Prospectus Supplement
---------------------
To Prospectus dated October 13, 2000
OPTION ONE MORTGAGE LOAN TRUST 2000-5
$237,001,000 (APPROXIMATE)
ASSET-BACKED CERTIFICATES, SERIES 2000-5, CLASS A
[LOGO]
FINANCIAL ASSET SECURITIES CORPORATION OPTION ONE MORTGAGE CORPORATION
DEPOSITOR MASTER SERVICER
THE TRUST IS OFFERING THE CLASS A CERTIFICATES WITH THE FOLLOWING
CHARACTERISTICS:
Initial Pass- Final Scheduled
Principal Balance Through Rate Payment Date
One-Month LIBOR +
$237,001,000(1) 0.25% per annum (2) August 20, 2030
-----------------------
(1) Approximate
(2) Subject to limitation or increase as described herein.
WE SUGGEST THAT YOU READ The property of the trust consists of a
THE SECTION ENTITLED "RISK pool of adjustable rate, first lien
FACTORS" STARTING ON PAGE sub-prime residential mortgage loans. THE
S-7 OF THIS PROSPECTUS OFFERED CERTIFICATES The pass-through
SUPPLEMENT AND PAGE 8 OF rate on the class A certificates is
THE PROSPECTUS AND CONSIDER subject to a cap. The pass-through rate
THESE FACTORS BEFORE MAKING on the class A certificates will step up
A DECISION TO INVEST IN in the event that the clean-up call is
THE CERTIFICATES. not exercised.
Interest and principal on the class A
These certificates represent certificates are scheduled to be paid
non-recourse obligations of monthly on the 20th day of the month, or
the trust only and are not the next business day. The first
interests in or obligations scheduled payment date is November 20,
of any other person or entity. 2000.
THE NON-OFFERED CERTIFICATES
Neither these certificates The class S certificates will accrue
nor the underlying mortgage interest for 36 months on their notional
loans will be insured or amount at a fixed pass-through rate that
guaranteed by any governmental will decline after 12 months and 24
agency or instrumentality. months. The class P certificates are
entitled to receive all collected
This prospectus supplement prepayment penalties. The class BIO
may be used to offer and sell certificates will receive all excess
the certificates only if cashflow not applied to other purposes.
accompanied by the prospectus. The class X certificates are entitled to
receive all excess amounts released from
the reserve account. The class R
certificates represent an interest in the
REMIC residuals. CREDIT ENHANCEMENT A
majority of the mortgage loans have
limited coverage under a modified
mortgage insurance policy.
Interest payments on the class A
certificates will be supported by cash
flows from certain interest rate cap
agreements for a limited time. The class
A certificates will have the benefit of
an insurance policy from Financial
Security Assurance Inc., which will
guarantee certain payments with respect
to the class A certificates.
The class A certificates will be
supported by an overcollateralization
feature. However, there will be no
initial overcollateralization. [FSA Logo] Delivery of the class A
certificates is expected to be made in book-entry form through the
facilities of The Depository Trust Company, Clearstream and the Euroclear
System on or about November 2, 2000.
The class A certificates will be offered by the underwriters from time to
time to the public in negotiated transactions or otherwise at varying
prices to be determined at the time of the related sale. Proceeds to the
depositor are anticipated to be approximately $236,307,122.00 from the sale
of the class A certificates before deducting expenses payable by the
depositor, estimated to be $500,000.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UBS WARBURG LLC PAINEWEBBER INCORPORATED
GREENWICH CAPITAL MARKETS, INC.
<PAGE>
S-2
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
We provide information to you about these securities in two
separate documents that progressively provide more detail: (1) the accompanying
prospectus, which provides general information, some of which may not apply to
this series of securities; and (2) this prospectus supplement, which describes
the specific terms of this series of securities.
This prospectus supplement does not contain complete
information about the offering of these securities. We suggest that you read
both this prospectus supplement and the prospectus in full. We cannot sell these
securities to you unless you have received both this prospectus supplement and
the prospectus.
TABLE OF CONTENTS
<PAGE>
SUMMARY.............................................3
RISK FACTORS........................................7
THE ORIGINATOR AND THE MASTER SERVICER.............11
General.........................................11
Underwriting Standards..........................12
Pending Consumer Mortgage Lending Proposals.....16
Pending Legislative Proposals...................16
DELINQUENCY AND LOSS INFORMATION...................16
USE OF PROCEEDS....................................19
THE MORTGAGE LOANS.................................19
General.........................................19
Mortgage Loan Statistics........................20
DESCRIPTION OF THE CERTIFICATES....................31
Pass-Through Rates..............................31
Distributions of Interest.......................33
Reserve Account.................................34
Supplemental Interest Payments..................34
Distributions of Principal......................34
Flow of Funds...................................34
Optional Termination............................35
Calculation of LIBOR............................35
CREDIT ENHANCEMENT.................................37
THE AGREEMENTS.....................................38
Formation of the Trust..........................38
Sale of Mortgage Loans..........................38
Advances........................................38
Termination of the Trust........................38
PREPAYMENT AND YIELD CONSIDERATIONS................39
Prepayments and Yields for Class A Certificates.39
THE CERTIFICATE INSURER............................43
Reinsurance.....................................43
Ratings.........................................43
Capitalization..................................44
Incorporation of Certain Documents by Reference.44
Insurance Regulation............................45
THE CERTIFICATE INSURANCE POLICY...................45
MATERIAL FEDERAL INCOME TAX CONSEQUENCES...........49
REMIC Elections.................................49
Special Tax Attributes..........................49
Net WAC Rate Carryover Amounts..................50
Information Reporting and Backup Withholding....51
STATE TAXES........................................51
ERISA CONSIDERATIONS...............................51
RATINGS............................................52
LEGAL INVESTMENT CONSIDERATIONS....................53
UNDERWRITING.......................................53
EXPERTS............................................54
LEGAL MATTERS......................................54
GLOSSARY...........................................55
<PAGE>
SUMMARY
o This summary highlights selected information from this prospectus supplement
and does not contain all of the information that you need to consider in making
your investment decision. To understand all of the terms of the offering of the
class A certificates, carefully read this entire prospectus supplement and the
accompanying prospectus.
o This summary provides an overview of structural provisions, calculations, cash
flows and other information to aid your understanding and is qualified by the
full description of the structural provisions, calculations, cash flows and
other information in this prospectus supplement and the accompanying prospectus.
TITLE OF SERIES
Option One Mortgage Loan Trust 2000-5, Asset-Backed Certificates, Series 2000-5.
SPONSOR
UBS Principal Finance LLC.
ORIGINATOR AND MASTER SERVICER
Option One Mortgage Corporation.
DEPOSITOR
Financial Asset Securities Corporation.
TRUSTEE
Wells Fargo Bank Minnesota, N. A.
THE TRUST
The depositor is forming the Option One Mortgage Loan Trust 2000-5 to hold a
pool of adjustable rate, first lien sub-prime residential mortgage loans. A
majority of the mortgage loans are covered by a limited mortgage insurance
policy. All of the mortgage loans were originated or acquired by the originator
or affiliates of the originator. The sponsor had previously purchased the
mortgage loans from the originator or an affiliate of the originator. The
depositor will purchase the mortgage loans from the sponsor and assign the
mortgage loans to the trustee for the benefit of the trust.
CERTIFICATE INSURER
The trustee will hold an insurance policy issued to it by Financial Security
Assurance Inc. guaranteeing payment of certain required monthly amounts due to
the owners of the class A certificates and the class S certificates.
CLASS A CERTIFICATES OFFERED
Option One Mortgage Loan Trust 2000-5, Asset-Backed Certificate, Series 2000-5,
Class A to be issued with an initial principal balance of $237,001,000 and a per
annum pass-through rate of one-month LIBOR plus a spread initially equal to
0.25%.
The class A certificates are subject to a cap on the pass-through rate.
The class A certificates are subject to an increase in the pass-through rate on
the payment date immediately following the month in which the clean-up call may
first be exercised.
The class A certificates will initially be issued in book-entry form through
DTC, Clearstream or Euroclear.
OTHER CERTIFICATES
The trust will also issue:
o senior, interest only class S certificates;
o class P certificates which will receive all prepayment penalties which
are collected and will not be entitled to any distributions in respect of
interest;
S-3
<PAGE>
o class BIO certificates which will receive all excess cashflow not
applied to other purposes;
o class X certificates which will receive all excess money from the
reserve account not applied to other purposes; and
o class R certificates which represent an interest in the REMIC residual,
none of which are being offered by this prospectus supplement. The class S
certificates, the class P certificates, the class BIO certificates, the
class X certificates and the class R certificates will initially be held by
a newly formed Delaware business trust.
CUT-OFF DATE
As of the close of business on October 1, 2000.
CLOSING DATE
On or about November 2, 2000.
FINAL SCHEDULED PAYMENT DATE
Although it is anticipated that the actual final payment date for each class
will occur earlier than the final scheduled payment date, the final scheduled
payment date for the class A certificates is August 20, 2030.
THE MORTGAGE LOANS
The mortgage loans owned by the trust will consist of a pool of adjustable rate,
first lien sub-prime residential mortgage loans.
See "THE MORTGAGE LOANS" for statistical information about the mortgage loans.
DISTRIBUTIONS
Owners of class A certificates will be entitled to receive payments of interest
each month. Owners of class A certificates may not necessarily receive a
distribution of principal in any given month. The amount of principal the owners
of class A certificates will be entitled to receive will vary depending on a
number of factors, including the payments received on the mortgage loans.
Distributions will be made on each payment date to the owners of the class A
certificates as of the record date. The record date for the class A certificates
is the business day immediately preceding the payment date, unless the class A
certificates are issued in definitive form, in which case the record date shall
be the last business day of the prior calendar month.
Owners of class A certificates will receive payments on the 20th day of each
month, or, if such day is not a business day, on the next business day. The
first payment date is November 20, 2000.
On each payment date the funds available to be distributed will be applied in
the following order of priority:
o FIRST, to pay fees and expenses of the trust due to the master
servicer, the trustee and the certificate insurer and mortgage
insurance premiums, if applicable,
o SECOND, to pay interest on the class A certificates and class S
certificates;
o THIRD, to reimburse the certificate insurer;
o FOURTH, to pay principal of the class A certificates;
o FIFTH, to make a distribution to the owners of the subordinate
certificates, a portion of which may be supplemental interest to the
class A certificateholders, in an amount equal to the reduction in
class A interest caused by the application of the cap on the pass
through rate on the class A certificates.
S-4
<PAGE>
ADVANCES
The Master Servicer will make cash advances to cover delinquent payments of
principal and interest to the extent it reasonably believes that the cash
advances are recoverable from future payments on the 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.
CREDIT ENHANCEMENT
Credit enhancement refers to a mechanism that is intended to protect the owners
of the class A certificates against losses due to defaults on the mortgage
loans.
The class A certificates have the benefit of the following six types of credit
enhancement:
o the use of excess interest to cover losses and to distribute principal
in order to create overcollateralization;
o the subordination of distributions on the subordinate certificates to
the reqzuired distributions on the class A certificates;
o the allocation of losses on the mortgage loans to the subordinate
certificates;
o a modified mortgage insurance policy;
o one or more interest rate cap agreements, the proceeds of which will
be paid into the reserve account; and
o the certificate insurance policy.
OPTIONAL TERMINATION
The master servicer or, if the master servicer fails to, the certificate
insurer, will have the right to exercise a clean-up call on any payment date
that the outstanding principal balance of the mortgage loans is less than or
equal to 10% of the aggregate principal balance of the mortgage loans as of the
cut-off date. The purchase price for the mortgage loans must include an amount
sufficient to pay all amounts then due to the class A certificateholders.
This clean-up call will result in the optional early retirement of the class A
certificates at a price of par plus accrued interest.
DENOMINATIONS
The trust will issue the class A certificates in book-entry form in minimum
denominations of $50,000 and integral multiples of $1 in excess thereof.
RATINGS
The class A certificates will be rated Aaa by Moody's Investors Service, Inc.,
AAA by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. and AAA
by Fitch, Inc.
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 a rating agency.
FEDERAL TAX ASPECTS
Dewey Ballantine LLP is special tax counsel to the sponsor and is of the opinion
that:
o the trust will be treated as a real estate mortgage investment
conduit, or REMIC, for federal income tax purposes, and
o the class A certificates will be REGULAR INTERESTS in the REMIC and
will be treated as debt instruments of the REMIC for federal income
tax purposes.
ERISA CONSIDERATIONS
The class A certificates may be offered to pension, profit sharing and other
employee benefit plans subject to ERISA.
S-5
<PAGE>
LEGAL INVESTMENT CONSIDERATIONS
The class A certificates will be MORTGAGE RELATED SECURITIES under the Secondary
Mortgage Market Enhancement Act of 1984.
S-6
<PAGE>
RISK FACTORS
In addition to the matters described elsewhere in this
prospectus supplement and the prospectus, prospective investors may wish to
consider the following factors before deciding to invest in the class A
certificates.
THE CLASS A CERTIFICATES HAVE A CAP ON THEIR PASS-THROUGH RATE, WHICH MAY LIMIT
THE AMOUNT OF INTEREST YOU WILL RECEIVE
The class A certificates have a certificate interest rate
based on one-month LIBOR and is subject to a cap calculated based on the
weighted average of the mortgage rates on the mortgage loans net of certain fees
and expenses of the trust and a fraction of the class S pass-through rate and,
after the termination of the cap agreements, a margin of 0.25% per annum as
described under "Description of the Certificates--Pass-Through Rates". All of
the mortgage loans in the pool are adjustable-rate mortgage loans which have
coupon rates based on six-month LIBOR, and may have fixed coupon rates for the
first two or three years. Since the base indices for the coupon rates on the
adjustable-rate mortgage loans in the trust differ from the base index for the
certificate interest rate on the class A certificates, the weighted-average
coupon rate on the mortgage loans in the trust, net of fees and expenses and a
fraction of the class S pass-through rate and the margin described above, could
be below what would otherwise be the certificate interest rate on the
certificates, in which case the certificate interest rate would be capped at
that lower rate. This cap would reduce the amount of interest you, as an
investor in those certificates, will receive. Any reduction in interest on the
class A certificates as a result of the cap will be paid from amounts otherwise
payable to the holders of the subordinated certificates, and to the extent
unpaid, carried forward to subsequent payment dates. There is no assurance that
funds will be available to pay such amounts and such amounts are not covered by
the certificate insurance policy.
If, however, the class A pass-through rate calculated without
regard to any cap would exceed the weighted average of the maximum mortgage
rates on the mortgage loans net of certain fees and expenses of the trust and a
fraction of the class S pass-through rate and the margin as described under
"Description of the Certificates--Pass-Through Rates", that excess will not be
carried forward.
THE UNDERWRITING STANDARDS OF OPTION ONE MORTGAGE CORPORATION ARE NOT AS
STRINGENT AS THOSE USED BY FANNIE MAE AND FREDDIE MAC, WHICH MAY RESULT IN
LOSSES ON THE CLASS A CERTIFICATES
The originator's underwriting standards are primarily intended
to assess the value of the mortgaged property and to evaluate the adequacy of
such property as collateral for the mortgage loan and the applicant's credit
standing and ability to repay. The originator makes loans primarily to borrowers
who do not qualify for loans conforming to Fannie Mae and Freddie Mac guidelines
but who generally have equity in their property. While the originator's primary
consideration in underwriting a mortgage loan is the value and adequacy of the
mortgaged property as collateral, the originator also considers, among other
things, a mortgagor's credit history, repayment ability and debt
service-to-income ratio, as well as the type and use of the mortgaged property.
Although all of the mortgage loans held by the trust are first lien mortgages,
the originator's underwriting standards do not prohibit a mortgagor from
obtaining another, second-lien mortgage at the time of origination of the
originator's first lien. These second lien mortgages would reduce the equity the
mortgagor would otherwise have in the mortgaged property as indicated in the
originator's loan-to-value ratio determination.
As a result of these underwriting standards, the mortgage
loans held by the trust are likely to experience rates of delinquency,
foreclosure and bankruptcy that are higher, and that may be substantially
higher, than those experienced by mortgage loans underwritten in a more
traditional manner.
S-7
<PAGE>
Furthermore, changes in the values of mortgaged properties may
have a greater effect on the delinquency, foreclosure, bankruptcy and loss
experience of the mortgage loans in the mortgage pool than on mortgage loans
originated in a more traditional manner. The values of the mortgaged properties
may decrease from the levels in effect on the dates of origination of the
related mortgage loans. See "THE ORIGINATOR AND THE MASTER SERVICER --
UNDERWRITING STANDARDS; REPRESENTATIONS" in this prospectus supplement.
RATING OF THE OFFERED CERTIFICATES BASED PRIMARILY ON CLAIMS-PAYING ABILITY OF
THE CERTIFICATE INSURER
The ratings on the offered certificates depend primarily on
the claims paying ability of the certificate insurer. Therefore, a reduction of
the rating assigned to the claims paying ability of the certificate insurer may
have a corresponding reduction on the ratings assigned to the offered
certificates. In general, the ratings address credit risk and do not address the
likelihood of prepayments.
IF THE CERTIFICATE INSURER FAILS TO MEET ITS OBLIGATIONS UNDER THE POLICY,
HOLDERS OF THE OFFERED CERTIFICATES MAY EXPERIENCE A LOSS ON THEIR INVESTMENT
If the protection created by the mortgage insurance, the
excess interest, the overcollateralization and the interest rate cap agreements
is insufficient and the certificate insurer is unable to meet its obligations
under the policy, then you could experience a loss of some of your investment.
SOME OF THE MORTGAGE LOANS HAVE HIGH LOAN-TO-VALUE RATIOS WHICH MAY PRESENT A
GREATER RISK OF LOSS
Approximately 25.03% of the mortgage loans, by aggregate
cut-off date principal balance, had a loan-to-value ratio at origination in
excess of 80%. No mortgage loan has a loan-to-value ratio exceeding 95.00% at
origination. Mortgage loans with higher loan-to-value ratios may present a
greater risk of loss. In addition, an overall decline in the residential real
estate market, a rise in interest rates over a period of time and the general
condition of a mortgaged property, as well as other factors, may have the effect
of reducing the value of a mortgaged property from the appraised value at the
time the mortgage loan was originated. If there is a reduction in value of the
mortgaged property, the loan-to-value ratio may increase over what it was at the
time the mortgage loan was originated. This increase may reduce the likelihood
of liquidation or other proceeds being sufficient to satisfy the mortgage loan,
resulting in a loss. The loan-to-value ratio of any mortgage loan determined at
any time after origination may be less than or equal to its original
loan-to-value ratio. Additionally, the originator's determination of the value
of a mortgaged property used in the calculation of the original loan-to-value
ratios of the mortgage loans may differ from the appraised values of such
mortgaged properties or the actual values of such mortgaged properties at the
time of origination of the mortgage loans. See "THE MORTGAGE POOL " in this
prospectus supplement.
SOME OF THE MORTGAGE LOANS WILL BE DELINQUENT AS OF THE CUT-OFF DATE, WHICH MAY
PRESENT A GREATER RISK OF LOSS
Approximately 1.59% of the mortgage loans, by aggregate
principal balance as of the cut-off date, were 30 days or more but less than 60
days delinquent and approximately 0.48% of the mortgage loans, by aggregate
principal balance as of the cut-off date, were 60 days or more but less than 90
days delinquent in their monthly payments as of the close of business on
September 30, 2000. Delinquent mortgage loans are more likely to result in
losses on your certificates.
S-8
<PAGE>
THE MORTGAGE LOANS HAVE CERTAIN GEOGRAPHIC CONCENTRATIONS IN A NUMBER OF STATES,
WHICH MAY PRESENT A GREATER RISK OF LOSS IF CONDITIONS IN THOSE STATES BECOME
ADVERSE
Approximately 15.20%, 7.16%, 7.08%, 5.91%, 5.13%, 5.13% of the
mortgage loans, by aggregate cut-off date principal balance, are secured by
mortgaged properties located in the states of California, Massachusetts,
Florida, Illinois, New Jersey and New York, respectively. The single highest zip
code concentration in California represents approximately $1,059,493 or 0.45% of
mortgage loans, by aggregate cut-off date principal balance. In these states, if
the residential real estate market should experience an overall decline in
property values after the dates of origination of the mortgage loans, the rates
of delinquencies, foreclosures, bankruptcies and losses on the mortgage loans
may increase over historical levels of comparable type loans, and may increase
substantially. In addition, properties located in California may be more
susceptible than homes located in other parts of the country to certain types of
uninsured hazards, such as earthquakes, floods, mudslides and other natural
disasters.
THE CLASS A CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE ASSETS OF THE
TRUST
Neither the certificates nor the underlying mortgage loans
will be guaranteed or insured by any governmental agency or instrumentality, by
the depositor, the originator, the master servicer, the trustee or any of their
affiliates, or by any other person other than the mortgage insurer and the
certificate insurer. The assets of the trust will be the sole source of payments
on the certificates, and there will be no recourse to the sponsor, the
depositor, the originator, the master servicer, the trustee or any other entity
in the event that the assets of the trust are insufficient or otherwise
unavailable to make all required payments on the class A certificates.
THE RATE AND TIMING OF PRINCIPAL PAYMENTS ON THE CLASS A CERTIFICATES WILL BE
AFFECTED BY PREPAYMENT SPEEDS AND BY THE PRIORITY OF PAYMENT ON THE CERTIFICATES
The rate and timing of distributions allocable to principal on
the class A certificates will depend, in general, on the rate and timing of
principal payments, including prepayments, liquidations and repurchases on the
mortgage loans, and the allocation of these amounts to pay principal on the
certificates. As is the case with mortgage-backed securities generally, the
class A certificates are subject to substantial inherent cash-flow uncertainties
because the mortgage loans may be prepaid at any time. However, with respect to
approximately 88.26% of the mortgage loans, by aggregate cut-off date principal
balance, a prepayment may subject the mortgagor to a prepayment charge. A
prepayment charge may or may not act as a deterrent to prepayment of the
mortgage loan.
