERTIFICATE. IN THE EVENT THAT SUCH REPRESENTATION IS VIOLATED, SUCH ATTEMPTEd
TRANSFER OR ACQUISITION SHALL BE VOID AND OF NO EFFECT.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 831
described in the Prospectus and the Exemption, and the potential consequences in
their specific circumstances, prior to making an investment in the Offered
Certificates. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification, an
investment in the Offered Certificates is appropriate for the Plan, taking into
account the overall investment policy of the Plan and the composition of the
Plan's investment portfolio.
LEGAL INVESTMENT CONSIDERATIONS
Because certain of the Mortgage Loans are secured by junior liens, the
Certificates will not constitute "mortgage related securities" for the purposes
of 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 Certificates.
There may be restrictions on the ability of certain investors,
including depository institutions, either to purchase the Certificates or to
purchase Certificates representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Certificates constitute legal
investments for such investors. See "Legal Investment" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, between the Depositor and the Underwriter (an affiliate of the
Depositor), the Depositor has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase from the Depositor, the Offered Certificates.
Distribution of the Offered Certificates will be made by the
Underwriter from time to time in negotiated transactions or otherwise at varying
prices to be determined at the time of sale. The Underwriter may effect such
transactions by selling Offered Certificates to or through dealers and such
dealers may receive from the Underwriter, for which they act as agent,
compensation in the form of underwriting discounts, concessions or commissions.
The Underwriter and any dealers that participate with the Underwriter in the
distribution of such Offered Certificates may be deemed to be underwriters, and
any discounts, commissions or concessions received by them, and any profits on
resale of the Certificates purchased by them, may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933, as amended (the
"ACT").
The Depositor has been advised by the Underwriter that it intends to
make a market in the Offered Certificates but has no obligation to do so. There
can be no assurance that a secondary market for the Offered Certificates will
develop or, if it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the Act.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Offered
Certificates will be passed upon for the Depositor and for the Underwriter by
Brown & Wood LLP, New York, New York.
RATINGS
It is a condition to the issuance of the Offered Certificates that (i)
the Class A Certificates be rated "___" by __________ and ______ (each, a
"RATING AGENCY"" and, together, the "RATING AGENCIES"), (ii) the M Certificates
be rated "__" by ___ and "___" by _______, and the Class B Certificates be rated
"___" by ___ .
The ratings assigned by the Rating Agencies to mortgage pass-through
certificates address the likelihood of the receipt of all distributions on the
mortgage loans by the related certificateholders under the agreements pursuant
to which such certificates are issued. The Rating Agencies' ratings take into
consideration the credit quality of the related mortgage pool, including any
credit support providers, structural and legal aspects associated with such
certificates, and the extent to which the payment stream on the mortgage pool is
adequate to make the payments required by such certificates. The Rating
Agencies' ratings on such certificates do not, however, constitute a statement
regarding frequency of prepayments of the mortgage loans.
The ratings on the Offered Certificates address the likelihood of the
receipt by the holders of the Offered Certificates of all distributions on the
Mortgage Loans to which they are entitled. The ratings on the Offered
Certificates also address the structural, legal and issuer-related aspects of
the Offered Certificates, including the nature of the Mortgage Loans. In
general, the ratings on the Offered Certificates address credit risk and not
prepayment risk. The ratings on the Offered Certificates do not represent any
assessment of the likelihood that principal prepayments of the Mortgage Loans
will be made by borrowers or the degree to which the rate of such prepayments
might differ from that originally anticipated. [The ratings on the Offered
Certificates do not address the likelihood of the payment of any Basis Risk
Shortfall Amount.] As a result, the initial ratings assigned to the Offered
Certificates do not address the possibility that holders of the Offered
Certificates might suffer a lower than anticipated yield in the event of
principal payments on the Offered Certificates resulting from rapid prepayments
of the Mortgage Loans or the application of the General Excess Available Amount
as described herein, or in the event that the Trust Fund is terminated prior to
the Assumed Final Maturity Date of the Classes of Offered Certificates.
The Depositor has not engaged any rating agency other than the Rating
Agencies to provide ratings on the Offered Certificates. However, there can be
no assurance as to whether any other rating agency will rate the Offered
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. Any rating on the Certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Offered
Certificates by the Rating Agencies.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to any of the Offered Certificates by the Rating Agencies are
subsequently lowered for any reason, no person or entity is obligated to provide
any additional support or credit enhancement with respect to such Offered
Certificates.
INDEX OF DEFINED TERMS
Accrual Period............................................................S-49
Act.......................................................................S-70
Adjustable Rate Mortgage Loans............................................S-17
Adjustment Date...........................................................S-24
Advance...................................................................S-36
Allocable Loss Amount.....................................................S-49
Assumed Final Maturity Date...............................................S-61
Available Funds...........................................................S-47
Available Funds Cap.......................................................S-54
Balloon Loan..............................................................S-18
Balloon Payment...........................................................S-18
Basic Principal Distribution Amount.......................................S-49
Basis Risk Shortfall Amount...............................................S-54
Book-Entry Certificates...................................................S-41
Call Option Date..........................................................S-49
Cede......................................................................S-41
Cedel.....................................................................S-41
Cedel Participants........................................................S-44
Certificate Owners........................................................S-41
Certificate Principal Balance.............................................S-49
Certificateholder.........................................................S-42
Certificates..............................................................S-41
Class A Principal Distribution Amount.....................................S-49
Class B Principal Distribution Amount.....................................S-50
Class M Principal Distribution Amount.....................................S-50
Closing Date..............................................................S-61
Code......................................................................S-63
Collection Account........................................................S-35
Compensating Interest.....................................................S-38
Contributions Tax.........................................................S-65
Cooperative...............................................................S-44
Cumulative Loss Trigger...................................................S-53
Cut-off Date..............................................................S-17
Cut-off Date Principal Balance............................................S-17
DCR.......................................................................S-67
Defective Mortgage Loans..................................................S-35
Definitive Certificate....................................................S-42
Delayed First Adjustment Mortgage Loan....................................S-18
Delinquency Percentage....................................................S-50
Delinquent................................................................S-51
Depositor.................................................................S-17
Determination Date........................................................S-38
Distribution Account......................................................S-35
Distribution Date.........................................................S-41
DOL.......................................................................S-67
DTC.......................................................................S-41
Due Date..................................................................S-18
Due Period................................................................S-51
Eligible Account..........................................................S-36
Eligible Substitute Mortgage Loan.........................................S-34
ERISA.....................................................................S-66
Euroclear Operator........................................................S-44
Euroclear Participants....................................................S-44
European Depositaries.....................................................S-42
Excess Reserve Fund Account...............................................S-56
Excess Servicing Fee......................................................S-38
Exemption.................................................................S-67
Exemption Rating Agencies.................................................S-67
Extra Principal Distribution Amount.......................................S-67
Financial Intermediary....................................................S-42
Fitch.....................................................................S-67
Fixed Rate Mortgage Loans.................................................S-17
Foreclosure Ratio.........................................................S-32
General Excess Available Amount...........................................S-51
Gross Margin..............................................................S-24
Index.....................................................................S-17
Interest Distributable Amount.............................................S-51
IRS.......................................................................S-65
LIBOR Business Day........................................................S-55
LIBOR Determination Date..................................................S-55
Liquidated Mortgage Loan..................................................S-53
Loss Reimbursement Entitlement............................................S-51
Maximum Cap...............................................................S-55
Maximum Loan Rate.........................................................S-24
Mezzanine Certificates....................................................S-41
Minimum Loan Rate.........................................................S-34
Monthly Interest Distributable Amount.....................................S-51
Moody's...................................................................S-67
Mortgage..................................................................S-18
Mortgage Loan Schedule....................................................S-33
Mortgage Loans............................................................S-17
Mortgage Pool.............................................................S-17
Mortgage Rates............................................................S-17
Mortgaged Property........................................................S-17
Net Gains/(Losses)........................................................S-32
Net Liquidation Proceeds..................................................S-53
Non-U.S. Person...........................................................S-64
Offered Certificates......................................................S-41
OID.......................................................................S-63
One-Month LIBOR...........................................................S-55
Original Certificate Principal Balance....................................S-49
Overcollateralization Deficiency Amount...................................S-51
Overcollateralization Release Amount......................................S-52
Overcollateralization Stepdown Trigger Event..............................S-52
Overcollateralization Target Amount.......................................S-52
Overcollateralized Amount.................................................S-52
Pass-Through Margin.......................................................S-54
Pass-Through Rate.........................................................S-54
Periodic Rate Cap.........................................................S-24
Plan......................................................................S-66
Pooling and Servicing Agreement...........................................S-33
Pool Principal Balance....................................................S-17
Prepayment Assumption.....................................................S-61
Prepayment Interest Shortfall.............................................S-38
Prepayment Period.........................................................S-47
Principal Distribution Amount.............................................S-52
Principal Prepayment......................................................S-52
Principal Remittance Amount...............................................S-52
Prohibited Transactions Tax...............................................S-65
PTCE 95-60................................................................S-69
Purchase Price............................................................S-34
Rating Agencies...........................................................S-70
Rating Agency.............................................................S-70
Realized Loss.............................................................S-53
Record Date...............................................................S-41
Reference Banks...........................................................S-55
Related Documents.........................................................S-33
Relevant Depositary.......................................................S-42
REMIC.....................................................................S-62
Required Reserve Amount...................................................S-56
Reserve Interest Rate.....................................................S-55
Residual Certificates.....................................................S-41
Restricted Group..........................................................S-68
Rolling Delinquency Percentage............................................S-53
Rules.....................................................................S-42
S&P.......................................................................S-67
Scoring Company...........................................................S-30
Seller....................................................................S-32
Senior Certificates.......................................................S-41
Senior Credit Enhancement Percentage......................................S-53
Senior Specified Enhancement Percentage...................................S-53
Servicing Advance.........................................................S-37
Servicing Fee.............................................................S-38
Servicing Fee Rate........................................................S-38
SMMEA.....................................................................S-69
Stepdown Date.............................................................S-53
Structuring Assumptions...................................................S-62
Subordinate Certificates..................................................S-41
Substitution Adjustment...................................................S-34
Tax Counsel...............................................................S-63
Telerate Page 3750........................................................S-55
Terms and Conditions......................................................S-45
Total Portfolio...........................................................S-32
Trigger Event.............................................................S-53
Trust Fund................................................................S-17
Trustee...................................................................S-37
Trustee Fee...............................................................S-37
Unpaid Interest Shortfall Amount..........................................S-54
Voting Rights.............................................................S-38
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
[____________________] Certificates (the "Global Securities") will be available
only in bookentry form. Investors in the Global Securities may hold such Global
Securities through [any] of The Depository Trust Company ("DTC"), [Cedel or
Euroclear]. The Global Securities will be tradable as home market instruments in
[both] the [European and] U.S. domestic markets. Initial settlement and all
secondary trades will settle in sameday funds.
[Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).]
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
[Secondary crossmarket trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a deliveryagainstpayment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.]
NonU.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 bookentry form by DTC in the name
of Cede & Co. as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. [As a result, Cedel and Euroclear will
hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.]
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional eurobonds, except
that there will be no temporary global security and no "lock-up" or restricted
period. Investor securities custody accounts will be credited with their
holdings against payment in sameday funds on the settlement date.
[Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no `lockup' or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in sameday
funds.]
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset backed certificates issues in sameday funds.
[Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in sameday funds.
Trading between DTC seller and Cedel or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedel Participant or a Euroclear Participant, the purchaser
will send instructions to Cedel or Euroclear through a Cedel Participant or
Euroclear Participant at least one business day prior to settlement. Cedel or
Euroclear will instruct the respective Depositary, as the case may be, to
receive the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment date
to and excluding the settlement date, on the basis of the actual number of days
in such accrual period and a year assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. Payment will then
be made by the respective Depositary of the DTC Participant's account against
delivery of the Global Securities. After settlement has been completed, the
Global Securities will be system and by the clearing system, in accordance with
its usual procedures, to the Cedel Participant's or Euroclear Participant's
account. The securities credit will appear the next day (European time) and the
cash debt will be backvalued to, and the interest on the Global Securities will
accrue from, the value date (which would be the preceding day when settlement
occurred in New York). If settlement is not completed on the intended value date
(i.e., the trade fails), the Cedel or Euroclear cash debt will be valued instead
as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
sameday funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit
to them, Cedel Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Cedel Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that oneday period may substantially reduce or offset the amount
of such overdraft charges, although this result will depend on each Cedel
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a crossmarket transaction
will settle no differently than a trade between two DTC Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. In these cases Cedel
or Euroclear will instruct the respective Depositary, as appropriate, to deliver
the Global Securities to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment to and excluding the settlement date on the basis of the
actual number of days in such accrual period and a year assumed to consist of
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of the Cedel Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedel Participant's or Euroclear Participant's account would be backvalued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the backvaluation
will extinguish any overdraft incurred over that oneday period. If settlement is
not completed on the intended value date (i.e., the trade fails), receipt of the
cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until
the purchase side of the day trade is reflected in their Cedel or
Euroclear accounts) in accordance with the clearing system's customary
procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give
the Global Securities sufficient time to be reflected in their Cedel or
Euroclear account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of
the trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the sale to
the Cedel Participant or Euroclear Participant.]
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities [through
Cedel or Euroclear] (or through DTC if the holder has an address outside the
U.S.[)] will be subject to the 30% U.S. withholding tax that generally applies
to payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W8). Beneficial owners of Global
Securities that are nonU.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W8 (Certificate of Foreign Status). If
the information shown on Form W8 changes, a new Form W8 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 nonU.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 W8. Form 1001 may be filed by the Certificate
Owners or his agent.
Exemption for U.S. Persons (Form W9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W9 (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 W8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity treated as a corporation
or partnership for United States federal income tax purposes organized in or
under the laws of the United States or any state thereof or the District of
Columbia or (iii) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. This summary does not deal
with all aspects of U.S. Federal income tax withholding that may be relevant to
foreign holders of the Global Securities. Investors are advised to consult their
own tax advisors for specific tax advice concerning their holding and disposing
of the Global Securities.
<TABLE>
<CAPTION>
===================================================================================================================================
<S> <C>
You should rely only on the information contained or
incorporated by reference in this prospectus
supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different
information. We are not offering the certificates in
any state where the offer is not permitted.
Dealers will deliver a prospectus supplement and $[ ]
prospectus when acting as underwriters of the (Approximate)
certificates and with respect to their unsold
allotments or subscriptions. In addition, all dealers HOME EQUITY LOAN
selling the certificates will be required to deliver ASSET BACKED CERTIFICATES
a prospectus supplement and prospectus until [ , 199 . _________________________
SERIES 199 -
-- --
TABLE OF CONTENTS $ CLASS A
[VARIABLE PASS-THROUGH RATE]
PAGE
PROSPECTUS SUPPLEMENT [$ CLASS M
[VARIABLE PASS-THROUGH RATE]
Table of Contents...........................................S-2
Summary of Terms............................................S-3
Risk Factors................................................S-9
The Mortgage Pool...........................................S-17 [$ CLASS B
Underwriting Standards......................................S-30 [VARIABLE PASS-THROUGH RATE]
The Master Servicer.........................................S-31
The Pooling and Servicing Agreement.........................S-33
Description of the Certificates.............................S-40
Yield, Prepayment and Maturity Considerations...............S-58
Use of Proceeds.............................................S-62 FINANCIAL ASSET SECURITIES CORP.
Certain Material Federal Income Tax Consequences............S-62 (Depositor)
State Taxes.................................................S-66
ERISA Considerations........................................S-66 [_______________________]
Legal Investment Considerations.............................S-69 Seller and Master Servicer
Method of Distribution......................................S-69
Legal Matters...............................................S-70
Ratings.....................................................S-70
Index of Defined Terms......................................S-72
Annex I.....................................................A-1 FINANCIAL ASSET
SECURITIES CORP.
PROSPECTUS
Table of Contents............................................2
Important Notice about Information in this Prospectus
and Each Accompanying Prospectus Supplement................3
Risk Factors.................................................4 PROSPECTUS SUPPLEMENT
The Trust Fund..............................................13 [___________ __, 199_]
Use of Proceeds.............................................20
The Depositor...............................................20
Loan Program ...............................................20
Description of the Securities...............................23
Credit Enhancement..........................................36
Yield and Prepayment Considerations ........................43
The Agreements..............................................46
Certain Legal Aspects of the Loans..........................62
Certain Material Federal Income Tax Considerations..........78
State Tax Considerations...................................107
ERISA Considerations.......................................107
Legal Investment ..........................................112
Method of Distribution.....................................113
Legal Matters..............................................114
Financial Information .....................................115
Available Information......................................115
Rating.....................................................115
Index of Defined Terms.....................................117
===================================================================================================================================
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED _____________ ___, ____
PROSPECTUS
ASSET BACKED SECURITIES
(ISSUABLE IN SERIES)
FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 4 OF THIS PROSPECTUS.
The securities represent obligations of the trust only and do not represent an
interest in or obligation of the depositor, the seller, the master servicer or
any of their affiliates.
This prospectus may be used to offer and sell the securities only if
accompanied by a prospectus supplement.
THE SECURITIES
Financial Asset Securities Corp., as depositor, will sell the securities, which
may be in the form of asset backed certificates or asset backed notes. Each
issue of securities will have its own series designation and will evidence
either:
o the ownership of certain trust assets or
o debt obligations secured by certain trust assets.
Each series of securities will consist of one or more classes. Each
class of securities will represent the entitlement to a specified portion of
future interest payments and a specified portion of future principal payments
on the assets in the related trust. In each case, the specified portion may
equal from 100% to 0%. A series may include one or more classes of securities
that are senior in right of payment to one or more other classes. One or more
classes of securities may be entitled to receive distributions of principal,
interest or both prior to one or more other classes or before or after certain
specified events have occurred. The related prospectus supplement will specify
each of these features.
THE TRUST AND ITS ASSETS
As specified in the related prospectus supplement, the assets of a trust will
include primarily the following:
o closed-end and/or revolving home equity loans secured by senior or
junior liens on one- to four-family residential properties;
o home improvement installment sales contracts and installment loan
agreements that are either unsecured or secured generally by junior
liens on one- to four-family residential properties or by purchase
money security interests in the related home improvements; and/or
o private asset backed securities.
Each trust may be subject to early termination in certain circumstances.
MARKET FOR THE SECURITIES
No market will exist for the securities of any series before they are issued.
In addition, even after the securities of a series have been issued and sold,
there can be no assurance that a resale market will develop.
OFFERS OF THE SECURITIES
Offers of the securities may be made through one or more different methods,
including through underwriters. All certificates will be distributed by, or
sold through underwriters managed by, Greenwich Capital Markets, Inc.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS AND EACH
ACCOMPANYING PROSPECTUS SUPPLEMENT..............................3
RISK FACTORS.......................................................4
THE TRUST FUND....................................................13
USE OF PROCEEDS...................................................20
THE DEPOSITOR.....................................................21
LOAN PROGRAM......................................................21
DESCRIPTION OF THE SECURITIES.....................................24
CREDIT ENHANCEMENT................................................36
YIELD AND PREPAYMENT CONSIDERATIONS...............................44
THE AGREEMENTS....................................................47
CERTAIN LEGAL ASPECTS OF THE LOANS................................63
CERTAIN MATERIAL FEDERAL INCOME TAX CONSIDERATIONS................79
STATE TAX CONSIDERATIONS.........................................108
ERISA CONSIDERATIONS.............................................108
LEGAL INVESTMENT.................................................113
METHOD OF DISTRIBUTION...........................................115
LEGAL MATTERS....................................................115
FINANCIAL INFORMATION............................................116
AVAILABLE INFORMATION............................................116
RATING...........................................................116
INDEX OF DEFINED TERMS...........................................118
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in two separate
documents:
o this prospectus, which provides general information, some of which
may not apply to a particular series; and
o the accompanying prospectus supplement for a particular series,
which describes the specific terms of the securities of that series.