Generally, when prevailing interest rates are increasing,
prepayment rates on mortgage loans tend to decrease; a decrease in the
prepayment rates on the mortgage loans will result in a reduced rate of return
of principal to investors in the class A certificates at a time when
reinvestment at the higher prevailing rates would be desirable. On the other
hand, when prevailing interest rates are declining, prepayment rates on mortgage
loans tend to increase; an increase in the prepayment rates on the mortgage
loans will result in a greater rate of return of principal to investors in the
class A certificates at a time when reinvestment at comparable yields may not be
possible.
For further information regarding the effect of principal
prepayments on the weighted average lives of the class A certificates, see
"PREPAYMENT AND YIELD CONSIDERATIONS" in this prospectus supplement.
THE YIELD TO MATURITY ON THE CLASS A CERTIFICATES WILL DEPEND ON A VARIETY OF
FACTORS
The yield to maturity on the class A certificates will depend,
in general, on:
S-9
<PAGE>
o the variable pass-through rate on the class A certificates, as well as
the impact of the cap on the pass-through rate on the class A certificates;
o the purchase price paid for the class A certificates;
o the rate and timing of principal payments on the mortgage loans,
including prepayments, liquidations and repurchases and the allocation of these
amounts to reduce the principal balance of the various classes of certificates;
and
o the rate, timing and severity of losses on the mortgage loans;
adjustments to the mortgage rates on the mortgage loans, and the amount of
excess interest generated by the mortgage loans.
In general, if a certificate is purchased at a premium and
principal payments occur at a rate faster than anticipated at the time of
purchase, the investor's actual yield to maturity will be lower than that
assumed at the time of purchase. On the other hand, if a certificate is
purchased at a discount and principal payments occur at a rate slower than that
anticipated at the time of purchase, the investor's actual yield to maturity
will be lower than that originally assumed.
The proceeds to the depositor from the sale of the class A
certificates were determined based on a number of assumptions, including an
assumed rate of prepayments. The mortgage loans are unlikely to prepay at that
rate, and the actual rate of prepayment cannot be predicted with accuracy or
confidence. The yield assumptions for the class A certificates will vary as
determined at the time of sale.
VIOLATION OF VARIOUS FEDERAL AND STATE LAWS MAY RESULT IN LOSSES ON THE MORTGAGE
LOANS
State laws generally regulate interest rates and other
charges, require certain disclosure, and require licensing of Option One
Mortgage Corporation as both the originator and as master servicer. In addition,
other legal requirements relating to the protection of consumers, unfair and
deceptive practices and debt collection practices may apply to the origination,
servicing and collection of the mortgage loans.
The mortgage loans are also subject to federal laws,
including:
o the Federal Truth-in-Lending Act, which requires certain disclosures to
the borrowers regarding the terms of the mortgage loans;
o the Equal Credit Opportunity Act, which prohibits discriminatory lending;
o the Fair Credit Reporting Act, which regulates the use and reporting of
information related to the borrower's credit experience;
o the Depository Institutions Deregulation and Monetary Control Act of
1980, which preempts some state usury laws; and
o the Alternative Mortgage Transaction Parity Act of 1982, which preempts
some state lending laws which regulate adjustable rate mortgage and balloon
loans.
Violations of these laws may limit the ability of the trust to
collect all or part of the principal of or interest on the mortgage loans, and
may entitle the borrower to a refund of amounts previously paid, each of which
could subject the trust, as owner of the mortgage loan, to claims for damages
and administrative enforcement which could reduce collections by the trust and,
in addition,
S-10
<PAGE>
could subject Option One Mortgage Corporation to claims for damages
and administrative enforcement, which could impair its ability to act as master
servicer.
PREPAYMENT INTEREST SHORTFALLS AND RELIEF ACT SHORTFALLS
When a mortgage loan is prepaid, the borrower is charged
interest on the amount prepaid only up to the date on which the prepayment is
made, rather than for an entire month. This may result in a shortfall in
interest collections available for payment on the next payment 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 amount of the master
servicer's servicing fee for the related calendar month. If this shortfall
exceeds the portion covered by the master servicer, the amount of interest paid
on the offered certificates will be reduced and will not be covered by the
certificate insurer, adversely affecting the yield on your investment.
In addition, certain shortfalls in interest collections
arising from the application of the Soldiers' and Sailors' Civil Relief Act of
1940 will not be covered by either the master servicer or the certificate
insurer and will adversely affect the yield on your investment.
THE LIQUIDITY OF YOUR CERTIFICATES MAY BE LIMITED
The underwriters have no obligation to make a secondary market
in the class A certificates. There is no assurance that a secondary market will
develop or, if it develops, that it will continue. Consequently, you may not be
able to sell your certificates readily or at prices that will enable you to
realize your desired yield. The market values of the certificates are likely to
fluctuate; these fluctuations may be significant and could result in significant
losses to you.
The secondary markets for asset-backed securities have
experienced periods of illiquidity in the past, 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.
------------------------
You can find a glossary of some of the defined terms used in
this prospectus supplement beginning on page S-55.
THE ORIGINATOR AND THE MASTER SERVICER
GENERAL
The information set forth in the following paragraphs has been
provided by Option One Mortgage Corporation. None of the depositor, the trustee,
the certificate insurer, the sponsor, the underwriters or any of their
affiliates has made or will make any representation as to the accuracy or
completeness of such information.
Option One Mortgage Corporation, a California corporation
headquartered in Irvine, California, will serve as the master servicer pursuant
to the pooling and servicing agreement for the mortgage loans.
Option One Mortgage Corporation was incorporated in 1992,
commenced receiving applications for mortgage loans under its regular lending
program in February 1993 and began funding
S-11
<PAGE>
such mortgage loans indirectly in the same month. The principal business of
Option One Mortgage Corporation is the origination, sale and servicing of
non-conforming mortgage loans.
Option One Mortgage Corporation is a wholly-owned subsidiary
of Block Financial, which is in turn a wholly-owned subsidiary of H&R Block,
Inc.
As of September 30, 2000, Option One Mortgage Corporation had
four loan origination centers in California, three loan origination centers in
each of Ohio and Illinois, two loan origination centers in each of Florida,
Massachusetts, Rhode Island, Texas and Virginia, one loan origination center in
each of Arizona, Colorado, Connecticut, Georgia, Indiana, Minnesota, New Jersey,
New York, North Carolina, Pennsylvania, Washington and Wisconsin, 41 retail
financial centers in 16 states and one telemarketing center in each of
California and Florida.
Option One Mortgage Corporation operates as a stand-alone
mortgage banking company and is a Freddie Mac approved servicer.
UNDERWRITING STANDARDS
The mortgage loans will have been originated generally in
accordance with Option One Mortgage Corporation's Guidelines (the "Option One
Guidelines"). On a case-by-case basis, exceptions to the Option One Guidelines
are made where compensating factors exist.
The Option One Guidelines are primarily intended to assess (i)
the value of the mortgaged property and to evaluate the adequacy of such
property as collateral for the mortgage loan and (ii) the creditworthiness of
the related mortgagor. The mortgage loans were also generally underwritten with
a view toward resale in the secondary market. The mortgage loans generally bear
higher rates of interest than mortgage loans that are originated in accordance
with Fannie Mae and Freddie Mac standards.
Each applicant completes an application which includes
information with respect to the applicant's liabilities, income, credit history,
employment history and personal information. The Option One Guidelines require a
credit report on each applicant from a credit reporting company. The report
typically contains information relating to such matters as credit history with
local and national merchants and lenders, installment debt payments and any
record of defaults, bankruptcies, repossessions or judgments. Mortgaged
properties that are to secure mortgage loans generally are appraised by
qualified independent appraisers. Such appraisers inspect and appraise the
subject property and verify that such property is in acceptable condition.
Following each appraisal, the appraiser prepares a report which includes a
market value analysis based on recent sales of comparable homes in the area and,
when deemed appropriate, replacement cost analysis based on the current cost of
constructing a similar home. All appraisers are required to conform to the
Uniform Standards of Professional Appraisal Practice adopted by the Appraisal
Standards Board of the Appraisal Foundation and are generally on forms
acceptable to Fannie Mae and Freddie Mac. The Option One Guidelines require a
review of the appraisal by a loan underwriter, who may request a written review
by an independent appraiser retained by Option One Mortgage Corporation.
The mortgage loans were originated consistent with and
generally conform to the Option One Guidelines' "Full Documentation," "Lite
Documentation" and "Stated Income Documentation" residential loan programs.
Under each of the programs, Option One reviews the applicant's source of income,
calculates the amount of income from sources indicated on the loan application
or similar documentation, reviews the credit history of the applicant,
calculates the debt service-to-income ratio to determine the applicant's ability
to repay the loan, reviews the type and use of the property being
S-12
<PAGE>
financed, and reviews the property. In determining the ability of the applicant
to repay the loan, a rate (the "Qualifying Rate") has been created under the
Option One Guidelines that generally is equal to the lesser of the fully indexed
interest rate on the loan being applied for or one percent above the initial
interest rate on such loan. The Option One Guidelines require that mortgage
loans be underwritten in a standardized procedure which complies with applicable
federal and state laws and regulations and requires Option One's underwriters to
be satisfied that the value of the property being financed, as indicated by an
appraisal and a review of the appraisal, currently supports the outstanding loan
balance. In general, the maximum loan amount for mortgage loans originated under
the programs is $350,000. Mortgage loans may, however, be originated generally
up to $950,000. The Option One Guidelines permits one- to four-family loans to
have loan-to-value ratios (each, an "LTV") at origination of generally up to 80%
(except as otherwise described below), depending on, among other things, the
purpose of the mortgage loan, a mortgagor's credit history, repayment ability
and debt service-to-income ratio, as well as the type and use of the property.
With respect to mortgage loans where the review of the appraisal results in a
valuation of the mortgaged property that is more than (i) 10% less in the case
of mortgage loans with LTV's less than or equal to 80% or (ii) 5% less in the
case of mortgage loans with LTV's in excess of 80%, the LTV of the related
mortgage loan is based on the valuation obtained in the review of the original
appraisal. With respect to mortgage loans secured by mortgaged properties
acquired by a mortgagor under a "lease option purchase," the LTV of the related
mortgage loan is based on the lower of the appraised value at the time of
origination of such mortgage loan or the sale price of the related mortgaged
property if the "lease option purchase price" was set less than 12 months prior
to origination and is based on the appraised value at the time of origination if
the "lease option purchase price" was set 12 months or more prior to
origination. There can be no assurance that the value of a Mortgaged Property
estimated in any appraisal or review is equal to the actual value of such
Mortgaged Property at the time of such appraisal or review. Furthermore, there
can be no assurance that the actual value of a Mortgaged Property has not
declined subsequent to the time of such appraisal or review.
The Option One Guidelines require that income be verified for
each applicant and that the source of funds (if any) required to be deposited by
the applicant into escrow under its various programs be as follows. Under the
Full Documentation program, applicants generally are required to submit
verification of stable income for 24 months (or, if the LTV is less than or
equal to 80%, for 12 months). Under the Lite Documentation Program, applicants
generally are required to submit 3 months' bank statements or a paystub as
verification of income. Under the Stated Income Documentation program, an
applicant may be qualified based upon monthly income as stated on the mortgage
loan application if the applicant meets certain criteria. All the foregoing
programs require that with respect to salaried employees there be a telephone
verification of the applicant's employment. Verification of the source of funds
(if any) required to be deposited by the applicant into escrow in the case of a
purchase money loan is generally required under the Full Documentation program
guidelines. No such verification is required under the other programs.
The Option One Guidelines have the following categories and
criteria for grading the potential likelihood that an applicant will satisfy the
repayment obligations of a mortgage loan:
"AA+" RISK. Under the "AA+" risk category, the applicant must
have generally repaid installment or revolving debt according to its terms. A
maximum of one 30-day late payment within the last 12 months is acceptable on an
existing mortgage loan and if the LTV is greater than 80%, no 60-day late
payments are allowed and the mortgage loan must be current at the time of
application and funding. If the LTV is greater than 80%, no charge-offs may have
been filed in the last 24 months and if the LTV is less than or equal to 80%, no
open charge-offs may remain open after the funding of the loan. No bankruptcy or
notice of default filings may have occurred during the preceding five years and
the borrower must have re-established a minimum of four trade lines, not
including mortgages, all paid as agreed for 24 months, if the LTV is greater
than 80% (or 80% under the Lite Documentation or Stated
S-13
<PAGE>
Income Documentation programs). If the LTV is less than or equal to 80%, no
bankruptcy or notice of default filings may have occurred during the preceding 3
years. A maximum LTV of 95% is permitted for a mortgage loan on a single family
owner-occupied property. The debt service-to-income ratio generally ranges from
45% or less depending on the Qualifying Rate. The applicant must have a FICO
Score of 620 or higher. A "FICO Score" is a statistical ranking of likely future
credit performance developed by Fair Isaac & Company and the three national
credit data repositories--Equifax, TransUnion and Experian.
"AA" RISK. Under the "AA" risk category, the applicant must
have generally repaid installment or revolving debt according to its terms. A
maximum of one 30-day late payment, and no 60-day late payments, within the last
12 months is acceptable on an existing mortgage loan. An existing mortgage loan
is not required to be current at the time the application is submitted. No open
collection accounts or charge-offs filed within the last 24 months may remain
open after the funding of the loan. No bankruptcies or foreclosures may have
occurred during the preceding three years; provided, however, that if the
borrower's chapter 13 bankruptcy has been discharged during the past three years
and the borrower has re-established a credit history otherwise complying with
the credit parameters set forth in this paragraph, then the borrower may qualify
for a mortgage loan on LTV's less than or equal to 80%. The mortgaged property
must be in at least average condition. A maximum LTV of 95% (or 80% for mortgage
loans originated under the Stated Income Documentation or Lite Documentation
programs) is permitted for a mortgage loan on a single family owner-occupied
property. A maximum LTV of 90% (or 80% for mortgage loans originated under the
Stated Income Documentation or Lite Documentation programs) is permitted for a
mortgage loan on an owner-occupied condominium or a maximum LTV of 80% (or 75%
for mortgage loans originated under the Lite Documentation program or 70% for
mortgage loans originated under the Stated Income Documentation program) is
permitted on an owner-occupied two- to four-family residential property (or 75%
for mortgage loans on a non-owner-occupied property under the Full Documentation
program or 70% for mortgage loans on a non-owner-occupied property under the
Lite Documentation program or 60% for mortgage loans on a non-owner-occupied
property under the Stated Income Documentation program). The debt
service-to-income ratio generally ranges from 45% or less to 55% or less
depending on the Qualifying Rate and the LTV.
"A" RISK. Under the "A" risk category, an applicant must have
generally repaid installment or revolving debt according to its terms. A maximum
of two 30-day late payments, and no 60-day late payments, within the last 12
months is acceptable on an existing mortgage loan. An existing mortgage loan is
not required to be current at the time the application is submitted. Minor
derogatory items are allowed as to non-mortgage credit, and a letter of
explanation may be required under the Full Documentation program. No open
collection accounts or open charge-offs filed within the last 24 months may
remain open after funding of the loan if the LTV is greater than 80%; if the LTV
is less than or equal to 80% up to $500 per account may remain open after
funding of the loan. No bankruptcies may have occurred during the preceding two
years; provided, however, that if the borrower's chapter 13 bankruptcy has been
discharged during the past two years and the borrower has re-established a
credit history otherwise complying with the credit parameters set forth in this
paragraph, then the borrower may qualify for a mortgage loan, if the LTV is less
than or equal to 80%. No foreclosures may have occurred during the preceding two
years. The mortgaged property must be in at least average condition. A maximum
LTV of 90% (or 80% for mortgage loans originated under the Stated Income
Documentation or Lite Documentation programs) is permitted for a mortgage loan
on a single family or condo owner-occupied property. A maximum LTV of 80% (or
75% for mortgage loans originated under the Lite Documentation program or 70%
for mortgage loans originated under the Stated Income Documentation program) is
permitted for a mortgage loan on an owner-occupied two- to four-family
residential property. A maximum LTV of 75% (or 70% for mortgage loans originated
under the Lite Documentation program or 60% for mortgage loans originated under
the Stated Income Documentation program) is permitted for a
S-14
<PAGE>
mortgage loan on a non-owner-occupied property. The debt service-to-income ratio
generally ranges from 45% or less to 55% or less depending on the Qualifying
Rate and the LTV.
"B" RISK. Under the "B" risk category, an applicant must have
generally repaid installment or revolving debt according to its terms. A maximum
of four 30-day late payments or, if the LTV is less than or equal to 80%, two
30-day and one 60-day late payments, within the last 12 months, is acceptable on
an existing mortgage loan. An existing mortgage loan is not required to be
current at the time the application is submitted. As to non-mortgage credit,
some prior defaults may have occurred, and a letter of explanation may be
required under the Full Documentation program. Generally, no more than $500 per
account, if the LTV is greater than 80%, or $1,500 per account if the LTV is
less than or equal to 80% in open charge-offs or collection accounts filed
within the last 24 months may remain open after the funding of the loan. No
bankruptcies or foreclosures by the applicant may have occurred during the
preceding 18 months if the LTV is less than or equal to 80% or 24 months if the
LTV is greater than 80%; provided, however, that if the borrower's chapter 13
bankruptcy has been discharged during the past 18 months and the borrower has
re-established a credit history otherwise complying with the credit parameters
set forth in this paragraph, then the borrower may qualify for a mortgage loan,
if the LTV is less than or equal to 80%. The mortgaged property must be in at
least average condition. A maximum LTV of 85% (or 80% for mortgage loans
originated under the Lite Documentation or Stated Income Documentation programs)
is permitted for a mortgage loan on an owner-occupied single family or
condominium property. A maximum LTV of 80% (or 75% for mortgage loans originated
under the Lite Documentation program or 65% for mortgage loans originated under
the Stated Income Documentation program) is permitted for a mortgage loan on an
owner-occupied two- to four- family residential property. A maximum LTV of 75%
(or 70% for mortgage loans originated under the Lite Documentation program or
60% for mortgage loans originated under the Stated Income Documentation program)
is permitted for a mortgage loan on a non-owner-occupied property. The debt
service-to-income ratio generally ranges from 45% or less to 55% or less
depending on the Quality Rate and the LTV.
"C" RISK. Under the "C" risk category, an applicant may have
experienced significant credit problems in the past. A maximum of six 30-day
late payments, one 60-day late payment and one 90-day late payment, within the
last 12 months is acceptable on an existing mortgage loan. However, more than
six 30-day late payments within the last 12 months are acceptable if there are
no 60-day or 90-day late payments within the last 12 months. An existing
mortgage loan is not required to be current at the time the application is
submitted. As to non-mortgage credit, significant prior defaults may have
occurred. No more than $3,000 per account is open charge-offs or collection
accounts filed within the last 24 months may remain open after the funding of
the loan. No bankruptcies or foreclosures by the applicant may have occurred
during the preceding 12 months; provided, however, that if the borrower's
chapter 13 bankruptcy has been discharged during the past 12 months and the
borrower has re-established a credit history otherwise complying with the credit
parameters set forth in this paragraph, then the borrower may qualify for a
mortgage loan. The mortgaged property must be in adequate condition. Generally,
a maximum LTV of 75% (or 70% for mortgage loans originated under the Lite
Documentation or Stated Income Documentation programs) for a mortgage loan on an
owner-occupied single family or condominium property is permitted. A maximum LTV
of 75% (or 70% for mortgage loans originated under the Lite Documentation
program or 65% for mortgage loans originated under the Stated Income
Documentation program) is permitted for a mortgage loan on an owner-occupied
two- to four-family residential property. A maximum LTV of 70% (or 65% for
mortgage loans originated under the Lite Documentation program) is permitted for
a mortgage loan on a non-owner-occupied property. The debt service-to-income
ratio generally ranges from 55% or less to 60% or less depending on the
Qualifying Rate and the LTV.
"CC" RISK. Under the "CC" risk category, an applicant may have
experienced significant credit problems in the past. As to mortgage credit,
mortgage delinquency, including foreclosure
S-15
<PAGE>
proceedings, will be considered on a case-by-case basis. As to non-mortgage
credit, significant prior defaults may have occurred. Open charge-offs or
collection accounts may remain open after the funding of the loan. The mortgaged
property may exhibit some deferred maintenance. A maximum LTV of 65% (or 60%
non-owner-occupied for mortgage loans originated under the Lite Documentation
program) is permitted for a mortgage loan on either an owner-occupied property
or a non-owner-occupied property. The debt service-to-income ratio generally is
60% or less depending on the Qualifying Rate and the LTV.
EXCEPTIONS. As described above, the foregoing categories and
criteria are guidelines only. On a case-by-case basis, it may be determined that
an applicant warrants a risk category upgrade, a debt service-to-income ratio
exception, a pricing exception, a loan-to-value exception or an exception from
certain requirements of a particular risk category (collectively called an
"upgrade" or an "exception"). An upgrade or exception may generally be allowed
if the application reflects certain compensating factors, among others: low LTV;
pride of ownership; a maximum of one 30-day late payment on all mortgage loans
during the last 12 months; stable employment or ownership of current residence
of five or more years. An upgrade or exception may also be allowed if the
applicant places a down payment through escrow of at least 20% of the purchase
price of the mortgaged property, or if the new loan reduces the applicant's
monthly aggregate mortgage payment by 25% or more. Accordingly, certain
mortgagors may qualify in a more favorable risk category that, in the absence of
such compensating factors, would satisfy only the criteria of a less favorable
risk category.