If the prospectus supplement contains information about a particular
series that differs from the information contained in this
prospectus, you should rely on the information in the prospectus
supplement.
You should rely only on the information contained in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide
you with information that is different from that contained in this prospectus
and the accompanying prospectus supplement. The information in this prospectus
is accurate only as of the date of this prospectus.
Beginning with the section titled "The Trust Fund", certain capitalized terms
are used in this prospectus to assist you in understanding the terms of the
securities. The capitalized terms used in this prospectus are defined on the
pages indicated under the caption "Index of Defined Terms" beginning on page
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
<PAGE>
unlikely to have significant assets in
the future. If the depositor should be
required to repurchase a loan from a
trust because of the breach of a
representation or warranty, the
depositor's sole source of funds for
the repurchase would be:
o funds obtained from enforcing any
similar obligation of the seller
or originator of the loan, or
o funds from a reserve account or
similar credit enhancement
established to pay for loan
repurchases.
In addition, the master servicer may
be obligated to make certain advances
if loans are delinquent, but only to
the extent it deems the advances to be
recoverable from amounts it expects to
receive on those loans. Credit
Enhancement Credit enhancement is
intended to reduce the effect of
delinquent payments or loan losses on
those classes of securities that have
the benefit of the credit enhancement.
Nevertheless, the amount of any credit
enhancement is subject to the limits
described in the related prospectus
supplement. Moreover, the amount of
credit enhancement may decline or be
depleted under certain circumstances
before the securities are paid in
full. As a result, securityholders may
suffer losses. In addition, credit
enhancement may not cover all
potential sources of risk of loss,
such as fraud or negligence by a loan
originator or other parties.
Prepayment and Yield
Considerations..................... The timing of principal payments on
the securities of a series will be
affected by a number of factors,
including the following:
o the extent of prepayments on the
underlying loans in the trust or,
if the trust is comprised of
underlying securities, on the
loans backing the underlying
securities;
o how payments of principal are
allocated among the classes of
securities of that series as
specified in the related
prospectus supplement;
o if any party has an option to
terminate the related trust early,
the effect of the exercise of the
option;
o the rate and timing of defaults
and losses on the assets
<PAGE>
in the related trust; and
o repurchases of assets in the
related trust as a result of
material breaches of
representations and warranties
made by the depositor or master
servicer.
The rate of prepayment of the loans
included in or underlying the assets
in each trust may affect the yield to
maturity of the securities.
Interest payable on the securities on
any given distribution date will
include all interest accrued during
the related interest accrual period.
The interest accrual period for the
securities of each series will be
specified in the applicable prospectus
supplement. If the interest accrual
period ends two or more days before
the related distribution date, your
effective yield will be less than it
would be if the interest accrual
period ended the day before the
distribution date. As a result, your
effective yield at par would be less
than the indicated coupon rate.
Balloon Payments .................... Certain of the underlying loans may
not be fully amortizing and may
require a substantial principal
payment (i.e., a "balloon" payment) at
their stated maturity. Loans of this
type involve a greater degree of risk
than fully amortizing loans since the
related borrower must generally be
able to refinance the loan or sell the
related property prior to the loan's
maturity date. The borrower's ability
to do so will depend on such factors
as the level of available mortgage
rates at the time of sale or
refinancing, the relative strength of
the local housing market, the
borrower's equity in the property, the
borrower's general financial condition
and tax laws.
Nature of Mortgages ................. The following factors, among others,
could adversely affect property values
in such a way that the outstanding
balance of the related loans, together
with any senior financing on the same
properties, would equal or exceed
those values:
o an overall decline in the
residential real estate markets
where the properties are located,
o failure of borrowers to maintain
their properties adequately, and
o natural disasters that are not
necessarily covered by
<PAGE>
hazard insurance, such as
earthquakes and floods.
If a home equity loan is in a junior
lien position, a decline in property
values could extinguish the value of
the junior mortgageholder in the
property before having any effect on
the interest of the senior
mortgageholder. If property values
decline, actual rates of
delinquencies, foreclosures and losses
on the underlying loans could be
higher than those currently
experienced by the mortgage lending
industry in general.
Even if you assume that the properties
provide adequate security for the
loans, substantial delays could occur
before defaulted loans are liquidated
and the proceeds forwarded to
investors. Property foreclosure
actions are regulated by state
statutes and rules and are subject to
many of the delays and expenses that
characterize other types of lawsuits
if defenses or counterclaims are made.
As a result, foreclosure actions can
sometimes take several years to
complete. Moreover, some states
prohibit a mortgage lender from
obtaining a judgment against the
borrower for amounts not covered by
property proceeds if the property is
sold outside of a judicial proceeding.
As a result, if a borrower defaults,
these restrictions may impede the
servicer's ability to dispose of the
borrower's property and obtain
sufficient proceeds to repay the loan
in full. In addition, the servicer is
entitled to deduct from liquidation
proceeds all the expenses it
reasonably incurs in trying to recover
on the defaulted loan, including
payment to the holders of any senior
mortgages, legal fees and costs, real
estate taxes, and property
preservation and maintenance expenses.
In general, the expenses of
liquidating defaulted loans do not
vary directly with the unpaid amount.
So, assuming that a servicer would
take the same steps to recover a
defaulted loan with a small unpaid
balance as it would a loan with a
large unpaid balance, the net amount
realized after paying liquidation
expenses would be a smaller percentage
of the balance of the small loan than
of the large loan. Since the mortgages
or deeds of trust securing home equity
loans typically will be in a junior
lien position, the proceeds from any
liquidation will be applied first to
the claims of the related senior
mortgageholders, including foreclosure
costs. In addition, a junior mortgage
lender may only foreclose subject to
any related senior mortgage. As a
result, the junior mortgage lender
generally must either pay the related
senior mortgage
<PAGE>
lender in full at or before the
foreclosure sale or agree to make the
regular payments on the senior
mortgage. Since the trust will not have
any source of funds to satisfy any
senior mortgages or to continue making
payments on them, the trust's ability
as a practical matter to foreclose on
any junior mortgage will be quite
limited.
State laws generally regulate interest
rates and other loan charges, require
certain disclosures, and often require
licensing of loan originators and
servicers. In addition, most states
have other laws and public policies
for the protection of consumers that
prohibit unfair and deceptive
practices in the origination,
servicing and collection of loans.
Depending on the provisions of the
particular law or policy and the
specific facts and circumstances
involved, violations may limit the
ability of the servicer to collect
interest or principal on the loans.
Also, the borrower may be entitled to
a refund of amounts previously paid
and the servicer may be subject to
damage claims and administrative
sanctions.
Environmental Risks ................. Federal, state and local laws and
regulations impose a wide range of
requirements on activities that may
affect the environment, health and
safety. In certain circumstances,
these laws and regulations impose
obligations on owners or operators of
residential properties such as those
that secure the loans. Failure to
comply with these laws and regulations
can result in fines and penalties that
could be assessed against the trust as
owner of the related property.
In some states, a lien on the property
due to contamination has priority over
the lien of an existing mortgage.
Further, a mortgage lender may be held
liable as an "owner" or "operator" for
costs associated with the release of
petroleum from an underground storage
tank under certain circumstances. If
the trust is considered the owner or
operator of a property, it will suffer
losses as a result of any liability
imposed for environmental hazards on
the property.
Certain Other Legal Considerations
Regarding the Loans ................. The Loans may also be subject to
federal laws relating to the
origination and underwriting. These
laws
o require certain disclosures to the
borrowers regarding the terms of
the loans;
<PAGE>
o prohibit discrimination on the
basis of age, race, color, sex,
religion, marital status, national
origin, receipt of public
assistance or the exercise of any
right under the consumer credit
protection act, in the extension
of credit;
o regulate the use and reporting of
information related to the
borrower's credit experience; and
o require additional application
disclosures, limit changes that
may be made to the loan documents
without the borrower's consent and
restrict a lender's ability to
declare a default or to suspend or
reduce a borrower's credit limit
to certain enumerated events.
Certain loans are also subject to
federal laws which impose additional
disclosure requirements on creditors
with respect to non-purchase money
mortgage loans with high interest
rates or high up-front fees and
charges. These laws can impose
specific statutory liabilities upon
creditors that fail to comply and may
affect the enforceability of the
related loans. In addition, any
assignee of the creditor (including
the trust) would generally be subject
to all claims and defenses that the
borrower could assert against the
creditor, including the right to
rescind the loan.
Certain loans relating to home
improvement contracts are subject to
federal laws that protect the borrower
from defective or incomplete work by a
contractor. These laws permit the
borrower to withhold payment if the
work does not meet the quality and
durability standards agreed to between
the borrower and the contractor. These
laws have the effect of subjecting any
assignee of the 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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
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.
- -------------------
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.
<PAGE>
If so specified in the related Prospectus Supplement, a Trust Fund relating
to a Series of Securities may be a business trust formed under the laws of the
state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a "TRUST AGREEMENT") between the Depositor and the trustee of
such Trust Fund.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding of the related Trust Fund Assets and other assets
contemplated herein and in the related Prospectus Supplement and the proceeds
thereof, issuing Securities and making payments and distributions thereon and
certain related activities. No Trust Fund is expected to have any source of
capital other than its assets and any related credit enhancement.
Unless otherwise specified in the related Prospectus Supplement, the only
obligations of the Depositor with respect to a Series of Securities will be to
obtain certain representations and warranties from the Sellers and to assign to
the Trustee for such Series of Securities the Depositor's rights with respect to
such representations and warranties. See "The Agreements--Assignment of Trust
Fund Assets". The obligations of the Master Servicer with respect to the Loans
will consist principally of its contractual servicing obligations under the
related Agreement (including its obligation to enforce the obligations of the
Sub-Servicers or Sellers, or both, as more fully described herein under "Loan
Program--Representations by Sellers; Repurchases or Substitutions" 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.
<PAGE>
THE LOANS
GENERAL. The real property which secures repayment of the Loans is referred
to as "PROPERTIES". Unless otherwise specified in the related Prospectus
Supplement, the Loans will be secured by mortgages or deeds of trust or other
similar security instruments creating a lien on a Property, which may be
subordinated to one or more senior liens on the related Properties, each as
described in the related Prospectus Supplement. As more fully described in the
related Prospectus Supplement, the Loans may be "conventional" loans or loans
that are insured or guaranteed by a governmental agency such as the FHA or VA.
The proceeds of the Closed-End Loans may have been applied to the purchase of
the related Property.
The Properties relating to Loans will consist primarily of detached or
semi-detached one- to four-family dwelling units, townhouses, rowhouses,
individual condominium units, individual units in planned unit developments, and
certain other dwelling units ("SINGLE FAMILY PROPERTIES") or Small Mixed-Used
Properties (as defined herein) which consist of structures of not more than
three stories which include one- to four-family residential dwelling units and
space used for retail, professional or other commercial uses. Such Properties
may include vacation and second homes, investment properties and leasehold
interests. The Properties may be located in any one of the fifty states, the
District of Columbia, Guam, Puerto Rico or any other territory of the United
States.
The payment terms of the Loans to be included in a Trust Fund will be
described in the related Prospectus Supplement and may include any of the
following features (or combination thereof) or other features, all as described
above or in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index (which will be specified in the
related Prospectus Supplement), a rate that is fixed for a period of
time or under certain circumstances and is followed by an adjustable
rate, a rate that otherwise varies from time to time, or a rate that
is convertible from an adjustable rate to a fixed rate. Changes to an
adjustable rate may be subject to periodic limitations, maximum rates,
minimum rates or a combination of such limitations. Accrued interest
may be deferred and added to the principal of a loan for such periods
and under such circumstances as may be specified in the related
Prospectus Supplement. Loans may provide for the payment of interest
at a rate lower than the specified interest rate borne by such
Mortgage (the "LOAN RATE") for a period of time or for the life of the
Loan, and the amount of any difference may be contributed from funds
supplied by the Seller of the Property or another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the loan over its term, may be calculated on the basis of an
assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different
from the interest rate on the Loan or may not be amortized during all
or a portion of the original term. Payment of all or a substantial
portion of the principal may be due on maturity ("balloon payment").
Principal may include interest that has been deferred and added to the
principal balance of the Loan.
<PAGE>
(c) Monthly payments of principal and interest may be fixed for the
life of the loan, may increase over a specified period of time or may
change from period to period. Loans may include limits on periodic
increases or decreases in the amount of monthly payments and may
include maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the loan or may decline over time, and
may be prohibited for the life of the loan or for certain periods
("lockout periods"). Certain loans may permit prepayments after
expiration of the applicable lockout period and may require the
payment of a prepayment fee in connection with any such subsequent
prepayment. Other loans may permit prepayments without payment of a
fee unless the prepayment occurs during specified time periods. The
loans may include "due on sale" clauses which permit the mortgagee to
demand payment of the entire loan in connection with the sale or
certain transfers of the related Property. Other loans may be
assumable by persons meeting the then applicable underwriting
standards of the Seller.
As more fully described in the related Prospectus Supplement, interest on
each Revolving Credit Line Loan, excluding introduction rates offered from time
to time during promotional periods, is computed and payable monthly on the
average daily outstanding principal balance of such Loan. Principal amounts on a
Revolving Credit Line Loan may be drawn down (up to a maximum amount as set
forth in the related Prospectus Supplement) or repaid under each Revolving
Credit Line Loan from time to time, but may be subject to a minimum periodic
payment. Except to the extent provided in the related Prospectus Supplement, the
Trust Fund will not include any amounts borrowed under a Revolving Credit Line
Loan after the Cut-off Date. The full amount of a Closed-End Loan is advanced at
the inception of the loan and generally is repayable in equal (or substantially
equal) installments of an amount to fully amortize such loan at its stated
maturity. Except to the extent provided in the related Prospectus Supplement,
the original terms to stated maturity of Closed-End Loan will not exceed 360
months. Under certain circumstances, under either a Revolving Credit Line Loan
or a Closed-End Loan, a borrower may choose an interest only payment option and
is obligated to pay only the amount of interest which accrues on the loan during
the billing cycle. An interest only payment option may be available for a
specified period before the borrower must begin paying at least the minimum
monthly payment of a specified percentage of the average outstanding balance of
the loan.
The aggregate principal balance of Loans secured by Properties that are
owner-occupied will be disclosed in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, the sole basis for a
representation that a given percentage of the Loans is secured by Single Family
Property that is owner-occupied will be either (i) the making of a
representation by the borrower at origination of the Loan either that the
underlying Property will be used by the borrower for a period of at least six
months every year or that the borrower intends to use the Property as a primary
residence or (ii) a finding that the address of the underlying Property is the
borrower's mailing address.
The Loans may include fixed-rate, closed-end mortgage loans having terms to
maturity of up to 30 years and secured by first-lien mortgages originated on
Properties containing one to four
<PAGE>
residential units and no more than three income producing non-residential units
("SMALL MIXED-USE PROPERTIES"). At least 50% of the units contained in a Small
Mixed-Use Property will consist of residential units. Income from such
non-residential units will not exceed 40% of the adjusted gross income of the
related borrower. The maximum Loan-to-Value Ratio on Small Mixed-Use Properties
will not exceed 65%. Small Mixed-Use Properties may be owner occupied or
investor properties and the loan purpose may be a refinancing or a purchase.
HOME IMPROVEMENT CONTRACTS. The Trust Fund Assets for a Series may consist,
in whole or part, of Home Improvement Contracts originated by a home improvement
contractor, a thrift or a commercial mortgage banker in the ordinary course of
business. As specified in the related Prospectus Supplement, the Home
Improvement Contracts will either be unsecured or secured by the Mortgages
primarily on Single Family Properties which are generally subordinate to other
mortgages on the same Property, or secured by purchase money security interest
in the Home Improvements financed thereby. Except as otherwise specified in the
related Prospectus Supplement, the Home Improvement Contracts will be fully
amortizing and may have fixed interest rates or adjustable interest rates and
may provide for other payment characteristics as described below and in the
related Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, the
Home Improvements securing the Home Improvement Contracts will include, but are
not limited to, replacement windows, house siding, new roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels.
The initial Loan-to-Value Ratio of a Home Improvement Contract is computed
in the manner described in the related Prospectus Supplement.
ADDITIONAL INFORMATION. Each Prospectus Supplement will contain
information, as of the date of such Prospectus Supplement and to the extent then
specifically known to the Depositor, with respect to the Loans contained in the
related Pool, including (i) the aggregate outstanding principal balance and the
average outstanding principal balance of the Loans as of the applicable Cut-off
Date, (ii) the type of property securing the Loan (e.g., one- to four-family
houses, individual units in condominium apartment buildings, vacation and second
homes or other real property), (iii) the original terms to maturity of the
Loans, (iv) the largest principal balance and the smallest principal balance of
any of the Loans, (v) the earliest origination date and latest maturity date of
any of the Loans, (vi) the Loan-to-Value Ratios or Combined Loan-to-Value
Ratios, as applicable, of the Loans, (vii) the Loan Rates or annual percentage
rates ("APR") or range of Loan Rates or APR's borne by the Loans, and (viii) the
geographical location of the Loans on a state-by-state basis. If specific
information respecting the Loans is not known to the Depositor at the time the
related Securities are initially offered, more general information of the nature
described above will be provided in the related Prospectus Supplement, and
specific information will be set forth in the Detailed Description.
Except as otherwise specified in the related Prospectus Supplement, the
"COMBINED LOAN-TO-VALUE RATIO" of a Loan at any given time is the ratio,
expressed as a percentage, of (i) the sum of (a) the original principal balance
of the Loan (or, in the case of a Revolving Credit Line Loan, the maximum amount
thereof available) and (b) the outstanding principal balance at the date of
origination of the Loan of any senior mortgage loan(s) or, in the case of any
open-ended senior mortgage loan, the maximum available line of credit with
respect to such mortgage
<PAGE>
loan, regardless of any lesser amount actually outstanding at the date of
origination of the Loan, to (ii) the Collateral Value of the related Property.
Except as otherwise specified in the related Prospectus Supplement, the
"COLLATERAL VALUE" of the Property, other than with respect to certain Loans the
proceeds of which were used to refinance an existing mortgage loan (each, a
"REFINANCE LOAN"), is the lesser of (a) the appraised value determined in an
appraisal obtained by the originator at origination of such Loan and (b) the
sales price for such Property. In the case of Refinance Loans, the "Collateral
Value" of the related Property is the appraised value thereof determined in an
appraisal obtained at the time of refinancing.