PENDING CONSUMER MORTGAGE LENDING PROPOSALS
Various legislative proposals and initiatives relating to the
banking and finance business have been or are expected to be introduced in the
federal and state legislatures. A number of these proposals may impact Option
One Mortgage Corporation's origination and servicing procedures.
PENDING LEGISLATIVE PROPOSALS
FEDERAL PROPOSALS. Recently, an FDIC discussion draft proposal
has been made public relating to capital requirements of subprime lenders. Under
the proposal, regulatory capital required to be held for certain mortgage or
other loans that are considered subprime would be increased.
The Secretary of Housing and Urban Development has established
a commission to study subprime lending practices and to recommend legislation.
The commission is made up of consumer advocates and representatives of relevant
government agencies and industry. The commission's recommendation is expected
before the end of the year.
Other federal legislative proposals and initiatives that could
impact Option One Mortgage Corporation's business include financial privacy
initiatives that would restrict the permissible use of customer-specific
financial and other credit information and statutory changes to the Real Estate
Settlement Procedures Act.
The form in which any of the foregoing federal proposals will
be adopted, if at all, cannot be predicted. Accordingly, the originators and the
master servicer have no way to determine what, if any, impact they will have on
their origination and servicing procedures in the future.
DELINQUENCY AND LOSS INFORMATION
The following tables set forth, as of December 31, 1997, 1998,
1999 and June 30, 2000, certain information relating to the delinquency
experience (including imminent foreclosures, foreclosures in progress and
bankruptcies) of one- to four-family residential mortgage loans included in
Option One
S-16
<PAGE>
Mortgage Corporation's entire servicing portfolio (which portfolio includes
mortgage loans originated under Option One Mortgage Corporation's guidelines and
mortgage loans that are subserviced for 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 has not been paid by the next scheduled due date for
such mortgage loan.
<TABLE>
<CAPTION>
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN THOUSANDS)
AT DECEMBER 31, 1997 AT DECEMBER 31, 1998
-------------------- --------------------
PERCENT PERCENT
PERCENT BY PERCENT BY
BY NO. BY DOLLAR BY NO. DOLLAR BY NO. BY DOLLAR BY NO. DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio...... 34,707 $3,407,167 N/A N/A 55,708 $5,601,703 N/A N/A
Period of Delinquency
30-59 Days........... 457 42,556 1.32 1.25 514 47,806 0.92 0.85
60-89 Days........... 222 20,364 0.64 0.60 276 25,731 0.50 0.46
90 days or more...... 1,099 100,238 3.17 2.94 1,161 101,984 2.08 1.82
----- -------- ---- ---- ----- --------- ---- ----
Total Delinquent Loans 1,778 $163,158 5.12% 4.79% 1,951 $ 175,521 3.50% 3.13%
----- ======== ==== ==== ===== ========= ==== ====
Loans in Foreclosure* 923 $ 83,726 2.66% 2.46% 939 $ 83,757 1.69% 1.50%
</TABLE>
================================================================================
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999 AT JUNE 30, 2000
-------------------- ----------------
PERCENT PERCENT
PERCENT BY PERCENT BY
BY NO. BY DOLLAR BY NO. DOLLAR BY NO. OF BY DOLLAR BY NO. OF DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
-------- ------ -------- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio...... 98,910 $9,924,101 N/A N/A 132,431 $13,327,695 N/A N/A
Period of Delinquency
30-59 Days........... 1,085 94,371 1.10 0.95 2,060 190,629 1.56 1.43%
60-89 Days........... 605 53,276 0.61 0.54 946 86,651 0.71 0.65%
90 days or more...... 2,167 193,290 2.19 1.95 3,206 293,923 2.42 2.21%
----- --------- ---- ---- ----- --------- ---- ----
Total Delinquent Loans 3,857 $ 340,937 3.90% 3.44% 6,212 $ 571,203 4.69% 4.29%
----- ========= ==== ==== ===== ========= ==== ====
Loans in Foreclosure* 1,983 $ 177,763 2.00% 1.79% 2,869 $ 267,121 2.17% 2.00%
</TABLE>
================================================================================
* Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
S-17
<PAGE>
<TABLE>
<CAPTION>
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
AT DECEMBER 31, 1997 AT DECEMBER 31, 1998 AT DECEMBER 31, 1999 AT JUNE 30, 2000
-------------------- -------------------- -------------------- ----------------
-------------------- -------------------- -------------------- ----------------
BY
BY NO. BY DOLLAR BY NO. BY DOLLAR BY NO. OF DOLLAR BY NO. BY DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------ ----- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio 34,707 $3,407,167 55,708 $5,601,703 98,910 $9,924.10 132,431 $13,327,695
Foreclosed Loans(1) 296 $ 26,313 336 $ 28,344 367 $ 28,940 547 $ 44,278
Foreclosure Ratio(2) 0.85% 0.77% 0.60% 0.51% 0.37% 0.29% 0.41% 0.33%
</TABLE>
----------------------------
(1) For the purpose of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title to which
has been acquired by Option One, by investors or by an insurer following
foreclosure or delivery of a deed in lieu of foreclosure.
(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, of mortgage loans in the Total Portfolio at the end of the
indicated period.
<TABLE>
<CAPTION>
LOAN LOSS EXPERIENCE ON OPTION ONE'S SERVICING PORTFOLIO OF MORTGAGE LOANS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
SIX MONTHS ENDED
1997 1998 1999 JUNE 30, 2000
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Total Portfolio(1) $ 3,407,167 $ 5,601,703 $ 9,924,101 $ 13,327,695
Net Losses(2)(3) $ 24,866 $ 22,135 $ 26,441 $ 17,722
Net Losses as a Percentage of
Total Portfolio(4) 0.73% 0.40% 0.27% 0.27%
</TABLE>
--------------------------------------------------------------------------------
(1) "Total Portfolio" on the date stated above is the principal balances of the
mortgage loans outstanding on the last day of the period.
(2) "Net Losses" means "Gross Losses" minus "Recoveries." "Gross Losses" are
actual losses incurred on liquidated properties for each respective period.
Losses are calculated after repayment of all principal, foreclosure costs
and accrued interest to the date of liquidation. "Recoveries" are recoveries
from liquidation proceeds and deficiency judgments.
(3) "Net Losses" are computed on a loan-by-loan basis and are reported with
respect to the period in which the loan is liquidated. If additional costs
are incurred or recoveries are received after the end of the period, the
amounts are adjusted with respect to the period in which the related loan
was liquidated. Accordingly, the Net Losses reported in the table may change
in future periods. The information in this table reflects costs and
recoveries through August 31, 2000.
(4) For June 30, 2000, "Net Losses as a Percentage of Total Portfolio" was
annualized by multiplying "Net Losses" by 2.0 before calculating the
percentage of "Net Losses as a Percentage of Total Portfolio".
It is unlikely that the delinquency experience of the mortgage
loans included in the mortgage pool will correspond to the delinquency
experience of Option One's mortgage portfolio set forth in the foregoing tables.
The statistics shown above represent the delinquency experience for Option One's
mortgage servicing portfolio only for the periods presented, whereas the
aggregate delinquency experience on the mortgage loans included in the mortgage
pool will depend on the results obtained over the life of the mortgage pool. In
particular, investors should note that newly originated mortgage loans will not
be added to the mortgage pool after the closing date, and the mortgage pool will
therefore consist
S-18
<PAGE>
of a static pool of mortgage loans, whereas new mortgage loans are continually
being originated and added to the pool for which such statistics above are
compiled. Accordingly, the actual loss and delinquency percentages with respect
to the mortgage pool are likely to be substantially higher than those indicated
in the tables above. In addition, 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 Option One Mortgage Corporation. Furthermore, adverse economic conditions may
affect the timely payment by borrowers of scheduled payments of principal and
interest on such mortgage loans and, accordingly, the actual rates of
delinquencies and foreclosures with respect to the mortgage pool.
USE OF PROCEEDS
Certificate net proceeds will be used by the depositor to
acquire the mortgage loans from the sponsor.
THE MORTGAGE LOANS
The information set forth in the following paragraphs has been
provided by the sponsor, based on information provided to it by the master
servicer. None of the depositor, the master servicer, the originator, the
underwriters, the trustee, the certificate insurer or any of their respective
affiliates have made or will make any representation as to the accuracy or
completeness of such information, other than any representations made by the
master servicer to the sponsor regarding the information provided to the sponsor
by the master servicer described above.
The statistical information presented in this prospectus
supplement relates to the mortgage loans only as of the cut-off date for those
mortgage loans. Unless otherwise noted, all statistical percentages set forth in
this prospectus supplement are measured as a percentage of the aggregate balance
of the mortgage loans or the number of mortgage loans in the pool as of the
cut-off date for those mortgage loans.
Certain information with respect to the mortgage loans is set
forth herein. Prior to the closing date, mortgage loans may be substituted
therefor. Some amortization of the mortgage loans may occur prior to the closing
date. Moreover, certain of the mortgage loans may prepay in full, or may be
determined not to meet the eligibility requirements for the final pool of
mortgage loans acquired by the trust on the closing date. The sponsor believes
that the information set forth herein is representative of the characteristics
of the mortgage pool as it will be constituted at the closing date, although
certain characteristics of the mortgage loans may vary.
GENERAL
The trust will consist of a pool of closed-end, first lien
adjustable-rate mortgage loans with principal balances that primarily do not
conform to Fannie Mae and Freddie Mac guidelines. The mortgage loans have
original terms to maturity ranging from 15 to 30 years and an aggregate
principal balance as of the cut-off date of approximately $237,001,865. All
mortgage loan statistics set forth herein are based on principal balances,
interest rates, terms to maturity, mortgage loan counts and similar statistics
as of the cut-off date. All weighted averages specified herein are based on the
principal balances of the mortgage loans as of the cut-off date, as adjusted for
the scheduled principal payments due on or before such date. The principal
balance of a mortgage loan, as of any date, is equal to the principal balance of
such mortgage loan at its origination, less the sum of scheduled and unscheduled
payments in respect of principal made on the mortgage loan. References to
percentages of the mortgage loans mean
S-19
<PAGE>
percentages based on the aggregate of the cut-off date principal balances of the
mortgage loans, unless otherwise specified.
The mortgage loans are subject to the "due-on-sale" provisions
included therein which provide that the mortgage loan is assumable by a
creditworthy purchaser of the related mortgaged property.
The depositor will purchase the mortgage loans from the
sponsor and the depositor will assign the mortgage loans to the trustee for the
benefit of the certificateholders.
Each of the mortgage loans in the mortgage pool was purchased
by the sponsor from the originator or its affiliates. The mortgage loans were
originated by the originator or acquired by the originator in the secondary
market in the ordinary course of its business and were underwritten or
re-underwritten by the originator in accordance with its underwriting standards
as described in "Option One Mortgage Corporation--Underwriting Standards."
The originator or the sponsor, as applicable, will make
certain representations and warranties to the trustee relating to certain
characteristics of the mortgage loans and, subject to certain limitations, will
be obligated to repurchase a mortgage loan as to which there exists deficient
documentation or an uncured breach of any such representation or warranty, if
such breach of any such representation or warranty materially and adversely
affects the certificateholders' interests in such mortgage loan. The originator
previously sold the mortgage loans without recourse, and the sponsor is selling
the mortgage loans without recourse; accordingly, neither the originator nor the
sponsor will have any obligation with respect to the certificates in its
capacity as originator or sponsor, as applicable, other than the repurchase
obligations described above.
Substantially all of the mortgage loans in the mortgage pool
have scheduled monthly payments due on the first day of the month.
MORTGAGE LOAN STATISTICS
The mortgage loans consist of approximately 2,136 mortgage
loans with an aggregate principal balance of approximately $237,001,865 as of
the cut-off date.
Approximately 88.26% of the mortgage loans provide for payment
by the borrower of a prepayment charge in limited circumstances on certain
prepayments. Generally, each such mortgage loan provides for payment of a
prepayment penalty on partial prepayments and prepayments in full made within a
stated number of months that is between 12 and 60 months from the date of
origination of such mortgage loan. The amount of the prepayment penalty is
provided in the related mortgage note and is generally equal to six months'
interest on any amounts prepaid in excess of 20% of the original principal
balance of the related mortgage loan in any 12 month period. The holders of the
class P certificates will be entitled to all prepayment penalties received on
the mortgage loans, and such amounts will not be available for distribution on
the other classes of certificates. Under certain circumstances, as described in
the pooling and servicing agreement, the master servicer may waive the payment
of any otherwise applicable prepayment penalty. Investors should conduct their
own analysis of the effect, if any, that the prepayment premiums, and decisions
by the master servicer with respect to the waiver thereof, may have on the
prepayment performance of the mortgage loans. The depositor makes no
representations as to the effect that the prepayment penalties, and decisions by
the master servicer with respect to the waiver thereof, may have on the
prepayment performance of the mortgage loans.
S-20
<PAGE>
The mortgage loans have original terms to maturity ranging
from 15 years to 30 years. The following statistical information is based upon
the cut-off date pool balance.
The mortgage loans are secured by mortgages or deeds of trust
or other similar security instruments creating first liens on one- to
four-family residential properties consisting of detached, attached or
semi-detached one to four-family dwelling units and individual condominium
units. Approximately 25.03% of the mortgage loans had loan-to-value ratios at
origination in excess of 80.00% and approximately 5.20% of the mortgage loans
had loan-to-value ratios at origination in excess of 90.00% but no mortgage loan
had a loan-to-value ratio at origination in excess of 95.00%. There can be no
assurance that the loan-to-value ratio of any mortgage loan determined at any
time after origination is less than or equal to its original loan-to-value
ratio. Additionally, the originator's determination of the value of a mortgaged
property used in the calculation of the original loan-to-value ratios of the
mortgage loans may differ from the appraised values of these mortgaged
properties or the actual values of such mortgaged properties at the time of the
origination of the mortgage loans.
Generally, the mortgage loans provide for semi-annual
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. The first adjustment for such mortgage loans will occur
after an initial period of two years in the case of 84.88% of the mortgage loans
and three years in the case of 15.12% of the mortgage loans. On each adjustment
date for each mortgage loan, the loan rate thereon will be adjusted to equal the
sum, rounded to the nearest or next highest multiple of 0.125%, of six-month
LIBOR and a fixed percentage amount which we refer to as the gross margin of
such mortgage loan. The loan rate on any mortgage loan will not increase by more
than an amount set forth in the related mortgage note, which is not more than
3.000% per annum on the first related adjustment date and 1.000% on any
adjustment date thereafter. The mortgage loans have a weighted average initial
periodic rate cap of approximately 2.999% per annum. Each loan rate on each
mortgage loan will not exceed a specified maximum loan rate over the life of
such mortgage loan or be less than a specified minimum loan rate over the life
of such mortgage loan. Effective with the first monthly payment due on each
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
(which may be LIBOR) and the related gross margin, rounded as described herein.
None of the mortgage loans will permit the related mortgagor to convert the
adjustable loan rate thereon to a fixed loan rate.
As of the cut-off date each mortgage loan accrues interest at
a loan rate of not less than 7.000% per annum and not more than 15.850% per
annum, and as of the cut-off date the weighted average loan rate of the mortgage
loans was approximately 10.338% per annum. As of the cut-off date, the mortgage
loans had gross margins ranging from 3.750% to 8.500%, minimum loan rates
ranging from 7.000% per annum to 15.850% per annum and maximum loan rates
ranging from 13.000% per annum to 21.850% per annum. As of the cut-off date, the
weighted average gross margin was approximately 5.754%, the weighted average
minimum loan rate was approximately 10.338% per annum and the weighted average
maximum loan rate was approximately 16.338% per annum. The latest next
adjustment date following the cut-off date on any mortgage loan occurs in July
2003 and the weighted average time until the next adjustment date for all of the
adjustable rate mortgage loans is approximately 22 months.
The weighted average remaining term to maturity of the
mortgage loans will be approximately 355 months as of the cut-off date. None of
the mortgage loans had a first due date prior to June 2000 or after August 2000
or will have a remaining term to maturity of less than 175 months or greater
than 30 years as of the cut-off date. The latest maturity date of any mortgage
loan is July 2030.
S-21
<PAGE>
The average principal balance of the mortgage loans at
origination was approximately $111,201. The average cut-off date principal
balance of the mortgage loans was approximately $110,956.
No mortgage loan had a cut-off date principal balance of
greater than approximately $624,778 or less than approximately $19,834. The
mortgage loans are expected to have the following characteristics as of the
cut-off date (the sum in any column may not equal the total indicated due to
rounding):
<TABLE>
<CAPTION>
CREDIT GRADES OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
CREDIT GRADE OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------ ----------------- ---------------- ----------------
<S> <C> <C> <C>
AA+ 10 $ 1,294,474.16 0.55%
AA 615 78,961,354.37 33.32
A 839 96,068,609.42 40.53
B 488 45,910,034.50 19.37
C 132 9,949,646.50 4.20
CC 52 4,817,745.79 2.03
----- --------------- ------
Total 2,136 $237,001,864.74 100.00%
===== =============== ======
</TABLE>
--------------------
(1) For a description of each credit grade, see "Option One Mortgage
Corporation - Underwriting Standards" herein.
<TABLE>
<CAPTION>
CUT-OFF DATE PRINCIPAL BALANCES OF THE MORTGAGE LOANS (1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PRINCIPAL BALANCE ($) OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
19,834 - 50,000 348 $ 13,396,208.06 5.65%
50,001 - 100,000 843 61,696,796.45 26.03
100,001 - 150,000 496 60,723,654.69 25.62
150,001 - 200,000 215 37,240,220.35 15.71
200,001 - 250,000 112 25,188,822.24 10.63
250,001 - 300,000 67 18,212,103.25 7.68
300,001 - 350,000 36 11,694,673.64 4.93
350,001 - 400,000 6 2,240,661.39 0.95
400,001 - 450,000 3 1,262,619.88 0.53
450,001 - 500,000 5 2,397,247.37 1.01
550,001 - 600,000 4 2,324,079.53 0.98
600,001 - 624,778 1 624,777.89 0.26
----- --------------- ------
Total 2,136 $237,001,864.74 100.00%
===== =============== ======
</TABLE>
--------------------
(1) The average cut-off date principal balance of the mortgage loans was
approximately $110,956.
S-22
<PAGE>
ORIGINAL TERMS TO MATURITY OF THE MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
CUT-OFF DATE PRINCIPAL BALANCES OF THE MORTGAGE LOANS (1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL TERM (MONTHS) OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
180 17 $ 858,934.57 0.36%
360 2,119 236,142,930.17 99.64
----- --------------- ------
Total 2,136 $237,001,864.74 100.00%
===== =============== ======
</TABLE>
--------------------
(1) The weighted average Original Term of the mortgage loans as of the cut-off
date was approximately 359 months.
<TABLE>
<CAPTION>
REMAINING TERMS TO MATURITY OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
REMAINING TERM (MONTHS) OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
175 - 176 17 $ 858,934.57 0.36%
355 - 356 2,019 226,339,319.76 95.50
357 100 9,803,610.41 4.14
----- --------------- ------
Total 2,136 $237,001,864.74 100.00%
===== =============== ======
</TABLE>
--------------------
(1) The weighted average Remaining Term of the mortgage loans as of the cut-off
date was approximately 355 months.
<TABLE>
<CAPTION>
PROPERTY TYPES OF THE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
Single Family Detached 1,606 $175,205,374.75 73.93%
PUD Detached 148 24,585,340.55 10.37
Condo Low-Rise Attached 114 11,725,006.67 4.95
2-4 Units Detached 92 11,092,819.30 4.68
Manufactured Housing 75 5,500,411.29 2.32
Condo High-Rise Attached 30 2,675,373.05 1.13
Single Family Attached 37 2,639,627.30 1.11
PUD Attached 22 1,950,920.71 0.82
2-4 Units Attached 11 1,384,682.40 0.58
Condo Low-Rise Detached 1 242,308.72 0.10
----- --------------- ------
Total 2,136 $237,001,864.74 100.00%
===== =============== ======
--------------------
</TABLE>
(1) PUD refers to a home or "unit" in a Planned Unit Development.
S-23
<PAGE>
<TABLE>
<CAPTION>
OCCUPANCY STATUS OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
Primary 1,987 $224,753,002.51 94.83%
Second Home 34 3,873,850.47 1.63
Non-owner 115 8,375,011.76 3.53
Total 2,136 $237,001,864.74 100.00%
</TABLE>
--------------------
(1) Occupancy as represented by the borrower at the time of origination.
<TABLE>
<CAPTION>
PURPOSE OF THE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PURPOSE OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
Purchase 1,018 $116,114,525.56 48.99%
Cash Out Refinance 906 98,162,332.64 41.42
Rate/Term Refinance 212 22,725,006.54 9.59
----- --------------- ------
Total 2,136 $237,001,864.74 100.00%
===== =============== ======
</TABLE>
S-24
<PAGE>
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS(1)(2)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL LOAN-TO-VALUE RATIO OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
10.53 - 15.00 1 $ 19,834.21 0.01%
15.01 - 20.00 2 137,742.17 0.06
20.01 - 25.00 7 236,626.68 0.10
25.01 - 30.00 3 159,414.80 0.07
30.01 - 35.00 11 507,873.81 0.21
35.01 - 40.00 9 909,400.12 0.38
40.01 - 45.00 18 1,136,515.17 0.48
45.01 - 50.00 30 2,609,578.53 1.10
50.01 - 55.00 40 4,067,866.08 1.72
55.01 - 60.00 53 4,683,918.23 1.98
60.01 - 65.00 116 11,487,532.42 4.85
65.01 - 70.00 194 21,198,427.59 8.94
70.01 - 75.00 295 31,172,983.42 13.15
75.01 - 80.00 916 99,342,555.34 41.92
80.01 - 85.00 88 10,836,363.41 4.57
85.01 - 90.00 267 36,174,059.61 15.26
90.01 - 95.00 86 12,321,173.15 5.20
----- --------------- ------
Total 2,136 $237,001,864.74 100.00%
===== =============== ======
------------------
</TABLE>
(1) The weighted average original loan-to-value ratio of the mortgage loans as
of the cut-off date was approximately 78.10%.