PRIVATE ASSET BACKED SECURITIES
GENERAL. Private Asset Backed Securities may consist of (a) pass-through
certificates or participation certificates evidencing an undivided interest in a
pool of home equity or home improvement loans, or (b) collateralized mortgage
obligations secured by home equity or home improvement loans. Private Asset
Backed Securities may include stripped asset backed securities representing an
undivided interest in all or a part of either the principal distributions (but
not the interest distributions) or the interest distributions (but not the
principal distributions) or in some specified portion of the principal and
interest distributions (but not all of such distributions) on certain home
equity or home improvement loans. Private Asset Backed Securities will have been
issued pursuant to a pooling and servicing agreement, an indenture or similar
agreement (a "PABS AGREEMENT"). The seller/servicer of the underlying Loans will
have entered into the PABS Agreement with the trustee under such PABS Agreement
(the "PABS TRUSTEE"). The PABS Trustee or its agent, or a custodian, will
possess the loans underlying such Private Asset Backed Security. Loans
underlying a Private Asset Backed Security will be serviced by a servicer (the
"PABS SERVICER") directly or by one or more subservicers who may be subject to
the supervision of the PABS Servicer. Except as otherwise specified in the
related Prospectus Supplement, the PABS Servicer will be a FNMA or FHLMC
approved servicer and, if FHA Loans underlie the Private Asset Backed
Securities, approved by HUD as an FHA mortgagee.
The issuer of the Private Asset Backed Securities (the "PABS ISSUER") will
be a financial institution or other entity engaged generally in the business of
mortgage lending, a public agency or instrumentality of a state, local or
federal government, or a limited purpose corporation organized for the purpose
of, among other things, establishing trusts and acquiring and selling housing
loans to such trusts and selling beneficial interests in such trusts. The PABS
Issuer shall not be an affiliate of the Depositor. The obligations of the PABS
Issuer will generally be limited to certain representations and warranties with
respect to the assets conveyed by it to the related trust. Except as otherwise
specified in the related Prospectus Supplement, the PABS Issuer will not have
guaranteed any of the assets conveyed to the related trust or any of the Private
Asset Backed Securities issued under the PABS Agreement. Additionally, although
the loans underlying the Private Asset Backed Securities may be guaranteed by an
agency or instrumentality of the United States, the Private Asset Backed
Securities themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private Asset
Backed Securities on the dates specified in the related Prospectus Supplement.
The Private Asset Backed Securities may be entitled to receive nominal or no
principal distributions or nominal or no interest distributions. Principal and
interest distributions will be made on the Private Asset
<PAGE>
Backed Securities by the PABS Trustee or the PABS Servicer. The PABS Issuer or
the PABS Servicer may have the right to repurchase assets underlying the Private
Asset Backed Securities after a certain date or under other circumstances as
specified in the related Prospectus Supplement.
UNDERLYING LOANS. The home equity or home improvement loans underlying
the Private Asset Backed Securities may consist of fixed rate, level payment,
fully amortizing loans or graduated payment loans, buydown loans, adjustable
rate loans, or loans having balloon or other special payment features. Such
loans may be secured by single family property, multifamily property,
manufactured homes or by an assignment of the proprietary lease or occupancy
agreement relating to a specific dwelling within a cooperative and the related
shares issued by such cooperative. Except as otherwise specified in the related
Prospectus Supplement, the underlying loans will have the following
characterizations: (i) no loan will have had a Loan-to-Value Ratio at
origination in excess of 95%, (ii) each single family loan secured by a
mortgaged property that had a Loan-to-Value ratio in excess of 80% at
origination will be covered by a primary mortgage insurance policy, (iii) each
loan will have had an original term to stated maturity of not less than 5 years
and not more than 40 years, (iv) no loan that was more than 89 days delinquent
as to the payment of principal or interest will have been eligible for
inclusion in the assets under the related PABS Agreement, (v) each loan (other
than a cooperative loan) will be required to be covered by a standard hazard
insurance policy (which may be a blanket policy), and (vi) each loan (other
than a cooperative loan or a contract secured by a manufactured home) will be
covered by a title insurance policy.
CREDIT SUPPORT RELATING TO PRIVATE ASSET BACKED SECURITIES. Credit
support in the form of reserve funds, subordination of other private
certificates issued under the PABS Agreement, letters of credit, surety bonds,
insurance policies or other types of credit support may be provided with
respect to the loans underlying the Private Asset Backed Securities themselves.
RATING OF PRIVATE ASSET BACKED SECURITIES. The PABS upon their
issuance will have been assigned a rating in one of the four highest rating
categories by at least one nationally recognized statistical rating agency.
ADDITIONAL INFORMATION. The Prospectus Supplement for a Series for
which the Trust Fund includes Private Asset Backed Securities will specify (i)
the aggregate approximate principal amount and type of the Private Asset Backed
Securities to be included in the Trust Fund, (ii) certain characteristics of
the loans which comprise the underlying assets for the Private Asset Backed
Securities including (A) the payment features of such loans, (B) the
approximate aggregate principal balance, if known, of underlying loans insured
or guaranteed by a governmental entity, (C) the servicing fee or range of
servicing fees with respect to the loans, and (D) the minimum and maximum
stated maturities of the underlying loans at origination, (iii) the maximum
original term-to-stated maturity of the Private Asset Backed Securities, (iv)
the weighted average term-to-stated maturity of the Private Asset Backed
Securities, (v) the pass-through or certificate rate of the Private Asset
Backed Securities, (vi) the weighted average pass-through or certificate rate
of the Private Asset Backed Securities, (vii) the PABS Issuer, the PABS
Servicer (if other than the PABS Issuer) and the PABS Trustee for such Private
Asset Backed Securities, (viii) certain characteristics of credit support, if
any, such as reserve funds, insurance policies, surety bonds, letters of credit
or guaranties relating to the loans underlying the Private Asset Backed
Securities or to such Private Asset Backed Securities themselves, (ix) the
<PAGE>
term on which the underlying loans for such Private Asset Backed Securities may,
or are required to, be purchased prior to their stated maturity or the stated
maturity of the Private Asset Backed Securities, (x) the terms on which loans
may be substituted for those originally underlying the Private Asset Backed
Securities and (xi) to the extent provided in a periodic report to the Trustee
in its capacity as holder of the PABS, certain information regarding the status
of the credit support, if any, relating to the PABS.
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.
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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;
<PAGE>
(xi) if a class is entitled only to a specified portion of
payments of interest on the Loans in the related Pool, the
Pass-Through Rate, if adjusted from the date of the last
statement, of the Loans expected to be applicable to the next
distribution to such class;
(xii) if applicable, the amount remaining in any Reserve
Account at the close of business on the Distribution Date;
(xiii) the Pass-Through Rate as of the day prior to the
immediately preceding Distribution Date;and
(xiv) any amounts remaining under letters of credit, pool
policies or other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a
dollar amount per single Security of the relevant class having the Percentage
Interest specified in the related Prospectus Supplement. The report to
Securityholders for any Series of Securities may include additional or other
information of a similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Securityholder of record at any time during such calendar year a report (a) as
to the aggregate of amounts reported pursuant to (i) and (ii) above for such
calendar year or, in the event such person was a Securityholder of record
during a portion of such calendar year, for the applicable portion of such year
and (b) such other customary information as may be deemed necessary or
desirable for Securityholders to prepare their tax returns.
BOOK-ENTRY REGISTRATION OF SECURITIES
As described in the Prospectus Supplement, if not issued in fully
registered form, each class of Securities will be registered as book-entry
certificates (the "BOOK-ENTRY SECURITIES"). Persons acquiring beneficial
ownership interests in the Securities ("SECURITY OWNERS") will hold their
Securities through the Depository Trust Company ("DTC") in the United States,
or Cedel Bank, societe anonyme ("CEDEL") or the Euroclear System ("EUROCLEAR")
(in Europe) if they are participants ("PARTICIPANTS") of such systems, or
indirectly through organizations which are Participants in such systems. The
Book-Entry Securities will be issued in one or more certificates which equal
the aggregate principal balance of the Securities and will initially be
registered in the name of Cede & Co., the nominee of DTC. CEDEL and Euroclear
will hold omnibus positions on behalf of their Participants through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositaries which in turn will hold such positions in customers'
securities accounts in the depositaries' names on the books of DTC. Citibank,
N.A. will act as depositary for CEDEL and the Brussels, Belgium branch of
Morgan Guarantee Trust Company of New York ("MORGAN") will act as depositary
for Euroclear (in such capacities, individually the "RELEVANT DEPOSITARY" and
collectively the "EUROPEAN DEPOSITARIES"). Except as described below, no
Security Owner will be entitled to receive a physical certificate representing
such Security (a "DEFINITIVE SECURITY"). Unless and until Definitive Securities
are issued, it is anticipated that the only "Securityholders" of the
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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):
<PAGE>
(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
<PAGE>
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".
<PAGE>
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
<PAGE>
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
<PAGE>
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".
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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%
<PAGE>
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
<PAGE>
of the Depositor or the Trust Fund; or (v) any other Event of Default provided
with respect to Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, either the Trustee or the holders of
a majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount (or, if the Notes of that Series have a
Pass-Through Rate of 0%, such portion of the principal amount as may be
specified in the terms of that Series, as provided in the related Prospectus
Supplement) of all the Notes of such Series to be due and payable immediately.
Such declaration may, under certain circumstances, be rescinded and annulled by
the holders of more than 50% of the Percentage Interests of the Notes of such
Series.
If, following an Event of Default with respect to any Series of Notes,
the Notes of such Series have been declared to be due and payable, the Trustee
may, in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration
of acceleration if such collateral continues to provide sufficient funds for
the payment of principal of and interest on the Notes of such Series as they
would have become due if there had not been such a declaration. In addition,
the Trustee may not sell or otherwise liquidate the collateral securing the
Notes of a Series following an Event of Default, unless (a) the holders of 100%
of the Percentage Interests of the Notes of such Series consent to such sale,
(b) the proceeds of such sale or liquidation are sufficient to pay in full the
principal of and accrued interest, due and unpaid, on the outstanding Notes of
such Series at the date of such sale or (c) the Trustee determines that such
collateral would not be sufficient on an ongoing basis to make all payments on
such Notes as such payments would have become due if such Notes had not been
declared due and payable, and the Trustee obtains the consent of the holders of
66K% of the Percentage Interests of each Class of Notes of such Series.