(2) For a description of the determination of loan-to-value ratio by the master
servicer see "Option One Mortgage Corporation - Underwriting Standards"
herein.
S-25
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
Arizona 56 $ 6,016,314.66 2.54%
Arkansas 1 35,668.35 0.02
California 196 36,035,433.82 15.20
Colorado 55 7,239,285.66 3.05
Connecticut 75 8,729,817.21 3.68
Delaware 11 1,087,635.95 0.46
District of Columbia 8 1,090,654.13 0.46
Florida 172 16,781,171.56 7.08
Georgia 66 6,464,508.64 2.73
Idaho 1 131,647.56 0.06
Illinois 122 14,011,709.26 5.91
Indiana 45 2,953,372.78 1.25
Iowa 2 93,955.94 0.04
Kansas 9 531,216.37 0.22
Kentucky 19 1,430,834.40 0.60
Louisiana 18 1,433,592.40 0.60
Maine 28 2,242,341.78 0.95
Maryland 42 5,360,096.79 2.26
Massachusetts 122 16,966,934.97 7.16
Michigan 84 7,496,255.95 3.16
Minnesota 56 6,655,543.46 2.81
Mississippi 5 281,510.32 0.12
Missouri 50 3,150,929.42 1.33
Nebraska 1 71,909.66 0.03
Nevada 33 4,135,916.89 1.75
New Hampshire 24 2,170,948.93 0.92
New Jersey 95 12,151,028.56 5.13
New Mexico 5 448,504.90 0.19
New York 91 12,168,627.62 5.13
North Carolina 41 3,137,426.44 1.32
North Dakota 1 105,992.74 0.04
Ohio 140 9,947,619.15 4.20
Oklahoma 7 328,732.45 0.14
Oregon 19 1,860,473.37 0.79
Pennsylvania 91 7,313,952.94 3.09
Rhode Island 18 1,640,524.39 0.69
South Carolina 18 1,705,708.03 0.72
Tennessee 11 976,492.52 0.41
Texas 73 7,853,025.32 3.31
Utah 16 1,539,204.22 0.65
Vermont 8 655,580.91 0.28
Virginia 75 9,313,649.49 3.93
Washington 61 8,292,738.79 3.50
West Virginia 4 265,141.11 0.11
Wisconsin 57 4,272,639.28 1.80
Wyoming 4 425,595.65 0.18
----- --------------- ------
Total 2,136 $237,001,864.74 100.00%
===== =============== ======
-------------------
</TABLE>
(1) The greatest ZIP Code geographic concentration of mortgage loans, by
cut-off date principal balance, was approximately 0.45% in the 94509 ZIP
Code.
S-26
<PAGE>
<TABLE>
<CAPTION>
DOCUMENTATION LEVEL OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
DOCUMENTATION LEVEL OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
Full Documentation 1,372 $152,159,694.73 64.20%
Stated Income Documentation 727 80,615,916.03 34.01
Lite Documentation 37 4,226,253.98 1.78
----- --------------- ------
Total 2,136 $237,001,864.74 100.00%
===== =============== ======
--------------------
</TABLE>
(1) For a description of each Documentation Level, see "Option One Mortgage
Corporation--Underwriting Standards" herein.
<TABLE>
<CAPTION>
LOAN RATES OF THE MORTGAGE LOANS(1)
DOCUMENTATION LEVEL OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN RATE (%) OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
7.000 1 $ 299,007.72 0.13%
7.001 -8.000 30 5,207,461.91 2.20
8.001 -9.000 198 24,960,060.91 10.53
9.001 -10.000 569 73,705,865.80 31.10
10.001 - 11.000 670 72,198,269.31 30.46
11.001 - 12.000 450 42,600,377.80 17.97
12.001 - 13.000 172 15,056,148.90 6.35
13.001 - 14.000 35 2,392,423.19 1.01
14.001 - 15.000 9 504,439.00 0.21
15.001 - 15.850 2 77,810.20 0.03
----- --------------- ------
Total 2,136 $237,001,864.74 100.00%
===== =============== ======
------------------
</TABLE>
(1) The weighted average loan rate of the mortgage loans as of the cut-off date
was approximately 10.338% per annum.
S-27
<PAGE>
<TABLE>
<CAPTION>
MAXIMUM LOAN RATES OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MAXIMUM LOAN RATE(%) OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
13.000 1 $ 299,007.72 0.13%
13.001 - 14.000 30 5,207,461.91 2.20
14.001 - 15.000 198 24,960,060.91 10.53
15.001 - 16.000 569 73,705,865.80 31.10
16.001 - 17.000 670 72,198,269.31 30.46
17.001 - 18.000 450 42,600,377.80 17.97
18.001 - 19.000 172 15,056,148.90 6.35
19.001 - 20.000 35 2,392,423.19 1.01
20.001 - 21.000 9 504,439.00 0.21
21.001 - 21.850 2 77,810.20 0.03
----- --------------- ------
Total 2,136 $237,001,864.74 100.00%
===== =============== ======
------------------
</TABLE>
(1) The weighted average maximum loan rate of the mortgage loans as of the
cut-off date was approximately 16.338% per annum.
<TABLE>
<CAPTION>
MINIMUM LOAN RATES OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MINIMUM LOAN RATE(%) OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
7.000 1 $ 299,007.72 0.13%
7.001 - 8.000 30 5,207,461.91 2.20
8.001 - 9.000 198 24,960,060.91 10.53
9.001 - 10.000 569 73,705,865.80 31.10
10.001 - 11.000 670 72,198,269.31 30.46
11.001 - 12.000 450 42,600,377.80 17.97
12.001 - 13.000 172 15,056,148.90 6.35
13.001 - 14.000 35 2,392,423.19 1.01
14.001 - 15.000 9 504,439.00 0.21
15.001 - 15.850 2 77,810.20 0.03
----- --------------- ------
Total 2,136 $237,001,864.74 100.00%
===== =============== ======
--------------------
</TABLE>
(1) The weighted average minimum loan rate of the mortgage loans as of the
cut-off date was approximately 10.338% per annum.
S-28
<PAGE>
<TABLE>
<CAPTION>
GROSS MARGINS OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
GROSS MARGINS (%) OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
3.750 - 4.000 3 $ 481,085.54 0.20%
4.001 - 5.000 192 21,775,731.97 9.19
5.001 - 6.000 1,184 133,010,239.47 56.12
6.001 - 7.000 711 78,898,930.36 33.29
7.001 - 8.000 41 2,445,242.24 1.03
8.001 - 8.500 5 390,635.16 0.16
----- --------------- ------
Total 2,136 $237,001,864.74 100.00%
===== =============== ======
------------------
</TABLE>
(1) The weighted average gross margin of the mortgage loans as of the cut-off
date was approximately 5.754%.
<TABLE>
<CAPTION>
NEXT ADJUSTMENT DATE FOR THE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RATE CHANGE DATE OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
05/01/02 253 $ 28,779,803.30 12.14%
06/01/02 1,476 162,958,001.71 68.76
07/01/02 96 9,437,490.71 3.98
05/01/03 98 12,180,231.16 5.14
06/01/03 209 23,280,218.16 9.82
07/01/03 4 366,119.70 0.15
----- --------------- ------
Total 2,136 $237,001,864.74 100.00%
===== =============== ======
</TABLE>
S-29
<PAGE>
<TABLE>
<CAPTION>
INITIAL PERIODIC RATE CAPS OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
INITIAL PERIODIC RATE CAP (%) OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
1.000 1 $ 159,728.17 0.07%
3.000 2,135 236,842,136.57 99.93
----- --------------- ------
Total 2,136 $237,001,864.74 100.00%
===== =============== ======
------------------
</TABLE>
(1) Relates solely to initial rate adjustments. The periodic rate cap for all
rate adjustments subsequent to the initial rate adjustments is 1.000%.
S-30
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The class A certificates will be issued by the trust under a
POOLING AND SERVICING AGREEMENT, among the depositor, the originator, the master
servicer, the sponsor and the trustee. The trust will also issue a senior,
interest only certificate, the class S, a prepayment penalty certificate, the
class P, a subordinate certificate, the class BIO, a certificate representing an
interest in the reserve account, class X, and one or more certificates
representing an interest in the REMIC residuals. These certificates are not
being offered by this prospectus supplement and will be initially held by a
newly formed Delaware business trust.
Distributions on the class A certificates are required to be
made on each payment date. PAYMENT DATES are the 20th day of each calendar
month, or if the 20th day is not a business day, the next succeeding business
day. The first payment date will be November 20, 2000. Payments will be made to
the owners of record. The OWNERS OF RECORD of the class A certificates are the
owners as of the business day immediately preceding the payment date, unless the
class A certificates are issued in definitive form, in which case the record
date shall be the last business day of the prior calendar month.
Distributions will be made in amounts equal to the product of
(a) the owner's percentage interest in the class and (b) the amount distributed
to the class A certificates on that payment date.
Persons in whose name a class A certificate is registered in
the register maintained by the trustee are the OWNERS of the class A
certificates. For so long as the class A certificates are in book-entry form
with DTC, the only owner under the pooling and servicing agreement will be Cede
& Co. No person acquiring a beneficial interest in a class A certificate will be
entitled to receive a definitive certificate representing that person's interest
in the trust, except in the event that physical certificates are issued because
DTC becomes unable or unwilling to act as depository or certain other
circumstances and no suitable replacement can be found. All references to the
owners of class A certificates mean and include the rights of the beneficial
owners. See "DESCRIPTION OF THE SECURITIES--FORM OF SECURITIES" in the
prospectus.
PASS-THROUGH RATES
The PASS-THROUGH RATE applicable to the class A certificates
for any payment date is equal to the lesser of (1) the lesser of one-month LIBOR
plus 0.25% per annum (or after the Step-Up Payment Date, one-month LIBOR + 0.50%
per annum), and the Maximum Cap, this rate being referred to as the CLASS A
FORMULA RATE, and (2) the Net WAC Rate for that payment date.
The pass-through rate applicable to the Class S Certificates
for any payment date is a per annum rate equal to 5.00% for the payment date in
November 2000 through the payment date in October 2001, 4.00% for the payment
date in November 2001 through the payment date in October 2002, 3.00% for the
payment date in November 2002 through the payment date in October 2003 and 0.00%
thereafter. Notwithstanding the foregoing, for federal income tax purposes and
under the REMIC Provisions, the Class S Certificates will not have a
pass-through rate. The notional amount of the class S certificates immediately
before any payment date will be the lesser of (i) the aggregate principal
balance of the mortgage loans (after giving effect to scheduled payments of
principal due during the related Due Period to the extent received or advanced
and unscheduled collections of principal received during the related Prepayment
Period and (ii) 10% of the aggregate principal balance of the mortgage loans as
of the cut-off date.
S-31
<PAGE>
The owners of class A certificates may be entitled to Net WAC
Rate Carryover Amounts. The NET WAC RATE CARRYOVER AMOUNT for the class A
certificates is equal to the sum of:
(i) the excess of (a) the amount of interest that would have
accrued on such class based on the Formula Rate over
(b) the amount of interest received on such class
based on the Net WAC Rate; and
(ii) the unpaid portion of any related Net WAC Rate Carryover
Amount from all prior payment dates together with accrued interest at the
related Formula Rate. Any Net WAC Rate Carryover Amount will be paid on that
payment date or future payment dates, to the extent of funds available.
If a Net WAC Rate Carryover Amount is due, the owner of one of
the subordinate certificates has agreed to pay this amount from the sources of
funds specified in the pooling and servicing agreement, including amounts which
would otherwise be distributed to that owner on that payment date. If the full
amount of any Net WAC Rate Carryover Amount is not paid on any payment date,
then the unpaid amount will accrue interest at the Class A Formula Rate, until
it is paid. There is no assurance that funds will be available to pay such Net
WAC Rate Carryover Amounts, and such amounts are not covered by the certificate
insurer.
None of the certificate insurer, the depositor, the sponsor,
the originator or the master servicer guarantees the payment of, nor do the
ratings assigned to the class A certificates address the likelihood of the
payment of, any Net WAC Rate Carryover Amount.
The NET WAC RATE for any payment date is an amount, expressed
as a per annum rate (subject to adjustment based on the actual number of days
elapsed in the related accrual period), equal to the weighted average of the
loan rates of the mortgage loans as of the first day of the prior calendar month
(less any mortgage insurance premium rate, if applicable) less the sum of:
(i) the servicing fee rate,
(ii) the trustee fee rate,
(iii) the Financial Security Assurance Inc. premium
rate multiplied by a fraction equal to:
(a) the balance of the class A certificates
divided by
(b) the aggregate balance of the mortgage
loans,
(iv) the pass-through rate of the class S
certificates multiplied by a fraction equal to
(a) the notional balance of the class S
certificates divided by
(b) the aggregate balance of the mortgage
loans, and
(v) after the expiration of the cap agreements, a
margin equal to 0.25% per annum.
S-32
<PAGE>
The STEP-UP PAYMENT DATE is the payment date immediately
following the calendar month in which the clean-up call is first permitted to
occur.
The MAXIMUM CAP for any payment date is a per annum rate
(subject to adjustment based on the actual number of days elapsed in the related
Interest Accrual Period) equal to:
A) the weighted average of the maximum loan rates of the
mortgage loans as of the first day of the prior calendar
month (less any mortgage insurance premium rate, if
applicable) less
B) the sum of:
(i) the servicing fee rate,
(ii) the trustee fee rate,
(iii) the Financial Security Assurance Inc. premium rate
multiplied by a fraction equal to:
(a) the balance of the class A certificates
divided by
(b) the aggregate balance of the mortgage
loans,
(iv) the pass-through rate of the class S certificates
multiplied by a fraction equal to
(a) the notional balance of the class S
certificates divided by
(b) the aggregate balance of the mortgage
loans, and
(v) after the expiration of the cap agreements, a margin
equal to 0.25% per annum.
The servicing fee rate is 0.50% per annum; the trustee fee
rate is 0.01% per annum; the Financial Security Assurance Inc. premium rate and
the mortgage insurance premium rates are determined as provided in the pooling
and servicing agreement.
DISTRIBUTIONS OF INTEREST
The interest due on the class A certificates will be the
interest which has accrued at the pass-through rate for class A certificates on
the principal balance of the class A certificates immediately prior to the
related payment date from the preceding payment date, or from the closing date
in the case of the first payment date, to and including the day prior to the
current payment date. The interest due on the class A certificates on the first
payment date will accrue from the closing date to and including the day prior to
the first payment date. The amount of interest payable on the class A
certificates for any payment date will be reduced to the extent of any
prepayment interest shortfalls (that exceed the aggregate servicing fee) or any
Relief Act shortfalls for such payment date. See "RISK FACTORS - PREPAYMENT
INTEREST SHORTFALLS AND RELIEF ACT SHORTFALLS" in this prospectus supplement.
All calculations of interest on the class A certificates will
be made on the basis of a 360-day year and the actual number of days elapsed in
the period from the prior payment date to and including the day prior to the
applicable payment date.
S-33
<PAGE>
RESERVE ACCOUNT
The trust will hold a reserve account which will hold one or
more interest rate cap agreements and the proceeds thereof, subject to a maximum
funding requirement. Amounts in the reserve account will be used to cover
interest shortfalls caused by delinquencies and defaults, as well as realized
losses. Amounts in the reserve account will not be used to pay Net WAC Carryover
Amounts, nor do they increase the Net WAC Rate.
SUPPLEMENTAL INTEREST PAYmENTS
The pass-through rate on the class A certificates is subject
to reduction by operation of the Net WAC Rate. The holders of the class BIO
certificates have directed the trustee to pay to the class A certificateholders
the aggregate amount of this reduction, to the extent of any Net WAC Rate
Carryover Amounts, from amounts otherwise distributable to the class BIO
holders. There can be no assurance that there will be sufficient amounts to pay
supplemental interest, nor will the certificate insurance policy cover these
amounts.
DISTRIBUTIONS OF PRINCIPAL
The owners of the class A certificates will be entitled to
receive monthly distributions of principal on each payment date which reflect
scheduled principal due on the mortgage loans during the related Due Period, to
the extent collected or advanced, and unscheduled principal collected on the
mortgage loans during the related Prepayment Period.
The overcollateralization provisions of the trust may result
from time to time in a limited acceleration of principal payments to the owners
of the class A certificates. These overcollateralization provisions are more
fully described under "CREDIT ENHANCEMENT--OVERCOLLATERALIZATION PROVISIONS."
On each payment date, the owners of each class of class A
certificates will receive the Base Principal Distribution Amount for that class
to the extent of funds available.
Under extreme loss or delinquency scenarios applicable to the
mortgage loans, investors in the class A certificates may temporarily not
receive distributions of principal. Additionally, under certain circumstances,
the specified overcollateralization requirement may be reduced. Under this
circumstance, the class A certificates may temporarily not receive distributions
of principal.
FLOW OF FUNDS
On each payment date, the Available Funds will be applied in
the following order of priority:
o to pay fees due to the master servicer, the trustee (plus trustee's
expenses not already reimbursed) and the certificate insurer and
mortgage insurance premiums, if applicable;
o to the payment of the Interest Distribution Amount for the class A
certificates and the class S certificates;
o to reimburse the certificate insurer for amounts owed to it;
o to the payment of the Base Principal Distribution Amount on the class
A certificates;
S-34
<PAGE>
o to the payment of the Overcollateralization Deficit on the class A
certificates, if any;
o as a payment of principal on the class A certificates to increase
overcollateralization to the specified
overcollateralization requirement;
o as directed by the owners of the class BIO certificates, to pay any
Net WAC Rate Carryover Amount; and
o any excess to the owners of the class BIO certificates.
The amount of each distribution guaranteed by the certificate
insurer under the policy is, for any payment date prior to August, 2030, the sum
of the Interest Distribution Amount for the class A certificates and any
Overcollateralization Deficit. On the payment date occurring in August, 2030,
the certificate insurer will also guarantee the payment of the outstanding
principal balance of the class A certificates.
The certificate insurance policy does not require that the
certificate insurer fund realized losses until the time that the aggregate,
cumulative realized losses have created an Overcollateralization Deficit. The
certificate insurance policy does not cover the master servicer's failure to
make delinquency advances until the time that the aggregate, cumulative amount
of the unpaid delinquency advances, when added to realized losses, have created
an Overcollateralization Deficit.
OPTIONAL TERMINATION
CLEAN-UP CALL. The master servicer, or, if the master servicer
fails to, the certificate insurer, will have the right to exercise a CLEAN-UP
CALL, which would enable them to purchase all the mortgage loans from the trust
on any payment date after the outstanding aggregate principal balance of the
mortgage loans in the trust has declined to 10% or less of the aggregate
principal balance of the mortgage loans as of the cut-off date. The clean-up
call will result in the early retirement of the class A certificates resulting
from the distribution to the holders of the class A certificates of the
outstanding principal amount of the class A certificates, plus accrued interest.
UPON LOSS OF REMIC STATUS. If the trust loses its status as a
REMIC, it would then be in danger of becoming a taxable entity. This offering
does not contemplate that the trust would have to pay income taxes, and the
trust, if it were to become subject to income tax, might not have enough
revenues to pay the taxes and to make required payments on the class A
certificates. Consequently, if the trust loses its REMIC status, the master
servicer, any of the master servicer affiliates and the certificate insurer will
each have an option to redeem the class A certificates at a price equal to the
outstanding principal amount of the class A certificates, plus accrued interest.
There can be no assurance that any such party would exercise such option.
CALCULATION OF LIBOR
On each INTEREST DETERMINATION DATE, which is the second
business day preceding each payment date or, in the case of the first payment
date, the second business day preceding the closing date, the trustee will
determine the London interbank offered rate for one-month U.S. dollar deposits,
or one-month LIBOR, for the next accrual period for the class A certificate.
One-month LIBOR will be established on the basis of the offered rates of the
rEFERENCE BANKS for one-month U.S. dollar deposits, as they appear on the
Telerate Page 3750, as of 11:00 a.m., London time, on the interest determination
date. As used in this section, BUSINESS DAY means a day on which banks are open
for dealing in foreign currency and exchange in London and New York City; and
REFERENCE BANKS means leading banks, selected by
S-35
<PAGE>
the trustee, which are engaged in transactions in Eurodollar deposits in the
international Eurocurrency market (1) with an established place of business in
London, (2) which have been designated by the trustee after consultation with
the master servicer and (3) which are not controlling, controlled by, or under
common control with the master servicer or the depositor.
On each interest determination date, the trustee will
determine one-month LIBOR for the next accrual period for the class A
certificate as follows:
o FIRST, on the basis of the offered rate for one-month
United States dollar deposits, as this rate appears on
Telerate Page 3750, as of 11:00 a.m., London time.
o SECOND, if the rate does not appear on Telerate Page
3750 as of 11:00 a.m. London time, one-month LIBOR will
be the arithmetic mean of the offered quotations of two
or more reference banks, rounded to the nearest whole
multiple of 1/16%.
o THIRD, if fewer than two reference banks provide
offered quotations, one-month LIBOR will be the higher
of:
o one-month LIBOR as determined on the previous interest
determination date and
o the reserve interest rate.
The RESERVE INTEREST RATE is the rate per annum that the
trustee determines to be either the arithmetic mean, rounded to the nearest
whole multiple of 1/16%, of the one-month U.S. dollar lending rates which New
York City banks, selected by the trustee, are quoting on the interest
determination date to the principal London offices of leading banks in the
London interbank market or, in the event that the trustee cannot determine the
arithmetic mean, the lowest one-month U.S. dollar lending rate which New York
City banks, selected by the trustee, are quoting on the interest determination
date to leading European banks.
The establishment of one-month LIBOR on each interest
determination date by the trustee and the trustee's calculation of the rate of
interest applicable to the class A certificates for the accrual period will, in
the absence of manifest error, be final and binding.
TRUSTEE'S FEES AND EXPENSES
The principal compensation to be paid to the trustee in
respect of its obligations under the pooling and servicing agreement will be
equal to certain investment earnings on the amounts on deposit in the
distribution account and a trustee fee equal to accrued interest at the trustee
fee rate of 0.01% per annum on the principal balance of the mortgage loans. 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 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. The pooling and servicing
agreement will provide that the trustee may withdraw amounts owing to it under
the pooling and servicing agreement prior to distributions to
certificateholders.
S-36
<PAGE>
CREDIT ENHANCEMENT
The credit enhancement for the class A certificates is a
combination of the credit enhancement provided by the overcollateralization
provisions of the trust, the external credit enhancement provided by the
certificate insurance policy, the cap agreements, and the limited private
mortgage insurance policy.
OVERCOLLATERALIZATION PROVISIONS. The difference between (a)
the mortgage loans' aggregate principal balance and (b) the class A
certificates' aggregate outstanding principal balance is the
overcollateralization which is available to absorb losses on the mortgage loans.
Once overcollateralization has reached certain specified required levels, the
amount of overcollateralization must be maintained at such specified required
levels, which are permitted to reduce or step down over time or may increase if
certain performance tests are violated.
The class A certificates represent beneficial interests in the
pool of mortgage loans. The mortgage loans have coupon rates which on average
are higher than the sum of the pass-through rate on the class A certificates and
the fees payable by the trust to the master servicer, the trustee, the mortgage
insurer and the certificate insurer. In the absence of losses and delinquencies
on the mortgage loans, the trust will have excess cashflow which will be
available to provide credit enhancement.
The trust will use the excess cashflow described above to make
payments of principal on the class A certificates for the purpose of maintaining
the overcollateralization at its required amount. Using mortgage loan coupon
payments received by the trust to pay class A certificate principal has the
effect of amortizing the class A certificates more quickly, and to a greater
degree, than the mortgage loans amortize. This feature thus builds up
overcollateralization, or replenishes overcollateralization which would
otherwise be reduced as a result of losses on the mortgage loans.
THE CERTIFICATE INSURANCE POLICY. If losses on the mortgage
loan pool are so severe that the overcollateralization level becomes negative,
meaning that the class A certificates' aggregate outstanding principal balance
exceeds the aggregate principal balance of the mortgage loans securing that
class, after taking into account all of the overcollateralization provisions,
then the trustee will make a claim on the certificate insurance policy for an
amount equal to the shortfall. The amount claimed will then be passed-through as
a principal distribution to the affected classes of class A certificates,
reducing their aggregate outstanding principal balance and re-establishing
parity with the principal balance of the mortgage loans. The certificate
insurance policy can only be drawn upon for principal in the event of a negative
overcollateralization situation, referred to in this prospectus supplement as an
Overcollateralization Deficit; it cannot be drawn upon to maintain the required
positive level of overcollateralization.
The required overcollateralization levels are determined for
each payment date as provided in the pooling and servicing agreement.
No later than the second business day prior to each payment
date the trustee will be required to determine the AVAILABLE FUNDS for the
mortgage loan pool. If the Required Distributions for the pool exceeds the
Available Funds on any payment date, the trustee will be required to draw the
amount of the insufficiency from the certificate insurer under the certificate
insurance policy. Amounts which cannot be distributed to the owners of the class
A certificates as a result of proceedings under the United States Bankruptcy
Code or similar insolvency laws will not be considered in determining the amount
of Available Funds available on any payment date.
S-37
<PAGE>
THE AGREEMENTS
In addition to the provisions of the agreements summarized
elsewhere in this prospectus supplement and the prospectus, the following is a
summary of other provisions of the agreements.
FORMATION OF THE TRUST
The trust will be created and established pursuant to the
pooling and servicing agreement on the closing date. On such date, the depositor
will cause the trust to acquire the mortgage loans and the trust will issue the
class A certificates, the class S certificates, the class P certificates, the
class BIO certificates, the class X certificates and the class R certificates.
The property of the trust shall include all money, instruments
and other property to the extent such money, instruments and other property are
subject or intended to be held in trust for the benefit of the owners of the
certificates, and all proceeds thereof.
SALE OF MORTGAGE LOANS
The originator, or its affiliate, previously transferred the
mortgage loans to the sponsor. On the closing date, the sponsor will transfer
the mortgage loans to the depositor under a mortgage loan purchase agreement.
The originator and the sponsor will make certain representations and warranties
with respect to the mortgage loans. If these representations and warranties are
breached, the originator or the sponsor, as applicable, will be obligated to
repurchase the affected mortgage loans.
On the closing date, the depositor will cause the trust to
acquire all its right, title and interest in each mortgage loan and all its
right, title and interest in all scheduled principal due after the cut-off date,
all unscheduled principal collected after the cut-off date and all interest
accrued on or after the cut-off date on each of those mortgage loans.
ADVANCES
The master servicer will be obligated to advance or cause to
be advanced on or before each payment date, funds in an amount equal to the
aggregate of all payments of principal and interest, net of servicing fees) that
were due during the related Due Period on the mortgage loans and that were
delinquent on the related determination date, plus certain amounts representing
assumed payments not covered by any current net income on the mortgaged
properties acquired by foreclosure or deed in lieu of foreclosure (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, condemnation proceeds or liquidation proceeds.
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. Subject to the
recoverability standard above, the master servicer's obligation to make advances
as to any mortgage loan will continue until the mortgage loan is paid in full,
or until the recovery of all liquidation proceeds thereon.
TERMINATION OF THE TRUST
The pooling and servicing agreement will provide that the
trust will terminate upon the payment to the owners of all certificates of all
amounts required to be paid to those owners and to the certificate insurer of
all amounts required to be paid to the certificate insurer as reimbursement for
any prior drawings on the certificate insurance policy after the latest to occur
of (a) the final payment or other liquidation of the last mortgage loan or (b)
the disposition of all property acquired in respect of any
S-38
<PAGE>
mortgage loan remaining in the trust estate or (c) at any time when a qualified
liquidation of the trust estate is effected as described in the next paragraph.
Within 90 days prior to the final Payment Date, the master
servicer shall prepare, and the trustee shall adopt, a plan of complete
liquidation, as contemplated by section 860F(a)(4) of the Internal Revenue Code,
and the master servicer shall furnish to the trustee an opinion of counsel
reasonably acceptable to the trustee to the effect that such liquidation
constitutes a qualified liquidation.
PREPAYMENT AND YIELD CONSIDERATIONS
PREPAYMENTS AND YIELDS FOR CLASS A CERTIFICATES
If purchased at other than par, the yield to maturity on the
class A certificates will be affected by the rate of the payment of principal of
the mortgage loans. If the actual rate of payments on the mortgage loans is
slower than the rate anticipated by an investor who purchases a class A
certificate at a discount, the actual yield to the investor will be lower than
that investor's anticipated yield. If the actual rate of payments on the
mortgage loans is faster than the rate anticipated by an investor who purchases
a class A certificate at a premium, the actual yield to that investor will be
lower than the investor's anticipated yield.
The rate of defaults on the mortgage loans will also affect
the rate and timing of principal payments on the mortgage loans. In general,
defaults on mortgage loans are expected to occur with greater frequency in their
early years. Increases in the monthly payments of the mortgage loans to an
amount in excess of the monthly payment required at the time of origination may
result in a default rate higher than that on level payment mortgage loans,
particularly since the mortgagor under each mortgage loan was qualified on the
basis of the mortgage rate in effect at origination. The repayment of such
mortgage loans will be dependent on the ability of the mortgagor to make larger
monthly payments as the mortgage rate increases. Furthermore, the rate and
timing of prepayments, defaults and liquidations on the mortgage loans will be
affected by the general economic condition of the region of the country in which
the related mortgaged properties are located. The risk of delinquencies and loss
is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values.
Prepayment penalties may or may not have an effect on the rate
and timing of prepayments. As of the cut-off date, prepayment penalties are in
effect for approximately 88.26% of the mortgage loans.
The final scheduled payment date for the class A certificates
is the payment date in the month following the latest maturity date of any
mortgage loan.
Weighted average life is the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
the security is repaid to the investor. The weighted average life of each class
of certificate will be influenced by the rate at which principal payments on the
mortgage loans are paid, which may be in the form of scheduled amortization,
accelerated amortization or prepayments, liquidation due to default, or as a
result of an early termination of the trust.
Prepayments of mortgage loans are commonly measured relative
to a prepayment standard or model. The model used in this prospectus supplement
(the "Prepayment Assumption") assumes a prepayment rate for the adjustable-rate
Mortgage Loans based on the Adjustable Rate Prepayment Vector. A "100%
Adjustable Rate Prepayment Vector" assumes a CPR of 4.0% per annum of the then
unpaid principal balance of such mortgage loans in the first month of the life
of such mortgage
S-39
<PAGE>
loans and an additional approximately 1.476% (precisely 31/21) per annum in each
month until the 22nd month. Beginning in the 22nd month and in each month
thereafter during the life of such mortgage loans, such prepayment vector
assumes a CPR of 35%. CPR is a prepayment assumption that represents a constant
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
model does not purport to be either a historical description of the prepayment
experience of any pool of mortgage loans or a prediction of the anticipated rate
of prepayment of any mortgage loans, including the mortgage loans to be included
in the trust.
The tables below were prepared on the basis of the assumptions
in the following paragraph, and there are discrepancies between the
characteristics of the actual mortgage loans and the characteristics of the
mortgage loans assumed in preparing the tables. Any discrepancy may have an
effect upon the percentages of the initial principal balances outstanding and
the weighted average lives of the class A certificates in the tables. In
addition, since the actual mortgage loans have characteristics which differ from
those assumed in preparing the tables set forth below, the distributions of
principal on the class A certificates may be made earlier or later than as
indicated in the tables.
For the purpose of the tables below, we have assumed that:
o the mortgage loans have the characteristics set forth
below,
o the closing date is November 2, 2000,
o distributions on the class A certificates is made on
the 20th day of each month regardless of the day on
which the payment actually occurs, commencing on
November 20, 2000,
o all prepayments are prepayments in full and include 30
days' interest,
o no early termination of the trust occurs, unless
otherwise specified,
o no mortgage loan is ever delinquent, and
o the class A certificates have the pass-through rates
and original principal balances described in this
prospectus supplement
The weighted average life of the class A certificates has been
determined by:
o multiplying the amount of each principal payment by the
number of years from the date of issuance to the
payment date of receipt;
o adding the results; and
o dividing the sum by the original principal balance of
the class A certificates of that class.
<TABLE>
<CAPTION>
PREPAYMENT SCENARIOS
Scenario Scenario Scenario Scenario Scenario Scenario Scenario Scenario
1 2 3 4 5 6 7 8
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loan pool as a
percentage of the
prepayment assumption 0% 50% 75% 100% 125% 150% 175% 200%
</TABLE>
S-40
<PAGE>
<TABLE>
<CAPTION>
REPRESENTATIVE MORTGAGE LOANS
GROUP I
MONTHS TO ORIGINAL REMAINING
GROSS MAXIMUM INITIAL PERIODIC NEXT TERM TO TERM TO
CURRENT BALANCE LOAN RATE MARGIN LOAN RATE MINIMUM LOAN PERIODIC RATE CAP ADJUSTMENT MATURITY MATURITY
($) (%) (%) (%) RATE (%) RATE CAP (%) (%) DATE (MONTHS) (MONTHS)
--------------- --------- ------ --------- ------------ -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
128,769.39 10.35000 6.05000 16.35000 10.35000 3.00000 1.00000 20 180 176
506,655.85 9.72342 5.07464 15.72342 9.72342 3.00000 1.00000 20 180 176
11,749,374.10 10.15998 5.56405 16.15998 10.15998 3.00000 1.00000 20 360 356
812,259.37 10.90139 5.86281 16.90139 10.90139 3.00000 1.00000 20 360 356
5,371,130.20 10.05380 5.60536 16.05380 10.05380 3.00000 1.00000 20 360 356
235,891.56 10.13988 5.52617 16.13988 10.13988 3.00000 1.00000 20 360 356
10,867,398.67 9.98764 5.59016 15.98764 9.98764 3.00000 1.00000 20 360 356
932,423.21 10.40966 5.58473 16.40966 10.40966 3.00000 1.00000 20 360 356
10,512,606.15 10.16182 5.78566 16.16182 10.16182 2.99711 1.00000 20 360 356
117,463.50 8.85000 5.97000 14.85000 8.85000 3.00000 1.00000 32 180 176
11,081,655.85 9.81970 5.54926 15.81970 9.81970 3.00000 1.00000 32 360 356
201,796.09 9.77404 5.59304 15.77404 9.77404 3.00000 1.00000 32 360 356
1,912,896.15 9.86840 5.52652 15.86840 9.86840 3.00000 1.00000 32 360 356
30,371.43 12.95500 5.67500 18.95500 12.95500 3.00000 1.00000 32 360 356
2,323,087.71 9.09990 5.37049 15.09990 9.09990 3.00000 1.00000 32 360 356
28,752.93 12.05000 6.65000 18.05000 12.05000 3.00000 1.00000 31 360 355
19,511,905.79 9.62950 5.57609 15.62950 9.62950 3.00000 1.00000 32 360 356
GROUP II
65,199.08 12.75420 5.89052 18.75420 12.75420 3.00000 1.00000 20 180 176
4,729,949.20 11.62532 5.95910 17.62532 11.62532 3.00000 1.00000 20 360 356
668,406.24 12.10913 6.15817 18.10913 12.10913 3.00000 1.00000 20 360 356
3,738,826.85 10.81525 5.80350 16.81525 10.81525 3.00000 1.00000 20 360 356
105,186.52 12.34000 7.05000 18.34000 12.34000 3.00000 1.00000 20 360 356
3,639,134.51 10.72763 5.75668 16.72763 10.72763 3.00000 1.00000 20 360 356
550,713.43 10.92607 5.69124 16.92607 10.92607 3.00000 1.00000 20 360 356
46,561,371.39 11.15851 5.90787 17.15851 11.15851 3.00000 1.00000 20 360 356
21,012.54 13.62000 5.70000 19.62000 13.62000 3.00000 1.00000 32 180 176
19,834.21 11.79000 5.05000 17.79000 11.79000 3.00000 1.00000 32 180 176
42,193.70 11.37500 5.70000 17.37500 11.37500 3.00000 1.00000 32 360 356
29,963.78 11.82500 4.95000 17.82500 11.82500 3.00000 1.00000 32 360 356
505,635.34 11.53125 6.08749 17.53125 11.53125 3.00000 1.00000 32 360 356
</TABLE>
The following table set forth the percentages of the initial
principal amount of the class A certificates that would be outstanding after
each of the dates shown, based on prepayment scenarios described in the table
entitled PREPAYMENT SCENARIOS.
S-41
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CLASS A CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
PREPAYMENT SCENARIO**
DATES SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7 SCENARIO 8
----- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100% 100% 100% 100% 100% 100% 100% 100%
October 2001 97% 89% 84% 80% 75% 70% 66% 61%
October 2002 96% 73% 62% 52% 42% 33% 26% 18%
October 2003 96% 59% 45% 34% 24% 16% 10% 6%
October 2004 95% 49% 33% 22% 13% 8% 4% 1%
October 2005 95% 40% 24% 14% 7% 3% 1% 0%
October 2006 94% 33% 18% 9% 4% 1% 0% 0%
October 2007 93% 27% 13% 6% 2% 0% 0% 0%
October 2008 93% 22% 9% 3% 1% 0% 0% 0%
October 2009 92% 18% 7% 2% 0% 0% 0% 0%
October 2010 91% 15% 5% 1% 0% 0% 0% 0%
October 2011 89% 12% 3% 1% 0% 0% 0% 0%
October 2012 88% 10% 2% 0% 0% 0% 0% 0%
October 2013 86% 8% 2% 0% 0% 0% 0% 0%
October 2014 85% 6% 1% 0% 0% 0% 0% 0%
October 2015 83% 5% 1% 0% 0% 0% 0% 0%
October 2016 81% 4% 0% 0% 0% 0% 0% 0%
October 2017 78% 3% 0% 0% 0% 0% 0% 0%
October 2018 75% 2% 0% 0% 0% 0% 0% 0%
October 2019 72% 2% 0% 0% 0% 0% 0% 0%
October 2020 69% 1% 0% 0% 0% 0% 0% 0%
October 2021 65% 1% 0% 0% 0% 0% 0% 0%
October 2022 60% 1% 0% 0% 0% 0% 0% 0%
October 2023 55% 0% 0% 0% 0% 0% 0% 0%
October 2024 49% 0% 0% 0% 0% 0% 0% 0%
October 2025 43% 0% 0% 0% 0% 0% 0% 0%
October 2026 36% 0% 0% 0% 0% 0% 0% 0%
October 2027 28% 0% 0% 0% 0% 0% 0% 0%
October 2028 18% 0% 0% 0% 0% 0% 0% 0%
October 2029 8% 0% 0% 0% 0% 0% 0% 0%
October 2030 0% 0% 0% 0% 0% 0% 0% 0%
Weighted Average
Life (years) to
Maturity : 21.60 5.26 3.59 2.72 2.18 1.82 1.55 1.35
Weighted Average
Life (years) to
Call : 21.56 4.90 3.34 2.54 2.04 1.71 1.47 1.29
</TABLE>
*Rounded to the nearest whole percentage.
**Assumes except where indicated, there is no optional termination exercised.
S-42
<PAGE>
THE CERTIFICATE INSURER
Financial Security Assurance Inc. is a monoline insurance
company incorporated in 1984 under the laws of the State of New York. Financial
Security Assurance Inc. is licensed to engage in financial guaranty insurance
business in all 50 states, the District of Columbia, Puerto Rico and the U.S.
Virgin Islands.
Financial Security Assurance Inc. and its subsidiaries are
engaged in the business of writing financial guaranty insurance, principally in
respect of securities offered in domestic and foreign markets. Financial
guaranty insurance provides a guaranty of scheduled payments on an issuer's
securities -- thereby enhancing the credit rating of those securities -- in
consideration for the payment of a premium to the insurer. Financial Security
Assurance Inc. and its subsidiaries principally insure asset-backed,
collateralized and municipal securities. Asset-backed securities are typically
supported by residential mortgage loans, consumer or trade receivables,
securities or other assets having an ascertainable cash flow or market value.
Collateralized securities include public utility first mortgage bonds and
sale/leaseback obligation bonds. Municipal securities include general obligation
bonds, special revenue bonds and other special obligations of state and local
governments. Financial Security Assurance Inc. insures both newly issued
securities sold in the primary market and outstanding securities sold in the
secondary market that satisfy Financial Security Assurance Inc.'s underwriting
criteria.
Financial Security Assurance Inc. is a wholly-owned subsidiary
of Financial Security Assurance Holdings Ltd. Financial Security Assurance
Holdings Ltd. is an indirect subsidiary of Dexia S.A., a publicly held Belgian
corporation. Dexia S.A., through its bank subsidiaries, is primarily engaged in
the business of public finance in France, Belgium and other European countries.
No shareholder of Financial Security Assurance Holdings Ltd. or Financial
Security Assurance Inc. is obligated to pay any debt of Financial Security
Assurance Inc. or any claim under any insurance policy issued by Financial
Security Assurance Inc. or to make any additional contribution to the capital of
Financial Security Assurance Inc.
The principal executive offices of Financial Security
Assurance Inc. are located at 350 Park Avenue, New York, New York 10022, and its
telephone number at that location is (212) 826-0100.
REINSURANCE
Under an intercompany agreement, liabilities on financial
guaranty insurance written or reinsured from third parties by Financial Security
Assurance Inc. or its domestic or Bermuda operating insurance company
subsidiaries are generally reinsured among such companies on an agreed-upon
percentage substantially proportional to their respective capital, surplus and
reserves, subject to applicable statutory risk limitations. In addition,
Financial Security Assurance Inc. reinsures a portion of its liabilities under
certain of its financial guaranty insurance policies with other reinsurers under
various treaties and on a transaction-by-transaction basis. This reinsurance is
used by Financial Security Assurance Inc. as a risk management device and to
comply with statutory and rating agency requirements; it does not alter or limit
Financial Security Assurance Inc.'s obligations under any financial guaranty
insurance policy.
RATINGS
Financial Security Assurance Inc.'s insurance financial
strength is rated "Aaa" by Moody's Investors Service Inc. and "AAA" by Fitch
Inc. Financial Security Assurance Inc.'s insurer financial strength is rated
"AAA" by Standard & Poor's Ratings Services and Standard & Poor's (Australia)
Pty. Ltd. Financial Security Assurance Inc.'s claims-paying ability is rated
"AAA" by Japan
S-43
<PAGE>
Rating and Investment Information, Inc. These ratings reflect only the views of
the respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by those rating
agencies.