Except as otherwise specified in the related Prospectus Supplement, in
the event the principal of the Notes of a Series is declared due and payable,
as described above, the holders of any such Notes issued at a discount from par
may be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default shall occur and be continuing with
respect to a Series of Notes, the Trustee shall be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of Notes of such Series, unless such holders
offered to the Trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying with
such request or direction. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, the holders of a majority of
the then aggregate outstanding amount of the Notes of such Series shall have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee or exercising any trust or power conferred
on the Trustee with respect to the Notes of such Series, and the holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may, in certain cases, waive any default with respect thereto, except a default
in the payment of principal or interest or a default in respect of a covenant
or provision of the
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
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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
<PAGE>
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.
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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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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.
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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.
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The federal income tax consequences to holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a REMIC under the Internal Revenue Code of 1986, as amended (the
"CODE"); (iii) the Securities represent an ownership interest in some or all of
the assets included in the Trust Fund for a Series; or (iv) an election is made
to treat the Trust Fund relating to a particular Series of Certificates as a
partnership. The Prospectus Supplement for each Series of Securities will
specify how the Securities will be treated for federal income tax purposes and
will discuss whether a REMIC election, if any, will be made with respect to
such Series.
As used herein, the term "U.S. PERSON" means a citizen or resident of
the United States, a corporation, partnership or other entity created or
organized in or under the laws of the United States, any state thereof or the
District of Columbia (other than a partnership that is not treated as a United
States person under any applicable Treasury regulations), an estate whose
income is subject to U.S. federal income tax regardless of its source of
income, or a trust if a court within the United States is able to exercise
primary supervision of the authority to control all substantial decisions of
the trust. Notwithstanding the preceding sentence, to the extent provided in
regulations, certain trusts in existence on August 20, 1996 and treated as
United States Persons prior to such date that elect to continue to be treated
as United States persons shall be considered U.S. Persons as well.
TAXATION OF DEBT SECURITIES
STATUS AS REAL PROPERTY LOANS. Except to the extent otherwise provided
in the related Prospectus Supplement, if the Securities are regular interests
in a REMIC ("REGULAR INTEREST SECURITIES") or represent interests in a grantor
trust, Tax Counsel is of the opinion that: (i) Securities held by a domestic
building and loan association will constitute "loans... secured by an interest
in real property" within the meaning of section 7701(a)(19)(C)(v) of the Code;
and (ii) Securities held by a real estate investment trust will constitute
"real estate assets" within the meaning of section 856(c)(4)(A) of the Code and
interest on Securities will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of section 856(c)(3)(B) of the Code.
INTEREST AND ACQUISITION DISCOUNT. In the opinion of Tax Counsel,
Regular Interest Securities are generally taxable to holders in the same manner
as evidences of indebtedness issued by the REMIC. Stated interest on the
Regular Interest Securities will be taxable as ordinary income and taken into
account using the accrual method of accounting, regardless of the holder's
normal accounting method. Interest (other than original issue discount) on
Securities (other than Regular Interest Securities) that are characterized as
indebtedness for federal income tax purposes will be includible in income by
holders thereof in accordance with their usual methods of accounting.
Securities characterized as debt for federal income tax purposes and Regular
Interest Securities will be referred to hereinafter collectively as "DEBT
SECURITIES."
Tax Counsel is of the opinion that Debt Securities that are Compound
Interest Securities will, and certain of the other Debt Securities issued at a
discount may, be issued with "original issue discount" ("OID"). The following
discussion is based in part on the rules governing OID which are set forth in
sections 1271 through 1275 of the Code and the Treasury regulations issued
thereunder on February 2, 1994, as amended on June 11, 1996 (the "OID
REGULATIONS").
<PAGE>
A holder should be aware, however, that the OID Regulations do not adequately
address certain issues relevant to prepayable securities, such as the Debt
Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. In the
opinion of Tax Counsel, a holder of a Debt Security must include such OID in
gross income as ordinary interest income as it accrues under a method taking
into account an economic accrual of the discount. In general, OID must be
included in income in advance of the receipt of the cash representing that
income. The amount of OID on a Debt Security will be considered to be zero if
it is less than a de minimis amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such class will be treated as
the fair market value of such class on the Closing Date. The issue price of a
Debt Security also includes the amount paid by an initial Debt Security holder
for accrued interest that relates to a period prior to the issue date of the
Debt Security. The stated redemption price at maturity of a Debt Security
includes the original principal amount of the Debt Security, but generally will
not include distributions of interest if such distributions constitute
"qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as
described below) provided that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Debt
Security. The OID Regulations state that interest payments are unconditionally
payable only if a late payment or nonpayment is expected to be penalized or
reasonable remedies exist to compel payment. Certain Debt Securities may
provide for default remedies in the event of late payment or nonpayment of
interest. In the opinion of Tax Counsel, the interest on such Debt Securities
will be unconditionally payable and constitute qualified stated interest, not
OID. However, absent clarification of the OID Regulations, where Debt
Securities do not provide for default remedies, the interest payments will be
included in the Debt Security's stated redemption price at maturity and taxed
as OID. Interest is payable at a single fixed rate only if the rate
appropriately takes into account the length of the interval between payments.
Distributions of interest on Debt Securities with respect to which deferred
interest will accrue, will not constitute qualified stated interest payments,
in which case the stated redemption price at maturity of such Debt Securities
includes all distributions of interest as well as principal thereon. Where the
interval between the issue date and the first Distribution Date on a Debt
Security is either longer or shorter than the interval between subsequent
Distribution Dates, all or part of the interest foregone, in the case of the
longer interval, and all of the additional interest, in the case of the shorter
interval, will be included in the stated redemption price at maturity and
tested under the DE MINIMIS rule described below. In the case of a Debt
Security with a long first period which has non-DE MINIMIS OID, all stated
interest in excess of interest payable at the effective interest rate for the
long first period will be included in the stated redemption price at maturity
and the Debt Security will generally have OID. Holders of Debt Securities
should consult their own tax advisors to determine the issue price and stated
redemption price at maturity of a Debt Security.
Under the DE MINIMIS rule, OID on a Debt Security will be considered
to be zero if such OID is less than 0.25% of the stated redemption price at
maturity of the Debt Security multiplied
<PAGE>
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 Services (the "IRS") issued regulations (the
"CONTINGENT REGULATIONS") governing the calculation of OID on instruments
having contingent interest payments. The Contingent Regulations represent the
only guidance regarding the views of the IRS with respect to contingent
interest instruments and specifically do not apply for purposes of calculating
OID on debt instruments subject to section 1272(a)(6) of the Code, such as the
Debt Security. Additionally, the OID Regulations do not contain provisions
specifically interpreting section 1272(a)(6) of the Code. Until the Treasury
issues guidance to the contrary, the Trustee intends to base its computation on
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.
<PAGE>
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
<PAGE>
amount of income) to the extent that the aggregate amount of distributions on
the Securities is deduced as a result of a Loan default. However, the timing
and character of such losses or reductions in income are uncertain and,
accordingly, holders of Securities should consult their own tax advisors on
this point.
INTEREST WEIGHTED SECURITIES. It is not clear how income should be
accrued with respect to Regular Interest Securities or Stripped Securities (as
defined under "--Tax Status as a Grantor Trust; GENERAL" below) the payments on
which consist solely or primarily of a specified portion of the interest
payments on qualified mortgages held by the REMIC or on Loans underlying
Pass-Through Securities ("INTEREST WEIGHTED SECURITIES"). The Issuer intends to
take the position that all of the income derived from an Interest Weighted
Security should be treated as OID and that the amount and rate of accrual of
such OID should be calculated by treating the Interest Weighted Security as a
Compound Interest Security. However, in the case of Interest Weighted
Securities that are entitled to some payments of principal and that are Regular
Interest Securities the IRS could assert that income derived from an Interest
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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,
<PAGE>
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
<PAGE>
adjusted such gain will generally be capital gain or loss, assuming that the
Security is held as a capital asset and will generally be long-term capital
gain or loss if the holding period of the security is one year or more.
Non-corporate taxpayers are subject to reduced maximum rates on long-term
capital gains and are generally subject to tax at ordinary income rates on
short-term capital gains. The deductibility of capital losses is subject to
certain limitations. Prospective investors should consult their own tax
advisors concerning these tax law provisions.
In the case of a Security held by a bank, thrift, or similar
institution described in section 582 of the Code, however, gain or loss
realized on the sale or exchange of a Regular Interest Security will be taxable
as ordinary income or loss. In addition, gain from the disposition of a Regular
Interest Security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of (i) the amount that
would have been includible in the holder's income if the yield on such Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of such holder's holding period, over the amount of ordinary income
actually recognized by the holder with respect to such Regular Interest
Security.
MISCELLANEOUS TAX ASPECTS
BACKUP WITHHOLDING. Subject to the discussion below with respect to
Trust Funds as to which a partnership election is made, a holder, other than a
holder of a REMIC Residual Security, may, under certain circumstances, be
subject to "backup withholding" at a rate of 31% with respect to distributions
or the proceeds of a sale of certificates to or through brokers that represent
interest or original issue discount on the Securities. This withholding
generally applies if the holder of a Security (i) fails to furnish the Trustee
with its taxpayer identification number ("TIN"); (ii) furnishes the Trustee an
incorrect TIN; (iii) fails to report properly interest, dividends or other
"reportable payments" as defined in the Code; or (iv) under certain
circumstances, fails to provide the Trustee or such holder's securities broker
with a certified statement, signed under penalty of perjury, that the TIN
provided is its correct number and that the holder is not subject to backup
withholding. Backup withholding will not apply, however, with respect to
certain payments made to holders, including payments to certain exempt
recipients (such as exempt organizations) and to certain Nonresidents (as
defined below). Holders should consult their tax advisers as to their
qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
The Trustee will report to the holders and to the Servicer for each
calendar year the amount of any "reportable payments" during such year and the
amount of tax withheld, if any, with respect to payments on the Securities.
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations
(the "NEW REGULATIONS") which make certain modifications to the withholding,
backup withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New Regulations will generally be effective for payments made
after December 31, 2000, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
<PAGE>
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds as to
which a partnership election is made, under the Code, unless interest
(including OID) paid on a Security (other than a Residual Interest Security) is
considered to be "effectively connected" with a trade or business conducted in
the United States by a nonresident alien individual, foreign partnership or
foreign corporation ("NONRESIDENTS"), in the opinion of Tax Counsel, such
interest will normally qualify as portfolio interest (except where (i) the
recipient is a holder, directly or by attribution, of 10% or more of the
capital or profits interest in the issuer, or (ii) the recipient is a
controlled foreign corporation to which the issuer is a related person) and
will be exempt from federal income tax. Upon receipt of appropriate ownership
statements, the issuer normally will be relieved of obligations to withhold tax
from such interest payments. These provisions supersede the generally
applicable provisions of United States law that would otherwise require the
issuer to withhold at a 30% rate (unless such rate were reduced or eliminated
by an applicable tax treaty) on, among other things, interest and other fixed
or determinable, annual or periodic income paid to Nonresidents. Holders of
Pass-Through Securities and Stripped Securities, including Ratio Strip
Securities, however, may be subject to withholding to the extent that the Loans
were originated on or before July 18, 1984.
Interest and OID of holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the holder. They will, however, generally be subject to the
regular United States income tax.
Payments to holders of Residual Interest Securities who are foreign
persons will generally be treated as interest for purposes of the 30% (or lower
treaty rate) United States withholding tax. Holders should assume that such
income does not qualify for exemption from United States withholding tax as
"portfolio interest." It is clear that, to the extent that a payment represents
a portion of REMIC taxable income that constitutes excess inclusion income, a
holder of a Residual Interest Security will not be entitled to an exemption
from or reduction of the 30% (or lower treaty rate) withholding tax rule. If
the payments are subject to United States withholding tax, they generally will
be taken into account for withholding tax purposes only when paid or
distributed (or when the Residual Interest Security is disposed of). The
Treasury has statutory authority, however, to promulgate regulations which
would require such amounts to be taken into account at an earlier time in order
to prevent the avoidance of tax. Such regulations could, for example, require
withholding prior to the distribution of cash in the case of Residual Interest
Securities that do not have significant value. Under the REMIC Regulations, if
a Residual Interest Security has tax avoidance potential, a transfer of a
Residual Interest Security to a Nonresident will be disregarded for all Federal
tax purposes. A Residual Interest Security has tax avoidance potential unless,
at the time of the transfer the transferor reasonably expects that the REMIC
will distribute to the transferee residual interest holder amounts that will
equal at least 30% of each excess inclusion, and that such amounts will be
distributed at or after the time at which the excess inclusions accrue and not
later than the calendar year following the calendar year of accrual. If a
Nonresident transfers a Residual Interest Security to a United States person,
and if the transfer has the effect of allowing the transferor to avoid tax on
accrued excess inclusions, then the transfer is disregarded and the transferor
continues to be treated as the owner of the Residual Interest Security for
purposes of the withholding tax provisions of the Code. See "--Residential
Interest Securities--EXCESS INCLUSIONS" above.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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, a
division of The McGraw-Hill Companies, Inc., Moody's Investors Service, Inc.,
Duff & Phelps Inc. Credit Rating Co. or Fitch IBCA, Inc. (the "Exemption
Rating Agencies"). 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 its counsel concerning the impact of ERISA and
the Code, the applicability of PTE 83-1 and the Underwriter Exemption, and the
potential consequences in its specific circumstances, prior to making such
investment. Moreover, each Plan fiduciary should 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 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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
withdrawn due to any erosion in the adequacy of the value of the Trust Fund
Assets or any credit enhancement with respect to a Series, such rating might
also be lowered or withdrawn among other reasons, because of an adverse change
in the financial or other condition of a credit enhancement provider or a
change in the rating of such credit enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a Series of Securities will be determined on the basis of
criteria established by each Rating Agency rating classes of such Series. Such
criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. Such analysis is often the basis upon which
each Rating Agency determines the amount of credit enhancement required with
respect to each such class. There can be no assurance that the historical data
supporting any such actuarial analysis will accurately reflect future
experience nor any assurance that the data derived from a large pool of
mortgage loans accurately predicts the delinquency, foreclosure or loss
experience of any particular pool of Loans. No assurance can be given that
values of any Properties have remained or will remain at their levels on the
respective dates of origination of the related Loans. If the residential real
estate markets should experience an overall decline in property values such
that the outstanding principal balances of the Loans in a particular Trust Fund
and any secondary financing on the related Properties become equal to or
greater than the value of the Properties, the rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In additional, adverse economic conditions
(which may or may not affect real property values) may affect the timely
payment by mortgagors of scheduled payments of principal and interest on the
Loans and, accordingly, the rates of delinquencies, foreclosures and losses
with respect to any Trust Fund. To the extent that such losses are not covered
by credit enhancement, such losses will be borne, at least in part, by the
holders of one or more classes of the Securities of the related Series.
<PAGE>
INDEX OF DEFINED TERMS
Accrual Securities...........................................................28
Additional Obligations......................................................112
Agreement....................................................................14
APR..........................................................................17
Asset Conservation Act.......................................................66
Available Funds..............................................................27
Average Interest Rate.......................................................112
Bankruptcy Bond..............................................................39
BIF..........................................................................49
Book-Entry Securities........................................................32
Cash Flow Bond Method........................................................93
Cede.........................................................................33
CEDEL........................................................................33
CEDEL Participants...........................................................34
CERCLA.......................................................................66
Certificates.................................................................13
Code.........................................................................79
Collateral Value.............................................................18
Combined Loan-to-Value Ratio.................................................18
Contingent Regulations.......................................................82
Cooperative..................................................................35
Cut-off Date.................................................................13
Debt Securities..............................................................80
Definitive Security..........................................................33
Detailed Description.........................................................14
Determination Date...........................................................27
DOL.........................................................................109
DOL Permitted Investments...................................................113
DTC..........................................................................33
Eligible Corporations.......................................................105
Euroclear....................................................................33
Euroclear Participants.......................................................35
European Depositaries........................................................33
FASCO........................................................................20
FASIT Qualification Test....................................................105
FDIC.........................................................................49
Financial Intermediary.......................................................33
Garn-St. Germain Act.........................................................69
GCM.........................................................................115
High-Yield Interest.........................................................105
Home Equity Loans............................................................14
Home Improvement Contracts...................................................14
Home Improvements............................................................14
HUD..........................................................................41
<PAGE>
Indenture....................................................................24
Installment Contract.........................................................72
Insurance Proceeds...........................................................50
Insured Expenses.............................................................50
Interest Weighted Securities.................................................84
IO 105
IRS..........................................................................82
Liquidation Expenses.........................................................50
Liquidation Proceeds.........................................................50
Loan Rate....................................................................15
Mark-to-Market Regulations...................................................91
Morgan.......................................................................33
Mortgage.....................................................................48
NCUA........................................................................114
New Regulations..............................................................95
Nonresidents.................................................................96
Notes........................................................................13
Obligations.................................................................112
OID..........................................................................80
OID Regulations..............................................................80
PABS Agreement...............................................................18
PABS Issuer..................................................................18
PABS Servicer................................................................18
PABS Trustee.................................................................18
Participants.................................................................33
Parties in Interest.........................................................109
Pass-Through Rate............................................................13
Pass-Through Securities......................................................91
Pay-Through Security.........................................................82
Permitted Investments........................................................50
Plans.......................................................................108
Policy Statement............................................................114
Pool.........................................................................13
Pool Insurance Policy........................................................40
Pool Insurer.................................................................40
Pooling and Servicing Agreement..............................................24
Pre-Funded Amount............................................................51
Pre-Funding Account..........................................................51
Pre-Funding Limit...........................................................112
Pre-Funding Period..........................................................112
Premium......................................................................77
Prepayment Assumption........................................................82
Primary Insurer..............................................................56
Principal Prepayments........................................................29
Properties...................................................................15
Property Improvement Loans...................................................75
PTE 83-1....................................................................109
<PAGE>
Purchase Price...............................................................23
Rating Agency...............................................................116
Ratio Strip Securities.......................................................93
RCRA.........................................................................67
Record Date..................................................................25
Refinance Loan...............................................................18
Regular Interest Securities..................................................80
Relevant Depositary..........................................................33
Relief Act...................................................................73
REMIC........................................................................26
Reserve Account..............................................................26
Residual Interest Security...................................................88
Retained Interest............................................................24
Rules........................................................................33
SAIF.........................................................................49
SEC..........................................................................20
Security Account.............................................................49
Security Owners..............................................................33
Security Register............................................................25
Sellers......................................................................13
Senior Securities............................................................37
Servicing Agreement..........................................................13
Servicing Fee................................................................91
Short-Term Note..............................................................97
Single Family Properties.....................................................15
Single Family Securities....................................................109
Small Mixed-Use Properties...................................................17
SMMEA.......................................................................113
Special Hazard Insurance Policy..............................................38
Special Hazard Insurer.......................................................38
Stripped Securities..........................................................91
Sub-Servicers................................................................13
Sub-Servicing Account........................................................49
Sub-Servicing Agreement......................................................51
Support Agreement............................................................30
Support Servicer.............................................................30
Tax Counsel..................................................................79
Terms and Conditions.........................................................35
TIN..........................................................................95
Title I Loans................................................................75
Title I Program..............................................................75
Title V......................................................................70
Trust Agreement..............................................................14
Trust Fund...................................................................13
Trust Fund Assets............................................................13
Trustee......................................................................24
U.S. Person..................................................................80
<PAGE>
UCC..........................................................................70
Underwriter Exemption.......................................................111
VA Guaranty Policy...........................................................42
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.*
The following table sets forth the estimated expenses to be incurred
in connection with the offering of the Securities, other than underwriting
discounts and commissions:
SEC Registration Fee.............................. $556,000
Trustee's Fees and Expenses....................... 71,000
Printing and Engraving............................ 179,000
Legal Fees and Expenses........................... 536,000
Blue Sky Fees..................................... 87,000
Accounting Fees and Expenses...................... 179,000
Rating Agency Fees................................ 435,000
Miscellaneous..................................... 87,000
Total............................................. $2,130,000
==========
- --------------------------
* All amounts, except the SEC Registration Fee, are estimates of
aggregate expenses incurred or to be incurred in connection with the issuance
and distribution of Securities in an aggregate principal amount assumed for
these purposes to be equal to $2,000,000,000 of Securities registered hereby.