CAPITALIZATION
The following table sets forth the capitalization of Financial
Security Assurance Inc. and its subsidiaries as of June 30, 2000 on the basis of
accounting principles generally accepted in the United States of America:
<TABLE>
<CAPTION>
JUNE 30, 2000
-------------
(in thousands)
<S> <C>
Deferred Premium Revenue ....(net of prepaid reinsurance premiums) $574,825
Surplus Notes..................................................... 120,000
Minority Interest................................................. 34,054
Shareholders' Equity:
Common Stock................................................. 15,000
Additional Paid-In Capital................................... 841,036
Accumulated Other Comprehensive Income
(net of deferred income taxes)......................... 662
Accumulated Earnings......................................... 520,869
Total Shareholders' Equity........................................ 1,377,567
Total Deferred Premium Revenue, Surplus Notes, Minority Interest
and Shareholder's Equity 2,106,446
</TABLE>
For further information concerning Financial Security
Assurance Inc., see the Consolidated Financial Statements of Financial Security
Assurance Inc. and Subsidiaries, and the notes thereto, incorporated by
reference in this prospectus supplement. Financial Security Assurance Inc.'s
financial statements are included as exhibits to the Annual Report on Form 10-K
and Quarterly Reports on Form 10-Q filed with the Securities and Exchange
Commission by Financial Security Assurance Holdings Ltd. and may be reviewed at
the EDGAR web site maintained by the Securities and Exchange Commission and at
Financial Security Assurance Holdings Ltd.'s web site, http://www.FSA.com.
Copies of the statutory quarterly and annual statements filed with the State of
New York Insurance Department by Financial Security Assurance Inc. are available
upon request to the State of New York Insurance Department.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described under "Incorporation of
Information by Reference" in the prospectus, the financial statements of
Financial Security Assurance Inc. included in, or as exhibits to, the following
documents, filed by Financial Security Assurance Holdings Ltd. with the
Securities and Exchange Commission, are hereby incorporated by reference in this
prospectus supplement: (a) the Annual Report on Form 10-K, of Financial Security
Assurance Holdings Ltd. for the year ended December 31, 1999, (b) the Quarterly
Report on Form 10-Q for the Quarter ended March 31, 2000 and (c) the Quarterly
Report on Form 10-Q for the quarter ending June 30, 2000.
All financial statements of Financial Security Assurance Inc.
included in, or as exhibits to, documents filed by Financial Security Assurance
Holdings Ltd. under Section 13(a), 13(c), 14 or 15(d)
S-44
<PAGE>
of the Securities Exchange Act of 1934, as amended, after the filing of this
prospectus supplement and before the termination of the offering of the
certificates shall be deemed incorporated by reference into this prospectus
supplement.
The originator will without charge to any person to whom this
prospectus supplement is delivered, upon oral or written request of that person,
provide a copy of any or all of the foregoing financial statements incorporated
by reference. Request for copies should be directed to the originator at 3 Ada
Road, Irvine, CA.
The originator on behalf of the trust will undertake that, for
purposes of determining any liability under the Securities Act of 1933, as
amended, each filing of the trust's annual report under section 13(a) or section
15(d) of the Securities Exchange Act of 1934; and each filing of the financial
statements of Financial Security Assurance Inc. included in or as an exhibit to
the annual report of Financial Security Assurance Holdings Ltd. filed pursuant
to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in the registration statement, as defined in the
prospectus, shall be deemed to be a new registration statement relating to the
securities offered by this prospectus supplement, and the offering of the
securities at that time shall be deemed to be the initial bona fide offering
thereof.
INSURANCE REGULATION
Financial Security Assurance Inc. is licensed and subject to
regulation as a financial guaranty insurance corporation under the laws of the
State of New York, its state of domicile. In addition, Financial Security
Assurance Inc. and its insurance subsidiaries are subject to regulation by
insurance laws of the various other jurisdictions in which they are licensed to
do business. As a financial guaranty insurance corporation licensed to do
business in the State of New York, Financial Security Assurance Inc. is subject
to Article 69 of the New York Insurance Law which, among other things, limits
the business of a financial guaranty insurer to writing financial guaranty
insurance and related business lines, requires each financial guaranty insurer
to maintain a minimum surplus to policyholders, establishes contingency, loss
and unearned premium reserve requirements for each financial guaranty insurer,
and limits the size of individual transactions --and the volume of transactions
that may be underwritten by each financial guaranty insurer. Other provisions of
the New York Insurance Law, applicable to non-life insurance companies such as
Financial Security Assurance Inc., regulate, among other things, permitted
investments, payment of dividends, transactions with affiliates, mergers,
consolidations, acquisitions or sales of assets and incurrence of liability for
borrowings.
THE CERTIFICATE INSURANCE POLICY
The following summary of the terms of the certificate
insurance policy does not purport to be complete and is qualified in its
entirety by reference to the certificate insurance policy. A form of the
certificate insurance policy may be obtained, upon request, from the originator.
Simultaneously with the issuance of the certificates, the
certificate insurer will deliver the certificate insurance policy to the
trustee, for the benefit of the holders of the certificates. Under the
certificate insurance policy, the certificate insurer will irrevocably and
unconditionally guarantee payment on each payment date to the trustee, for the
benefit of the holders of the certificates, of the Insured Amounts with respect
to the related class of certificates calculated in accordance with the original
terms of the certificates when issued and without regard to any amendment or
modification of the certificates or the pooling and servicing agreement except
amendments or modifications to which the certificate insurer has given its prior
written consent. In addition, with respect to any payment date occurring on a
date when an event of default under the insurance agreement has occurred and is
continuing or a date on or
S-45
<PAGE>
after the first date on which a claim is made under the certificate insurance
policy, the certificate insurer at its sole option, may pay any or all of the
outstanding principal balance of the certificates. Interest shortfalls on the
class A certificates caused by application of the Relief Act or prepayments in
full of the mortgage loans and Net WAC Rate Carryover Amounts will not be
covered by payments under the certificate insurance policy.
Payment of claims under the certificate insurance policy will
be made by the certificate insurer following receipt by the certificate insurer
of the appropriate notice for payment on the later to occur of (a) 12:00 noon,
New York City time, on the second business day following receipt of such notice
for payment, and (b) 12:00 noon, New York City time, on the relevant payment
date.
If any payment of an amount guaranteed by the certificate
insurer pursuant to the certificate insurance policy is avoided as a preference
payment under applicable bankruptcy, insolvency, receivership or similar law the
certificate insurer will pay such amount out of the funds of the certificate
insurer on the later of:
o the date when due to be paid pursuant to the order referred to
below, or
o the first to occur of:
o the fourth business day following receipt by the certificate
insurer from the pooling and servicing agreement trustee of
(A) a certified copy of the order of the court or other
governmental body which exercised jurisdiction to the effect
that a holder is required to return principal or interest
paid with respect to a certificate during the term of the
certificate insurance policy because such payments were
avoidable preferences under applicable bankruptcy law, (B) a
certificate of the holder(s) that the order has been entered
and is not subject to any stay, and (C) an assignment duly
executed and delivered by the holder(s), in such form as is
reasonably required by the certificate insurer and provided
to the holder(s) by the certificate insurer, irrevocably
assigning to the certificate insurer all rights and claims
of the holder(s) relating to or arising under the
certificates against the debtor which made such preference
payment or otherwise with respect to such preference
payment, or
o the date of receipt by the certificate insurer from the
trustee of the items referred to in clauses (A), (B) and (C)
above if, at least four business days prior to such date of
receipt, the certificate insurer shall have received written
notice from the trustee that such items were to be delivered
on such date and such date was specified in such notice.
Such payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the order and not to the
trustee or any holder directly (unless a holder has previously paid such amount
to the receiver, conservator, debtor-in-possession or trustee in bankruptcy
named in the order, in which case such payment shall be disbursed to the trustee
for payment to such holder upon proof of such payment reasonably satisfactory to
the certificate insurer).
The terms "receipt" and "received," with respect to the
certificate insurance policy, means actual delivery to the certificate insurer
and to its fiscal agent appointed by the certificate insurer at its option, if
any, prior to 12:00 p.m., New York City time, on a business day; delivery either
on a day that is not a business day or after 12:00 p.m., New York City time,
shall be deemed to be receipt on the next succeeding business day. If any notice
or certificate given under the certificate insurance policy by the trustee is
not in proper form or is not properly completed, executed or delivered, it shall
be deemed not to
S-46
<PAGE>
have been received, and the certificate insurer or the fiscal agent shall
promptly so advise the trustee and the trustee may submit an amended notice.
Under the certificate insurance policy, "business day" means
any day other than a Saturday or Sunday or a day on which banking institutions
in the City of New York, New York the Commonwealth of Pennsylvania, the State of
California, the State of Delaware, the State of Maryland or the State of
Minnesota, are authorized or obligated by law or executive order to be closed.
The certificate insurer's obligations under the certificate insurance policy to
distribute Insured Amounts shall be discharged to the extent funds are
transferred to the trustee as provided in the certificate insurance policy,
whether or not such funds are properly applied by the trustee.
The certificate insurer shall be subrogated to the rights of
each holder to receive payments of principal and interest on the certificates to
the extent of any payment by the certificate insurer under the certificate
insurance policy. To the extent the certificate insurer makes Insured Payments,
either directly or indirectly, as by paying through the trustee, to the holders
of certificates, the certificate insurer will be subrogated to the rights of the
holders, as applicable, with respect to such Insured Payment and shall be deemed
to the extent of the payments so made to be a registered holder for purposes of
payment.
Claims under the certificate insurance policy will rank
equally with any other unsecured debt and unsubordinated obligations of the
certificate insurer except for certain obligations in respect of tax and other
payments to which preference is or may become afforded by statute. Claims
against the certificate insurer under the certificate insurance policy
constitute pari passu claims against the general assets of the certificate
insurer. The terms of the certificate insurance policy cannot be modified or
altered by any other agreement or instrument, or by the merger, consolidation or
dissolution of the trust. The certificate insurance policy is governed by the
laws of the State of New York. The certificate insurance policy is not covered
by the Property/Casualty Insurance Security Fund specified in Article 76 of the
New York Insurance Law.
To the fullest extent permitted by applicable law, the
certificate insurer agrees under the certificate insurance policy not to assert,
and waives, for the benefit of each holder, all its rights, whether by
counterclaim, setoff or otherwise, and defenses, including, without limitation,
the defense of fraud, whether acquired by subrogation, assignment or otherwise,
to the extent that such rights and defenses may be available to the certificate
insurer to avoid payment of its obligations under the certificate insurance
policy in accordance with the express provisions of the certificate insurance
policy.
Pursuant to the terms of the pooling and servicing agreement,
unless a certificate insurer default exists, the certificate insurer shall be
deemed to be the holder of the certificates for all purposes, other than with
respect to payment on the certificates and will be entitled to exercise all
rights of the holders thereunder, without the consent of such holders, and the
holders may exercise such rights only with the prior written consent of the
certificate insurer. In addition, the certificate insurer will, as a third-party
beneficiary to the pooling and servicing agreement have, among others, the
following rights:
o the right to give notices of breach or to terminate the
rights and obligations of the master servicer under the
pooling and servicing agreement in the event of a servicer
event of default and to institute proceedings against the
master servicer;
o the right to consent to or direct any waivers of defaults by
the master servicer;
o the right to remove the trustee pursuant to the pooling and
servicing agreement;
o the right to direct the actions of the trustee during the
continuation of a master servicer default;
S-47
<PAGE>
o the right to require the originator or the sponsor, as
applicable, to repurchase mortgage loans for breach of
representation and warranty or defect in documentation;
o the right to direct foreclosures upon the failure of the
master servicer to do so in accordance with the pooling and
servicing agreement;
o the right to direct all matters relating to a bankruptcy or
other insolvency proceeding involving the originator; and
o the right to direct the trustee to investigate certain
matters.
The certificate insurer's consent will be required prior to,
among other things, (x) the removal of the trustee, (y) the appointment of any
successor trustee or master servicer or (z) any amendment to the pooling and
servicing agreement.
The trust, the depositor, the sponsor, the master servicer and
the certificate insurer will enter into the Insurance Agreement pursuant to
which the trust, the depositor, the sponsor and the master servicer will agree
to reimburse, with interest, the certificate insurer for amounts paid pursuant
to claims under the certificate insurance policy; provided, the payment
obligations shall be non-recourse obligations with respect to the depositor, the
sponsor, the trust and the master servicer and shall be payable only from monies
available for such payment in accordance with the provisions of the pooling and
servicing agreement. The certificate insurer will also be indemnified against
all reasonable charges and expenses which the certificate insurer may pay or
incur relative to any amounts paid under the certificate insurance policy or
otherwise in connection with the transaction and to indemnify the certificate
insurer against certain liabilities. Except to the extent provided therein,
amounts owing under the Insurance Agreement will be payable solely from the
trust estate. An "event of default" under the Insurance Agreement will
constitute an event of default under the pooling and servicing agreement and a
master servicer event of default under the pooling and servicing agreement and
allow the certificate insurer, among other things, to direct the trustee to
terminate the master servicer. An "event of default" under the Insurance
Agreement includes:
o the originator's, the depositor's, the sponsor's or the
master servicer's failure to pay when due any amount owed
under the Insurance Agreement or certain other documents,
o the inaccuracy or incompleteness in any material respect of
any representation or warranty of the originator, the
depositor, the sponsor or the master servicer in the
Insurance Agreement, the pooling and servicing agreement or
certain other documents,
o the originator's, the depositor's, the sponsor's or the
master servicer's failure to perform or to comply with any
covenant or agreement in the Insurance Agreement, the
pooling and servicing agreement and certain other documents,
o a finding or ruling by a governmental authority or agency
that the Insurance Agreement, the pooling and servicing
agreement or certain other documents are not binding on the
sponsor, the depositor, the originator or the master
servicer,
o the sponsor's, the depositor', the originator's or the
master servicer's failure to pay its debts in general or the
occurrence of certain events of insolvency or bankruptcy
with respect to the originator, the master servicer, the
depositor or the sponsor, and
o the occurrence of certain "performance test violations"
designed to measure the performance of the mortgage loans.
S-48
<PAGE>
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Investors may wish to review the following discussion of the
material anticipated federal income tax consequences of the purchase, ownership
and disposition of the class A certificates together with the information in the
section "CERTAIN MATERIAL FEDERAL INCOME TAX CONSIDERATIONS" in the prospectus.
The discussion in this section and in the prospectus is based
upon laws, regulations, rulings and decisions now in effect, all of which are
subject to change. The discussion below and in the prospectus does not purport
to deal with all federal tax consequences applicable to all categories of
investors, some of which may be subject to special rules. Investors may wish to
consult their own tax advisors in determining the federal, state, local and any
other tax consequences to them of the purchase, ownership and disposition of the
class A certificates. References in this section and in the "ERISA
CONSIDERATIONS" section to the CODE and SECTIONS are to the Internal Revenue
Code of 1986, as amended.
REMIC ELECTIONS
The trustee will cause one or more REMIC elections to be made
with respect to specified assets of the trust for federal income tax purposes.
Dewey Ballantine LLP, special tax counsel, will advise that, in its opinion, for
federal income tax purposes, assuming the REMIC elections are made and
compliance with the pooling and servicing agreement, such specified assets will
be treated as a REMIC for federal income tax purposes. The class A certificates
(other than the right of the holder of such class A certificates to receive the
related Net WAC Rate Carryover Amounts) will be a REGULAR INTEREST in a REMIC.
For federal income tax purposes, regular interests in a REMIC
are treated as debt instruments issued by the REMIC on the date on which those
interests are created, and not as ownership interests in the REMIC or its
assets. Owners of class A certificates that otherwise report income under a cash
method of accounting will be required to report income with respect to the class
A certificates under an accrual method.
It is anticipated that the class A certificates will not have
any original issue discount other than possibly an original issue discount
within a de minimis exception and that, accordingly, the provisions of sections
1271 through 1273 and 1275 generally will not apply to the class A certificates.
Original issue discount will be considered de minimis if it is less than 0.25%
of the principal amount of a class A certificate multiplied by its expected
weighted average life. Because rules regarding the accrual of income on
prepayable debt instruments such as the class A certificates have not yet been
issued by the Internal Revenue Service, the proper treatment regarding possible
original issue discount and the accrual of income on the class A certificates is
not clear. Potential investors may wish to consult their own tax advisors
regarding an investment in the class A certificates. The prepayment assumption
that will be used in determining the rate of accrual of original issue discount
on the class A certificates is 100% of the PREPAYMENT ASSUMPTION. No
representation is made that any of the mortgage loans will prepay at these rates
or any other rate. See "PREPAYMENT AND YIELD CONSIDERATIONS--PREPAYMENTS AND
YIELDS FOR CLASS A CERTIFICATES" in this prospectus supplement and "CERTAIN
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS--TAXATION OF DEBT SECURITIES" in the
prospectus.
SPECIAL TAX ATTRIBUTES
The class A certificates possess special tax attributes by
virtue of the REMIC provisions of the code. See "CERTAIN MATERIAL FEDERAL INCOME
TAX CONSIDERATIONS--TAXATION OF THE REMIC AND ITS HOLDERS" in the prospectus.
S-49
<PAGE>
NET WAC RATE CARRYOVER AMOUNTS
Each holder of a class A certificate is deemed to own an
undivided beneficial ownership interest in two assets:
o a REMIC regular interest without the right to receive
payments in respect of the related Net WAC Rate Carryover
Amount; and
o the right to receive such payments.
The owners of the class A certificates must allocate the
purchase price of their certificates between these two investments based on
their relative fair market values. The purchase price allocated to the first
investment will be the issue price of the class A certificates for calculating
accruals of original issue discount. See "CERTAIN MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS--TAXATION OF DEBT SECURITIES" in the prospectus.
The proper federal income tax treatment of the right to
receive payments in respect of the related Net WAC Rate Carryover Amount is not
clear and tax counsel can not make a reliable estimation of the degree of
certainty of treatment among several possible treatments and unknown other
treatments the Internal Revenue Service may apply to such right. Special tax
counsel believes that a likely treatment of the right is as a notional principal
contract. The trust intends to treat the right for federal income tax purposes
as a notional principal contract. Treasury Regulations under section 446
relating to notional principal contracts provide that taxpayers, regardless of
their method of accounting, generally must recognize the ratable daily portion
of a periodic payment for the taxable year to which that portion relates.
Assuming treatment as a notional principal contract, any payments of Net WAC
Rate Carryover Amount will be periodic payments. Income with respect to periodic
payments under a notional principal contract for a taxable year should
constitute ordinary income. The purchase price allocated to the right to receive
Net WAC Rate Carryover Amounts will be treated as a nonperiodic payment under
these regulations. This nonperiodic payment may be amortized using several
methods, including the level payment method described in these regulations.
Further, upon the sale of a class A certificate, the amount of the sale
allocated to the selling class A certificateholder's right to receive payments
in respect of the related Net WAC Rate Carryover Amount would be considered a
"termination payment" under the Notional Principal Contract Regulations
allocable to the related class A certificate.
Alternative federal income tax characterization of the right
to receive payments in respect of the related Net WAC Rate Carryover Amount is
possible, including treatment of the right as indebtedness or an interest in a
partnership. The amount, timing and character of the income and deductions for
an owner of the right would differ if such right was held to constitute
indebtedness or an interest in a partnership, but for most investors in most
circumstances, those differences would not be material.
The right to receive the Net WAC Rate Carryover Amounts will
not constitute: a real estate asset within the meaning of section 856(c)(5)(B)
if held by a real estate investment trust; a qualified mortgage within the
meaning of section 860G(a)(3) or a permitted investment within the meaning of
section 860G(a)(5) if held by a REMIC; or assets described in section
7701(a)(19)(C)(xi) if held by a thrift. Moreover, other special rules may apply
to some categories of investors, including dealers in securities and dealers in
notional principal contracts.
S-50
<PAGE>
INFORMATION REPORTING AND BACKUP WITHHOLDING
The trustee will furnish or make available, within a
reasonable time after the end of each calendar year, to each person who held a
class A certificate at any time during this year, the information required by
applicable rules to assist the holders in preparing their federal income tax
returns, or to enable holders to make the information available to beneficial
owners or financial intermediaries that hold the certificates on behalf of
beneficial owners. In particular, this information will include a statement of
the adjusted issue price of the class A certificate at the beginning of each
accrual period. In addition, the reports will include information necessary to
compute the accrual of any market discount that may arise upon secondary trading
of class A certificates.
Distributions of interest and principal as well as
distributions of proceeds from the sale of the class A certificates, may be
subject to the BACKUP WITHHOLDING REQUIREMENT under section 3406 at a rate of
31% if the recipients of these distributions fail to furnish to the payor
information, including their taxpayer identification numbers, or otherwise fail
to establish an exemption from this tax. Any amounts deducted and withheld from
a distribution to a recipient would be allowed as a credit against the
recipient's federal income tax. Furthermore, penalties may be imposed by the IRS
on a recipient of distributions that is required to supply information but does
not do so in the proper manner. See "CERTAIN MATERIAL FEDERAL INCOME
CONSIDERATIONS--MISCELLANEOUS TAX ASPECTS" in the prospectus.
STATE TAXES
The depositor makes no representations regarding the tax
consequences of purchase, ownership or disposition of the class A certificates
under tax laws of any state. Investors considering an investment in the class A
certificates may wish to consult their own tax advisors regarding these tax
consequences.
All investors should consult their own tax advisors regarding
the federal, state, local or foreign tax consequences of the purchase, ownership
and disposition of the class A certificates.
ERISA CONSIDERATIONS
Investors may wish to review the material set forth in this
section together with the information in the section "ERISA CONSIDERATIONS" in
the prospectus.