Item 15. Indemnification of Directors and Officers.
Under Section 8(b) of the proposed form of Underwriting Agreement,
the Underwriters are obligated under certain circumstances to indemnify
certain controlling persons of the Registrant against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Act").
The Registrant's Restated Certificate of Incorporation provides for
indemnification of directors and officers of the Registrant to the full extent
permitted by Delaware law.
Section 145 of the Delaware General Corporation Law provides, in
substance, that Delaware corporations shall have the power, under specified
circumstances, to indemnify their directors, officers, employees and agents in
connection with actions, suits or proceedings brought against them by a third
party or in the right of the corporation, by reason of the fact that they were
or are such directors, officers, employees or agents, against expenses
incurred in any such action, suit or proceeding. The Delaware General
Corporation Law also provides that the Registrant may purchase insurance on
behalf of any such director, officer, employee or agent.
Item 16. Exhibits.
(a) Financial Statements:
None.
(b) Exhibits:
1.1 Form of Underwriting Agreement.*
3.1 Restated Certificate of Incorporation of the Registrant.*
3.2 By-laws of the Registrant.*
4.1 Forms of Pooling and Servicing Agreement.*
4.2 Form of Trust Agreement.*
4.3 Form of Indenture.*
5.1 Opinion of Brown & Wood LLP as to legality of the Securities.
8.1 Opinion of Brown & Wood LLP as to certain tax matters.
10.1 Form of Mortgage Loan Purchase Agreement.*
23.1 Consent of Brown & Wood (included in Exhibits 5.1 and 8.1 hereto)
24.1 Powers of Attorney (included on Page II-4)
25.1 Statement of Eligibility and Qualification of Trustee.**
- ----------------------
* Filed as an exhibit to Registration Statement No. 333-44067
on Form S-3 and incorporated herein by reference.
** To be filed on Form 8-K, as applicable.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the termination
of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to Section 15(d) of the Securities Exchange Act of 1934, as amended), that is
incorporated by reference in the registration statement shall be deemed a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers
and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act of 1933, as amended, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933, as
amended, and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Greenwich, Connecticut, on the 11th day of
August, 1999.
FINANCIAL ASSET SECURITIES CORP.
By: /s/ Robert J. McGinnis
---------------------------
Robert J. McGinnis
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of John Anderson, James Esposito and Paul
Stevelman, or any of them, his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him or her and
his or her name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Robert J. McGinnis President (Principal Executive August 11, 1999
- ---------------------- Officer)
Robert J. McGinnis
/s/ Laura J. Herrington
- ----------------------- Senior Vice President and Controller August 11, 1999
Laura J. Herrington (Principal Financial and Accounting
/s/ Jay N. Levine Officer)
Jay N. Levine Director and Managing Director August 11, 1999
- ----------------------
/s/ John C. Anderson
John C. Anderson Director and Senior Vice President August 11, 1999
- ----------------------
/s/ David R. Jones
David R. Jones Director August 11, 1999
</TABLE>
EXHIBIT 5.1
August 11, 1999
Financial Asset Securities Corp.
600 Steamboat Road
Greenwich, Connecticut 06830
Re: Financial Asset Securities Corp.
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel for Financial Asset Securities Corp., a
Delaware corporation (the "Company"), in connection with the preparation of
the registration statement on Form S-3 (the "Registration Statement") relating
to the Securities (defined below) and with the authorization and issuance from
time to time in one or more series (each, a "Series") of up to $2,000,000,000
aggregate principal amount of asset-backed securities (the "Securities"). As
set forth in the Registration Statement, each Series of Securities will be
issued under and pursuant to the terms of a separate pooling and servicing
agreement, master pooling and servicing agreement, pooling agreement, trust
agreement or indenture (each, an "Agreement") among the Company, a trustee
(the "Trustee") and, where appropriate, a servicer (the "Servicer"), each to
be identified in the prospectus supplement for such Series of Securities.
We have examined copies of the Company's Restated Certificate of
Incorporation, the Company's By-laws and forms of each Agreement, as filed or
incorporated by reference as exhibits to the Registration Statement, and the
forms of Securities included in any Agreement so filed or incorporated by
reference in the Registration Statement and such other records, documents and
statutes as we have deemed necessary for purposes of this opinion.
Based upon the foregoing, we are of the opinion that:
1. When any Agreement relating to a Series of Securities has been
duly and validly authorized by all necessary action on the part of the Company
and has been duly executed and delivered by the Company, the Servicer, if any,
the Trustee and any other party thereto, such Agreement will constitute a
legal, valid and binding agreement of the Company, enforceable against the
Company in accordance with its terms, except as enforcement thereof may be
limited by bankruptcy, insolvency or other laws relating to or affecting
creditors' rights generally or by general equity principles.
2. When a Series of Securities has been duly authorized by all
necessary action on the part of the Company (subject to the terms thereof
being otherwise in compliance with applicable law at such time), duly executed
and authenticated by the Trustee for such Series in accordance with the terms
of the related Agreement and issued and delivered against payment therefor as
described in the Registration Statement, such Series of Securities will be
legally and validly issued, fully paid and nonassessable, and the holders
thereof will be entitled to the benefits of the related Agreement.
In rendering the foregoing opinions, we express no opinion as to the
laws of any jurisdiction other than the laws of the State of New York
(excluding choice of law principles therein) and the federal laws of the
United States of America.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the references to this firm under the heading
"Legal Matters" in the prospectus forming a part of the Registration Statement
and the forms of prospectus supplement related thereto, without admitting that
we are "experts" within the meaning of the Securities Act of 1933, as amended,
or the Rules and Regulations of the Commission issued thereunder, with respect
to any part of the Registration Statement, including this exhibit.
Very truly yours,
/s/ Brown & Wood LLP
Exhibit 8.1
August 11, 1999
Financial Asset Securities Corp.
600 Steamboat Road
Greenwich, Connecticut 06830
Re: Financial Asset Securities Corp.
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as special tax counsel for Financial Asset Securities
Corp., a Delaware corporation (the "Company"), in connection with the
preparation of the registration statement on Form S-3 (the "Registration
Statement") relating to the Securities (defined below) and with the
authorization and issuance from time to time in one or more series (each, a
"Series") of up to $2,000,000,000 aggregate principal amount of asset-backed
securities (the "Securities"). The Registration Statement is being filed with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended. As set forth in the Registration Statement, each Series of Securities
will be issued under and pursuant to the terms of a separate pooling and
servicing agreement, master pooling and servicing agreement, pooling
agreement, trust agreement or indenture (each an "Agreement") among the
Company, a trustee (the "Trustee") and, where appropriate, a servicer (the
"Servicer"), each to be identified in the prospectus supplement for such
Series of Securities.
We have examined the prospectus and forms of prospectus supplement
related thereto contained in the Registration Statement (each, a "Prospectus")
and such other documents, records and instruments as we have deemed necessary
for the purposes of this opinion.
In arriving at the opinion expressed below, we have assumed that each
Agreement will be duly authorized by all necessary corporate action on the
part of the Company, the Trustee, the Servicer (where applicable) and any
other party thereto for such Series of Securities and will be duly executed
and delivered by the Company, the Trustee, the Servicer and any other party
thereto substantially in the applicable form filed or incorporated by
reference as an exhibit to the Registration Statement, that each Series of
Securities will be duly executed and delivered in substantially the forms set
forth in the related Agreement filed or incorporated by reference as an
exhibit to the Registration Statement, and that Securities will be sold as
described in the Registration Statement.
As special tax counsel to the Company, we have advised the Company
with respect to certain material federal income tax aspects of the proposed
issuance of each Series of Securities pursuant to the related Agreement. Such
advice has formed the basis for the description of selected federal income tax
consequences for holders of such Securities that appear under the headings
"Certain Federal Income Tax Consequences" in each Prospectus forming a part of
the Registration Statement. Such description does not purport to discuss all
possible federal income tax ramifications of the proposed issuance of the
Securities, but with respect to those federal income tax consequences
described therein, such description is accurate in all material respects.
This opinion is based on the facts and circumstances set forth in the
Registration Statement and in the other documents reviewed by us. Our opinion
as to the matters set forth herein could change with respect to a particular
Series of Securities as a result of changes in facts or circumstances, changes
in the terms of the documents reviewed by us, or changes in the law subsequent
to the date hereof. Because the Prospectuses contemplate Series of Securities
with numerous different characteristics, you should be aware that the
particular characteristics of each Series of Securities must be considered in
determining the applicability of this opinion to a particular Series of
Securities.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the references to this firm under the heading
"Certain Federal Income Tax Consequences" in each Prospectus forming a part of
the Registration Statement, without admitting that we are "experts" within the
meaning of the 1933 Act or the Rules and Regulations of the Commission issued
thereunder, with respect to any part of the Registration Statement, including
this exhibit.
Very truly yours
/s/ Brown & Wood LLP