The class A certificates may be offered to pension, profit
sharing and other employee benefit plans subject to ERISA. A fiduciary of any
such plan or any other person investing PLAN ASSETS of any such plan, including
an insurance company investing through its general or separate accounts, may
wish to review with its legal advisors whether the purchase or holding of class
A certificates could give rise to a transaction prohibited or not otherwise
permissible under ERISA or section 4975 of the code.
The Department of Labor has issued to the underwriters
individual prohibited transaction exemptions which, as described under the
section "ERISA CONSIDERATIONS" in the prospectus, provide exemptive relief for
certain transactions relating to investments in pass-through certificates issued
by trusts which hold obligations such as the mortgage loans. As of the initial
cut-off date, there is no single mortgage loan included in the trust that
constitutes more than five percent of the aggregate unamortized principle
balance of the assets of the trust. Before purchasing a class A certificate
based on the underwriters' exemptions, a fiduciary of a plan should itself
confirm (1) that such certificate constitutes a CERTIFICATE for purposes of the
underwriters' exemptions and (2) that the conditions and other requirements set
forth in the underwriters' exemptions would be satisfied.
S-51
<PAGE>
Any plan fiduciary considering the purchase of class A
certificates may wish to consult with its counsel as to the potential
applicability of ERISA, the Internal Revenue Code, and the underwriters'
exemptions prior to making an investment in the certificates. Moreover, each
plan fiduciary may wish to determine whether, under the general fiduciary
standards of investment prudence and diversification, an investment in the class
A 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.
The sale of the class A certificates to a plan is in no
respect a representation by the depositor or the underwriters that this
investment meets all relevant legal requirements with respect to investments by
plans generally or by any particular plan or that this investment is appropriate
for plans generally or any particular plan.
RATINGS
It is a condition of the original issuance of the class A
certificates that they receive ratings of "AAA" by Standard & Poor's, "Aaa" by
Moody's and "AAA" by Fitch, Inc. The ratings assigned to the class A
certificates will be based on the mortgage loans, as well as the financial
strength of the certificate insurer. These ratings will be the views of the
rating agencies only.
Explanations of the significance of these ratings may be
obtained from Standard & Poor's, whose principal offices are located at 55 Water
Street, New York, New York 10041, Moody's, whose principal offices are located
at 99 Church Street, New York, New York 10007 and Fitch, Inc., whose principal
offices are located at One State Street Plaza, New York, New York 10004. There
is no assurance that these ratings will continue for any period of time or that
these ratings will not be revised or withdrawn. Any revision or withdrawal of
the ratings may have an adverse effect on the market price of the class A
certificates. A security rating is not a recommendation to buy, sell or hold
securities.
Moody's ratings on mortgage loan pass-through certificates
address the likelihood of the receipt by the owners of all distributions to
which the owners are entitled. Moody's rating opinions address the structural
and legal issues associated with the class A certificates, including the nature
of the mortgage loans and the credit quality of the credit enhancement provider.
Moody's ratings on pass-through certificates do not represent any assessment of
the likelihood that principal prepayments may differ from those originally
anticipated.
The ratings do not address the possibility that, as a result
of principal prepayments, certificateholders may receive a lower than
anticipated yield. Additionally, the ratings do not address the payment of the
Net WAC Carryover Amounts.
The ratings of the class A certificates should be evaluated
independently from similar ratings on other types of securities.
The depositor has not requested a rating of the class A
certificates by any rating agency other than Moody's, Standard & Poor's and
Fitch and the depositor has not provided information relating to the class A
certificates or the mortgage loans to any rating agency other than Moody's,
Standard & Poor's and Fitch. There can be no assurance as to whether any other
rating agency will rate the class A certificates or, if another rating agency
rates them, what rating would be assigned by that rating agency. Any unsolicited
rating assigned by another rating agency to the class A certificates may be
lower than the rating assigned to the class A certificates by Moody's, Standard
& Poor's and Fitch.
S-52
<PAGE>
LEGAL INVESTMENT CONSIDERATIONS
The class A certificates will constitute MORTGAGE RELATED
SECURITIES for purposes of the Secondary Mortgage Market Enhancement Act of
1984.
UNDERWRITING
The depositor has agreed to cause the trust to sell the class
A certificates to the underwriters, and the underwriters have agreed to purchase
the class A certificates.
In the underwriting agreement, the underwriters have agreed to
purchase the entire principal amount of the class A certificates in the
following amounts:
Principal Amount of
Underwriter Class A
----------- -------
Greenwich Capital Markets, Inc. $154,050,650
UBS Warburg LLC 41,475,175
PaineWebber Incorporated 41,475,175
------------
Total $237,001,000
============
The depositor has been advised by the underwriters that they
propose initially to offer the class A certificates to the public in the United
States at market prices prevailing at the time of sale, at prices related to
market prices or at negotiated prices, and to certain dealers at such price less
a selling concession, not in excess of the percentage set forth in the table
below of the principal balance of the class A certificates. The underwriters may
allow and such dealers may reallow a reallowance discount, not in excess of the
percentage set forth in the table below of the class A certificates, to certain
other dealers. After the initial public offering, the public offering price,
such concessions and such discounts may be changed.
SELLING CONCESSION REALLOWANCE DISCOUNT
------------------ --------------------
0.15% 0.10%
Until the distribution of the class A certificates is
completed, rules of the SEC may limit the ability of the underwriters and
certain selling group members to bid for and purchase the class A certificates.
As an exception to these rules, the underwriters are permitted to engage in
certain transactions that stabilize the price of the class A certificates. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the class A certificates.
In general, purchases of a security for the purpose of
stabilization or to reduce a short position could cause the price of the
security to be higher than it might be in the absence of such purchases.
Neither the depositor nor any of the underwriters makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the prices of the class A
certificates. In addition, neither the depositor nor any of the underwriters
makes any representation that the underwriters will engage in such transactions
or that such transactions, once commenced, will not be discontinued without
notice.
S-53
<PAGE>
The depositor, sponsor and the originator have agreed to
indemnify the underwriters against liabilities under the Securities Act of 1933.
The depositor has been advised by the underwriters that the
underwriters presently intend to make a market in the class A certificates, as
permitted by applicable laws and regulations. None of the underwriters are
obligated to make a market in the class A certificates, and any market making
may be discontinued at any time at the sole discretion of any underwriter.
Accordingly, no assurance can be given as to the liquidity of, or trading
markets for, the class A certificates.
EXPERTS
The consolidated balance sheets of Financial Security
Assurance, Inc. and its subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statements of income, changes in shareholder's equity, and
cash flows for each of the three years in the period ended December 31, 1999,
incorporated by reference in this prospectus supplement, have been incorporated
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
LEGAL MATTERS
Legal matters relating to the validity of the issuance of the
class A certificates will be passed upon for the sponsor by Dewey Ballantine
LLP, New York, New York, and for the depositor and the underwriters by Thacher,
Proffitt and Wood LLP, New York, New York.
S-54
<PAGE>
GLOSSARY
"AVAILABLE FUNDS" is the amount available to the trustee for
distribution to the owners on a payment date.
"BASE PRINCIPAL DISTRIBUTION AMOUNT" for any payment date is
the lesser of:
(a) the Available Funds, plus any Insured Payment and minus the Interest
Distribution Amount, and
(b) (1) the sum, without duplication of:
(A) the principal actually collected by the master servicer or
advanced by the master servicer with respect to the mortgage
loans that was due during the related Due Period;
(B) the proceeds in the amount equal to the principal balance of
each mortgage loan which either was repurchased by the sponsor
or the originator or purchased by the master servicer or any
sub-servicer in connection with that payment date;
(C) all principal prepayments (excluding prepayment penalties) and
all net liquidation proceeds related to principal, in each
case that were actually collected by the master servicer with
respect to the mortgage loans during the related Prepayment
Period;
(D) the proceeds related to principal received by the trustee from
any termination;
minus
(2) the amount, if any, by which the level of
overcollateralization exceeds the amount of
overcollateralization required to be maintained for that
payment date.
"DEFICIENCY AMOUNT" means, for any payment date, the excess,
if any, of Required Distributions over the Available Funds.
"DUE FOR PAYMENT" shall mean with respect to an Insured
Amount, the payment date on which Insured Amounts are due or, with respect to an
Insured Payment which is a Preference Amount, the business day on which the
documentation required by the certificate insurer referred to above has been
received by the certificate insurer.
"DUE PERIOD" means, with respect to any payment date, the
period commencing on the second day of the month preceding the month in which
such payment date occurs and ending on the first day of the month in which such
payment date occurs.
"EXCESS CASHFLOW" is equal to the Available Funds minus the
aggregate Interest Distribution Amount and the Base Principal Distribution
Amount.
"FORMULA RATE" a per annum rate equal to the lesser of
one-month LIBOR + 0.25% (or after the Step-Up Payment Date, one-month LIBOR +
0.50%) and the Maximum Cap.
"INSURED AMOUNTS" shall mean, for any payment date, any
Deficiency Amount for that payment date.
S-55
<PAGE>
"INSURED PAYMENTS" shall mean, the aggregate amount actually
paid by the certificate insurer to the trustee in respect of (i) Insured Amounts
for a payment date and (ii) Preference Amounts for any given business day.
"INTEREST ACCRUAL PERIOD" for each payment date for the class
A certificates is the period from the preceding payment date, or, in the case of
the first payment date, from the closing date, through the day preceding the
payment date. All calculations of interest on the class A certificates will be
made on the basis of the actual number of days elapsed in the period from the
prior payment date to and including the day prior to the applicable payment
date, divided by 360.
"INTEREST DETERMINATION DATE" the second business day
preceding each payment date or, in the case of the first payment date, the
second business day preceding the closing date.
"INTEREST DISTRIBUTION AMOUNT" means, for each class and
payment date, the interest due with respect to that class, together with any
unpaid interest shortfall relating to that class from prior payment dates less
prepayment shortfalls and Relief Act shortfalls.
"LOAN-TO-VALUE RATIO" or "LTV" means, with respect to any
mortgage loans the ratio of the original principal balance of the mortgage loan
to the lesser of (i) the appraised value of the mortgaged property at the time
of origination of the mortgage loans by an appraiser who met the minimum
requirements of Fannie Mae and Freddie Mac and (ii) the purchase price of the
mortgaged property. With respect to mortgage loans where the review of the
appraisal results in a valuation of the mortgaged property that is more than (i)
10% less in the case of mortgage loans with LTV's less than or equal to 80% or
(ii) 5% less in the case of mortgage loans with LTV's in excess of 80%, the LTV
of the related mortgage loan is based on the valuation obtained in the review of
the original appraisal. With respect to mortgage loans secured by mortgaged
properties acquired by a mortgagor under a "lease option purchase," the LTV of
the related mortgage loan is based on the lower of the appraised value at the
time of origination of such mortgage loan or the sale price of the related
mortgaged property if the "lease option purchase price" was set less than 12
months prior to origination and is based on the appraised value at the time of
origination in the "lease option purchase price" was set 12 months or more prior
to origination.
"OVERCOLLATERALIZATION DEFICIT" for any payment date is the
amount, if any, by which:
(1) the aggregate principal balance of the class A
certificates, after taking into account all distributions to be made on
that payment date, except for any payment to be made as to principal
from the proceeds of the certificate insurance policy, exceeds
(2) the aggregate scheduled principal balance of the
mortgage loans as of the close of business on the first day of the
month in which such payment date occurs reduced by scheduled payments
of principal due during the related Due Period, to the extent received
or advanced, and by unscheduled principal collected during the related
Prepayment Period.
"OVERCOLLATERALIZATION INCREASE AMOUNT" means the actual
amount of Excess Cashflow actually applied as an accelerated payment of
principal of class A certificates.
"PREFERENCE AMOUNT" means any payment of principal or interest
on a class A certificate which has become Due for Payment and which is made to
an owner of a class A certificate by or on behalf of the trustee which has been
deemed a preferential transfer and was previously recovered from its owner
pursuant to the United States Bankruptcy Code in accordance with a final,
nonappealable order of a court of competent jurisdiction.
S-56
<PAGE>
"PREPAYMENT PERIOD" With respect to any payment date, the
period commencing on the day after the determination date in the calendar month
preceding the calendar month in which such payment date occurs (or, in the case
of the first payment date, commencing on the cut-off date) and ending on the
determination date of the calendar month in which such payment date occurs. The
determination date is the 10th of each month or the first business day preceding
the 10th of each month.
"REQUIRED DISTRIBUTIONS" means (1) with respect to any payment
date occurring prior to the payment date in August 2030, the Interest
Distribution Amount for the class A certificates -- net of any shortfalls
arising due to the application of the Soldiers' and Sailors' Civil Relief Act,
any interest shortfalls due to principal prepayments in full -- and any
Overcollateralization Deficit and (2) the payment date occurring in August 2030,
the aggregate outstanding principal balance, if any, of the class A
certificates, after giving effect to all other payments of principal on the
class A certificates on that payment date plus the Interest Distribution Amount
for the class A and class S certificates.
"STEP-UP PAYMENT DATE" means, the payment date following the
calendar month in which the clean-up call is first permitted to occur.
S-57
<PAGE>
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 servcicer 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.
October 13, 2000
<PAGE>
TABLE OF CONTENTS
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT..................................3
RISK FACTORS.................................................................4
THE TRUST FUND..............................................................11
USE OF PROCEEDS.............................................................16
THE DEPOSITOR...............................................................16
LOAN PROGRAM................................................................17
DESCRIPTION OF THE SECURITIES...............................................19
CREDIT ENHANCEMENT..........................................................28
YIELD AND PREPAYMENT CONSIDERATIONS.........................................33
THE AGREEMENTS..............................................................35
CERTAIN LEGAL ASPECTS OF THE LOANS..........................................47
CERTAIN MATERIAL FEDERAL INCOME TAX CONSIDERATIONS..........................59
STATE TAX CONSIDERATIONS....................................................80
ERISA CONSIDERATIONS........................................................80
LEGAL INVESTMENT............................................................84
METHOD OF DISTRIBUTION......................................................85
LEGAL MATTERS...............................................................86
FINANCIAL INFORMATION.......................................................86
AVAILABLE INFORMATION.......................................................86
RATING......................................................................86
INDEX OF DEFINED TERMS......................................................88
2
<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 3/4 Incorporation of Certain Information by
Reference" beginning on page 20 of this prospectus.
------------------------------------
3
<PAGE>
RISK FACTORS
You should carefully consider the following information, since it
identifies certain significant sources of risk associated with an investment in
these securities.
Limited Liquidity.......................... No market will exist for the
securities of any series before
they are issued. In addition, there
can be no assurance that a resale
market will develop following the
issuance and sale of any series of
the securities. Even if a resale
market does develop, it might not
provide investors with liquidity of
investment or continue for the life
of the securities.
Limited Assets............................. Unless the applicable prospectus
supplement provides otherwise, the
securities of each series will be
payable solely from the assets of
the related trust, including any
applicable credit enhancement, and
will not have any claims against
the assets of any other trust.
Moreover, at the times specified in
the related prospectus supplement,
certain assets of the trust and/or
the related security account may be
released to the depositor, master
servicer, any servicer, credit
enhancement provider or other
person, if:
o all payments then due on the
related securities have been
made;
o adequate provision for future
payments on certain classes of
the securities has been made;
and
o any other payments specified
in the related prospectus
supplement have been made.
Once released, such assets will no
longer be available to make
payments to securityholders.
There will be no recourse against
the depositor or the master
servicer if any required
distribution on the securities is
not made.
The securities will not represent
an interest in the depositor, the
master servicer, any servicer or
any of their respective affiliates,
nor will the securities represent
an obligation of any of them. The
only obligations of the depositor
with respect to the related trust
or the securities would arise from
the representations and warranties
that the depositor may make
concerning the related assets. The
depositor does not have significant
assets and is unlikely to have
significant assets in the future.
If the depositor should be required
to repurchase a loan from a trust
because of the breach of a
representation or warranty, the
depositor's sole source of funds
for the repurchase would be:
o funds obtained from enforcing
any similar obligation of the
seller or originator of the
loan, or
o funds from a reserve account
or similar credit enhancement
established to pay for loan
repurchases.
In addition, the master servicer
may be obligated to make certain
advances if loans are delinquent,
but only to the extent it deems the
4
<PAGE>
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 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
5
<PAGE>
factors as the level of available
mortgage rates at the time of sale
or refinancing, the relative
strength of the local housing
market, the borrower's equity in
the property, the borrower's
general financial condition and tax
laws.
Nature of Mortgages........................ The following factors, among
others, could adversely affect
property values in such a way that
the outstanding balance of the
related loans, together with any
senior financing on the same
properties, would equal or exceed
those values:
o an overall decline in the
residential real estate markets
where the properties are
located,
o failure of borrowers to
maintain their properties
adequately, and
o natural disasters that are not
necessarily covered by hazard
insurance, such as earthquakes
and floods.
If a home equity loan is in a
junior lien position, a decline in
property values could extinguish
the value of the junior
mortgageholder in the property
before having any effect on the
interest of the senior
mortgageholder. If property values
decline, actual rates of
delinquencies, foreclosures and
losses on the underlying loans
could be higher than those
currently experienced by the
mortgage lending industry in
general.
Even if you assume that the
properties provide adequate
security for the loans, substantial
delays could occur before defaulted
loans are liquidated and the
proceeds forwarded to investors.
Property foreclosure actions are
regulated by state statutes and
rules and are subject to many of
the delays and expenses that
characterize other types of
lawsuits if defenses or
counterclaims are made. As a
result, foreclosure actions can
sometimes take several years to
complete. Moreover, some states
prohibit a mortgage lender from
obtaining a judgment against the
borrower for amounts not covered by
property proceeds if the property
is sold outside of a judicial
proceeding. As a result, if a
borrower defaults, these
restrictions may impede the
servicer's ability to dispose of
the borrower's property and obtain
sufficient proceeds to repay the
loan in full. In addition, the
servicer is entitled to deduct from
liquidation proceeds all the
expenses it reasonably incurs in
trying to recover on the defaulted
loan, including payment to the
holders of any senior mortgages,
legal fees and costs, real estate
taxes, and property preservation
and maintenance expenses.
In general, the expenses of
liquidating defaulted loans do not
vary directly with the unpaid
amount. So, assuming that a
servicer would take the same steps
to recover a defaulted loan with a
small unpaid balance as it would a
loan with a large unpaid balance,
the net amount realized after
paying liquidation expenses would
be a smaller percentage of the
balance of the small loan than of
the large loan. Since the mortgages
or deeds of trust securing home
equity loans typically will be in a
junior lien position, the proceeds
from any liquidation will be
applied first to the claims of the
related senior mortgageholders,
including foreclosure
6
<PAGE>
costs. In addition, a junior
mortgage lender may only foreclose
subject to any related senior
mortgage. As a result, the junior
mortgage lender generally must
either pay the related senior
mortgage lender in full at or
before the foreclosure sale or
agree to make the regular payments
on the senior mortgage. Since the
trust will not have any source of
funds to satisfy any senior
mortgages or to continue making
payments on them, the trust's
ability as a practical matter to
foreclose on any junior mortgage
will be quite limited.
State laws generally regulate
interest rates and other loan
charges, require certain
disclosures, and often require
licensing of loan originators and
servicers. In addition, most states
have other laws and public policies
for the protection of consumers
that prohibit unfair and deceptive
practices in the origination,
servicing and collection of loans.
Depending on the provisions of the
particular law or policy and the
specific facts and circumstances
involved, violations may limit the
ability of the servicer to collect
interest or principal on the loans.
Also, the borrower may be entitled
to a refund of amounts previously
paid and the servicer may be
subject to damage claims and
administrative sanctions.
Environmental Risks........................ Federal, state and local laws and
regulations impose a wide range of
requirements on activities that may
affect the environment, health and
safety. In certain circumstances,
these laws and regulations impose
obligations on owners or operators
of residential properties such as
those that secure the loans.
Failure to comply with these laws
and regulations can result in fines
and penalties that could be
assessed against the trust as owner
of the related property.
In some states, a lien on the
property due to contamination has
priority over the lien of an
existing mortgage. Further, a
mortgage lender may be held liable
as an "owner" or "operator" for
costs associated with the release
of petroleum from an underground
storage tank under certain
circumstances. If the trust is
considered the owner or operator of
a property, it will suffer losses
as a result of any liability
imposed for environmental hazards
on the property.
Certain Other Legal Considerations
Regarding the Loans........................ The loans may also be subject to
federal laws relating to the
origination and underwriting. These
laws
o require certain disclosures to
the borrowers regarding the
terms of the loans;
o prohibit discrimination on the
basis of age, race, color, sex,
religion, marital status,
national origin, receipt of
public assistance or the
exercise of any right under the
consumer credit protection act,
in the extension of credit;
o regulate the use and reporting
of information related to the
borrower's credit experience;
and
o require additional application
disclosures, limit changes that
may be made to the loan
documents without the borrower's
consent and
7
<PAGE>
restrict a lender's ability
to declare a default or to
suspend or reduce a
borrower's credit limit to
certain enumerated events.
Certain loans are also subject to
federal laws which impose
additional disclosure requirements
on creditors with respect to
non-purchase money mortgage loans
with high interest rates or high
up-front fees and charges.
These laws can impose specific
statutory liabilities upon
creditors that fail to comply and
may affect the enforceability of
the related loans. In addition, any
assignee of the creditor (including
the trust) would generally be
subject to all claims and defenses
that the borrower could assert
against the creditor, including the
right to rescind the loan.
Certain loans relating to home
improvement contracts are subject
to federal laws that protect the
borrower from defective or
incomplete work by a contractor.
These laws permit the borrower to
withhold payment if the work does
not meet the quality and durability
standards agreed to between the
borrower and the contractor. These
laws have the effect of subjecting
any assignee of the creditor
(including the trust) to all claims
and defenses which the borrower in
a sale transaction could assert
against the seller of defective
goods.
If certain provisions of these
federal laws are violated, the
master servicer may be unable to
collect all or part of the
principal or interest on the loans.
The trust also could be subject to
damages and administrative
enforcement.
Ratings of the Securities.................. Any class of securities is issued
under this prospectus and the
accompanying prospectus supplement
will be rated in one of the four
highest rating categories of a
nationally recognized rating
agency. A rating is based on the
adequacy of the value of the trust
assets and any credit enhancement
for that class and reflects the
rating agency's assessment of how
likely it is that holders of the
class of securities will receive
the payments to which they are
entitled. A rating does not
constitute an assessment of how
likely it is that principal
prepayments on the underlying loans
will be made, the degree to which
the rate of prepayments might
differ from that originally
anticipated or the likelihood of
early, optional termination of the
securities. You must not view a
rating as a recommendation to
purchase, hold or sell securities
because it does not address the
market price or suitability of the
securities for any particular
investor.
There is no assurance that any
rating will remain in effect for
any given period of time or that
the rating agency will not lower or
withdraw it entirely in the future.
The rating agency could lower or
withdraw its rating due to:
o any decrease in the adequacy
of the value of the trust assets
or any related credit
enhancement;
o an adverse change in the
financial or other condition of
a credit enhancement provider;
or
8
<PAGE>
o a change in the rating of the
credit enhancement provider's
long-term debt.
Book-Entry Registration.................... LIMIT ON LIQUIDITY OF SECURITIES.
Securities issued in book-entry
form may have only limited
liquidity in the resale market,
since investors may be unwilling to
purchase securities for which they
cannot obtain physical instruments.
LIMIT ON ABILITY TO TRANSFER OR
PLEDGE. Transactions in book-entry
securities can be effected only
through The Depository Trust
Company ("DTC"), its participating
organizations, its indirect
participants and certain banks. As
a result, your ability to transfer
or pledge securities issued in
book-entry form may be limited.
DELAYS IN DISTRIBUTIONS. You may
experience some delay in the
receipt of distributions on
book-entry securities since the
distributions will be forwarded by
the trustee to DTC for DTC to
credit the accounts of its
participants. In turn, these
participants will thereafter credit
the distributions to your account
either directly or indirectly
through indirect participants.
Pre-Funding Accounts....................... The related prospectus supplement
may provide that the depositor
deposit a specified amount in a
pre-funding account on the date the
securities are issued. In this
case, the deposited funds may only
be used to acquire the additional
assets for the trust during a set
period after the initial issuance
of the securities. Any amounts
remaining in the account at the end
of the period will be distributed
as a prepayment of principal to the
holders of the related securities.
Lower Credit Quality Trust Fund
Assets..................................... Certain of the trust assets may
have been made to lower credit
quality borrowers who fall into one
of two categories:
o customers with moderate
income, limited assets and
other income characteristics
that cause difficulty in
borrowing from banks and
other traditional lenders;
and
o customers with a history of
irregular employment,
previous bankruptcy filings,
repossession of property,
charged-off loans or
garnishment of wages.
The average interest rate charged
on loans made to these types of
borrowers is generally higher than
that charged by lenders that
typically impose more stringent
credit requirements. There is a
greater likelihood of late payments
on loans made to these types of
borrowers than on loans to
borrowers with a higher credit
quality. Payments from borrowers
with a lower credit quality are
more likely to be sensitive to
changes in the economic climate in
the areas in which they reside.
Delinquent Trust Fund Assets............... No more than 20% (by principal
balance) of the trust assets for
any particular series of securities
will be contractually delinquent as
of the related cut-off date.
9
<PAGE>
Other Considerations....................... There is no assurance that the
value of the trust assets for any
series of securities at any time
will equal or exceed the principal
amount of the outstanding
securities of the series. If trust
assets have to be sold because of
an event of default or otherwise,
providers of services to the trust
(including the trustee, the master
servicer and the credit enhancer,
if any) generally will be entitled
to receive the proceeds of the sale
to the extent of their unpaid fees
and other amounts due them before
any proceeds are paid to investors.
As a result, the proceeds of such a
sale may be insufficient to pay the
full amount of interest and
principal of the related
securities.
10
<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.
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
--------
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.
11
<PAGE>
to the Trustee for such Series of Securities the Depositor's rights with respect
to such representations and warranties. See "The Agreements-Assignment of Trust
Fund Assets". The obligations of the Master Servicer with respect to the Loans
will consist principally of its contractual servicing obligations under the
related Agreement (including its obligation to enforce the obligations of the
Sub-Servicers or Sellers, or both, as more fully described herein under "Loan
Program-Representations by Sellers; Repurchases or Substitutions" and "The
Agreements-Assignment of the Trust Fund Assets" and "Sub-Servicing of Loans")
and its obligation, if any, to make certain cash advances in the event of
delinquencies in payments on or with respect to the Loans in the amounts
described herein under "Description of the Securities-Advances". The obligations
of the Master Servicer to make advances may be subject to limitations, to the
extent provided herein and in the related Prospectus Supplement.
As specified in the related Prospectus Supplement, the Trust fund
Assets for a Series of Securities may consist of (i) closed-end and/or revolving
home equity loans (the "HOME EQUITY LOANS") secured by senior or junior liens on
one- to four-family residential properties, (ii) have improvement installment
sales contracts and installment loan agreements (the "HOME IMPROVEMENT
CONTRACTS") that are either unsecured or secured primarily by junior liens on
one- to four-family residential properties, or by purchase money security
interests in the home improvements financed thereby (the "HOME IMPROVEMENTS")
and/or (iii) Private Asset Backed Securities (as defined herein).
The following is a brief description of the assets expected to be
included in the Trust Funds. If specific information respecting the Trust Fund
Assets is not known at the time the related Series of Securities initially is
offered, more general information of the nature described below will be provided
in the related Prospectus Supplement, and specific information will be set forth
in a report on Form 8-K to be filed with the Securities and Exchange Commission
within fifteen days after the initial issuance of such Securities (the "DETAILED
DESCRIPTION"). A copy of the Agreement with respect to each Series of Securities
will be attached to the Form 8-K and will be available for inspection at the
corporate trust office of the Trustee specified in the related Prospectus
Supplement. A schedule of the Trust Fund Assets relating to such Series will be
attached to the Agreement delivered to the Trustee upon delivery of the
Securities.
THE LOANS
GENERAL. The real property which secures repayment of the Loans is
referred to as "Properties". Unless otherwise specified in the related
Prospectus Supplement, the Loans will be secured by mortgages or deeds of trust
or other similar security instruments creating a lien on a Property, which may
be subordinated to one or more senior liens on the related Properties, each as
described in the related Prospectus Supplement. As more fully described in the
related Prospectus Supplement, the Loans may be "conventional" loans or loans
that are insured or guaranteed by a governmental agency such as the FHA or VA.
The proceeds of the Closed-End Loans may have been applied to the purchase of
the related Property.
The Properties relating to Loans will consist primarily of detached or
semi-detached one- to four-family dwelling units, townhouses, rowhouses,
individual condominium units, individual units in planned unit developments, and
certain other dwelling units ("SINGLE FAMILY PROPERTIES") or Small Mixed-Used
Properties (as defined herein) which consist of structures of not more than
three stories which include one- to four-family residential dwelling units and
space used for retail, professional or other commercial uses. Such Properties
may include vacation and second homes, investment properties and leasehold
interests. The Properties may be located in any one of the fifty states, the
District of Columbia, Guam, Puerto Rico or any other territory of the United
States.
The payment terms of the Loans to be included in a Trust Fund will be
described in the related Prospectus Supplement and may include any of the
following features (or combination thereof) or other features, all as described
above or in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate,
a rate adjustable from time to time in relation to an index
(which will be specified in the related Prospectus
Supplement), a rate that is fixed for a period of time or
under certain circumstances and is followed by an adjustable
rate, a rate that otherwise varies from time to time, or a
rate that is convertible from an adjustable rate to a fixed
rate. Changes to an adjustable rate may be subject to periodic
limitations, maximum rates, minimum rates or a combination of
such limitations. Accrued interest may be deferred and added
to the principal of a loan for such periods and under such
circumstances as may be specified in the related
12
<PAGE>
Prospectus Supplement. Loans may provide for the payment of
interest at a rate lower than the specified interest rate
borne by such Mortgage (the "LOAN RATE") for a period of time
or for the life of the Loan, and the amount of any difference
may be contributed from funds supplied by the Seller of the
Property or another source.
(b) Principal may be payable on a level debt
service basis to fully amortize the loan over its term, may be
calculated on the basis of an assumed amortization schedule
that is significantly longer than the original term to
maturity or on an interest rate that is different from the
interest rate on the Loan or may not be amortized during all
or a portion of the original term. Payment of all or a
substantial portion of the principal may be due on maturity
("balloon payment"). Principal may include interest that has
been deferred and added to the principal balance of the Loan.
(c) Monthly payments of principal and
interest may be fixed for the life of the loan, may increase
over a specified period of time or may change from period to
period. Loans may include limits on periodic increases or
decreases in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject
to a prepayment fee, which may be fixed for the life of the
loan or may decline over time, and may be prohibited for the
life of the loan or for certain periods ("lockout periods").
Certain loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a
prepayment fee in connection with any such subsequent
prepayment. Other loans may permit prepayments without payment
of a fee unless the prepayment occurs during specified time
periods. The loans may include "due on sale" clauses which
permit the mortgagee to demand payment of the entire loan in
connection with the sale or certain transfers of the related
Property. Other loans may be assumable by persons meeting the
then applicable underwriting standards of the Seller.
As more fully described in the related Prospectus Supplement, interest
on each Revolving Credit Line Loan, excluding introduction rates offered from
time to time during promotional periods, is computed and payable monthly on the
average daily outstanding principal balance of such Loan. Principal amounts on a
Revolving Credit Line Loan may be drawn down (up to a maximum amount as set
forth in the related Prospectus Supplement) or repaid under each Revolving
Credit Line Loan from time to time, but may be subject to a minimum periodic
payment. Except to the extent provided in the related Prospectus Supplement, the
Trust Fund will not include any amounts borrowed under a Revolving Credit Line
Loan after the Cut-off Date. The full amount of a Closed-End Loan is advanced at
the inception of the loan and generally is repayable in equal (or substantially
equal) installments of an amount to fully amortize such loan at its stated
maturity. Except to the extent provided in the related Prospectus Supplement,
the original terms to stated maturity of Closed-End Loan will not exceed 360
months. Under certain circumstances, under either a Revolving Credit Line Loan
or a Closed-End Loan, a borrower may choose an interest only payment option and
is obligated to pay only the amount of interest which accrues on the loan during
the billing cycle. An interest only payment option may be available for a
specified period before the borrower must begin paying at least the minimum
monthly payment of a specified percentage of the average outstanding balance of
the loan.
The aggregate principal balance of Loans secured by Properties that are
owner-occupied will be disclosed in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, the sole basis for a
representation that a given percentage of the Loans is secured by Single Family
Property that is owner-occupied will be either (i) the making of a
representation by the borrower at origination of the Loan either that the
underlying Property will be used by the borrower for a period of at least six
months every year or that the borrower intends to use the Property as a primary
residence or (ii) a finding that the address of the underlying Property is the
borrower's mailing address.
The Loans may include fixed-rate, closed-end mortgage loans having
terms to maturity of up to 30 years and secured by first-lien mortgages
originated on Properties containing one to four residential units and no more
than three income producing non-residential units ("Small Mixed-Use
Properties"). At least 50% of the units contained in a Small Mixed-Use Property
will consist of residential units. Income from such non-residential units will
not exceed 40% of the adjusted gross income of the related borrower. The maximum
Loan-to-Value Ratio on Small Mixed-Use Properties
13
<PAGE>
will not exceed 65%. Small Mixed-Use Properties may be owner occupied or
investor properties and the loan purpose may be a refinancing or a purchase.
HOME IMPROVEMENT CONTRACTS. The Trust Fund Assets for a Series may
consist, in whole or part, of Home Improvement Contracts originated by a home
improvement contractor, a thrift or a commercial mortgage banker in the ordinary
course of business. As specified in the related Prospectus Supplement, the Home
Improvement Contracts will either be unsecured or secured by the Mortgages
primarily on Single Family Properties which are generally subordinate to other
mortgages on the same Property, or secured by purchase money security interest
in the Home Improvements financed thereby. Except as otherwise specified in the
related Prospectus Supplement, the Home Improvement Contracts will be fully
amortizing and may have fixed interest rates or adjustable interest rates and
may provide for other payment characteristics as described below and in the
related Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, the
Home Improvements securing the Home Improvement Contracts will include, but are
not limited to, replacement windows, house siding, new roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels.
The initial Loan-to-Value Ratio of a Home Improvement Contract is
computed in the manner described in the related Prospectus Supplement.
ADDITIONAL INFORMATION. Each Prospectus Supplement will contain
information, as of the date of such Prospectus Supplement and to the extent then
specifically known to the Depositor, with respect to the Loans contained in the
related Pool, including (i) the aggregate outstanding principal balance and the
average outstanding principal balance of the Loans as of the applicable Cut-off
Date, (ii) the type of property securing the Loan (e.g., one- to four-family
houses, individual units in condominium apartment buildings, vacation and second
homes or other real property), (iii) the original terms to maturity of the
Loans, (iv) the largest principal balance and the smallest principal balance of
any of the Loans, (v) the earliest origination date and latest maturity date of
any of the Loans, (vi) the Loan-to-Value Ratios or Combined Loan-to-Value
Ratios, as applicable, of the Loans, (vii) the Loan Rates or annual percentage
rates ("APR") or range of Loan Rates or APR's borne by the Loans, and (viii) the
geographical location of the Loans on a state-by-state basis. If specific
information respecting the Loans is not known to the Depositor at the time the
related Securities are initially offered, more general information of the nature
described above will be provided in the related Prospectus Supplement, and
specific information will be set forth in the Detailed Description.
Except as otherwise specified in the related Prospectus Supplement, the
"COMBINED LOAN-TO-VALUE Ratio" of a Loan at any given time is the ratio,
expressed as a percentage, of (i) the sum of (a) the original principal balance
of the Loan (or, in the case of a Revolving Credit Line Loan, the maximum amount
thereof available) and (b) the outstanding principal balance at the date of
origination of the Loan of any senior mortgage loan(s) or, in the case of any
open-ended senior mortgage loan, the maximum available line of credit with
respect to such mortgage loan, regardless of any lesser amount actually
outstanding at the date of origination of the Loan, to (ii) the Collateral Value
of the related Property. Except as otherwise specified in the related Prospectus
Supplement, the "COLLATERAL VALUE" of the Property, other than with respect to
certain Loans the proceeds of which were used to refinance an existing mortgage
loan (each, a "REFINANCE LOAN"), is the lesser of (a) the appraised value
determined in an appraisal obtained by the originator at origination of such
Loan and (b) the sales price for such Property. In the case of Refinance Loans,
the "Collateral Value" of the related Property is the appraised value thereof
determined in an appraisal obtained at the time of refinancing.
PRIVATE ASSET BACKED SECURITIES
GENERAL. Private Asset Backed Securities may consist of (a)
pass-through certificates or participation certificates evidencing an undivided
interest in a pool of home equity or home improvement loans, or (b)
collateralized mortgage obligations secured by home equity or home improvement
loans. Private Asset Backed Securities may include stripped asset backed
securities representing an undivided interest in all or a part of either the
principal distributions (but not the interest distributions) or the interest
distributions (but not the principal distributions) or in some specified portion
of the principal and interest distributions (but not all of such distributions)
on certain home equity or home improvement loans. Private Asset Backed
Securities will have been issued pursuant to a pooling and servicing agreement,
an indenture or similar agreement (a "PABS AGREEMENT"). The seller/servicer of
the underlying Loans will have entered
14
<PAGE>
into the PABS Agreement with the trustee under such PABS Agreement (the "PABS
TRUSTEE"). The PABS Trustee or its agent, or a custodian, will possess the loans
underlying such Private Asset Backed Security. Loans underlying a Private Asset
Backed Security will be serviced by a servicer (the "PABS SERVICER") directly or
by one or more subservicers who may be subject to the supervision of the PABS
Servicer. Except as otherwise specified in the related Prospectus Supplement,
the PABS Servicer will be a FNMA or FHLMC approved servicer and, if FHA Loans
underlie the Private Asset Backed Securities, approved by HUD as an FHA
mortgagee.
The issuer of the Private Asset Backed Securities (the "PABS ISSUER")
will be a financial institution or other entity engaged generally in the
business of mortgage lending, a public agency or instrumentality of a state,
local or federal government, or a limited purpose corporation organized for the
purpose of, among other things, establishing trusts and acquiring and selling
housing loans to such trusts and selling beneficial interests in such trusts.
The PABS Issuer shall not be an affiliate of the Depositor. The obligations of
the PABS Issuer will generally be limited to certain representations and
warranties with respect to the assets conveyed by it to the related trust.
Except as otherwise specified in the related Prospectus Supplement, the PABS
Issuer will not have guaranteed any of the assets conveyed to the related trust
or any of the Private Asset Backed Securities issued under the PABS Agreement.
Additionally, although the loans underlying the Private Asset Backed Securities
may be guaranteed by an agency or instrumentality of the United States, the
Private Asset Backed Securities themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Asset Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Asset Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Asset Backed
Securities by the PABS Trustee or the PABS Servicer. The PABS Issuer or the PABS
Servicer may have the right to repurchase assets underlying the Private Asset
Backed Securities after a certain date or under other circumstances as specified
in the related Prospectus Supplement.
UNDERLYING LOANS. The home equity or home improvement loans underlying
the Private Asset Backed Securities may consist of fixed rate, level payment,
fully amortizing loans or graduated payment loans, buydown loans, adjustable
rate loans, or loans having balloon or other special payment features. Such
loans may be secured by single family property, multifamily property,
manufactured homes or by an assignment of the proprietary lease or occupancy
agreement relating to a specific dwelling within a cooperative and the related
shares issued by such cooperative. Except as otherwise specified in the related
Prospectus Supplement, the underlying loans will have the following
characterizations: (i) no loan will have had a Loan-to-Value Ratio at
origination in excess of 95%, (ii) each single family loan secured by a
mortgaged property that had a Loan-to-Value ratio in excess of 80% at
origination will be covered by a primary mortgage insurance policy, (iii) each
loan will have had an original term to stated maturity of not less than 5 years
and not more than 40 years, (iv) no loan that was more than 89 days delinquent
as to the payment of principal or interest will have been eligible for inclusion
in the assets under the related PABS Agreement, (v) each loan (other than a
cooperative loan) will be required to be covered by a standard hazard insurance
policy (which may be a blanket policy), and (vi) each loan (other than a
cooperative loan or a contract secured by a manufactured home) will be covered
by a title insurance policy.
CREDIT SUPPORT RELATING TO PRIVATE ASSET BACKED SECURITIES. Credit
support in the form of reserve funds, subordination of other private
certificates issued under the PABS Agreement, letters of credit, surety bonds,
insurance policies or other types of credit support may be provided with respect
to the loans underlying the Private Asset Backed Securities themselves.
RATING OF PRIVATE ASSET BACKED SECURITIES. The PABS upon their issuance
will have been assigned a rating in one of the four highest rating categories by
at least one nationally recognized statistical rating agency.
ADDITIONAL INFORMATION. The Prospectus Supplement for a Series for
which the Trust Fund includes Private Asset Backed Securities will specify (i)
the aggregate approximate principal amount and type of the Private Asset Backed
Securities to be included in the Trust Fund, (ii) certain characteristics of the
loans which comprise the underlying assets for the Private Asset Backed
Securities including (A) the payment features of such loans, (B) the approximate
aggregate principal balance, if known, of underlying loans insured or guaranteed
by a governmental entity, (C) the servicing fee or range of servicing fees with
respect to the loans, and (D) the minimum and maximum stated maturities of the
underlying loans at origination, (iii) the maximum original term-to-stated
maturity of the Private Asset
15
<PAGE>
Backed Securities, (iv) the weighted average term-to-stated maturity of the
Private Asset Backed Securities, (v) the pass-through or certificate rate of the
Private Asset Backed Securities, (vi) the weighted average pass-through or
certificate rate of the Private Asset Backed Securities, (vii) the PABS Issuer,
the PABS Servicer (if other than the PABS Issuer) and the PABS Trustee for such
Private Asset Backed Securities, (viii) certain characteristics of credit
support, if any, such as reserve funds, insurance policies, surety bonds,
letters of credit or guaranties relating to the loans underlying the Private
Asset Backed Securities or to such Private Asset Backed Securities themselves,
(ix) the term on which the underlying loans for such Private Asset Backed
Securities may, or are required to, be purchased prior to their stated maturity
or the stated maturity of the Private Asset Backed Securities, (x) the terms on
which loans may be substituted for those originally underlying the Private Asset
Backed Securities and (xi) to the extent provided in a periodic report to the
Trustee in its capacity as holder of the PABS, certain information regarding the
status of the credit support, if any, relating to the PABS.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports
filed or caused to be filed by Financial Asset Securities Corp. ("FASCO") with
respect to a Trust Fund pursuant to Section 13(a), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended, prior to the termination of the offering of
Certificates evidencing interests therein.
Upon request by any person to whom this Prospectus is delivered in connection
with the offering of one or more classes of Certificates, FASCO will provide or
cause to be provided without charge a copy of any such documents and/or reports
incorporated herein by reference, in each case to the extent such documents or
reports relate to such classes of Certificates, other than the exhibits to such
documents (unless such exhibits are specifically incorporated by reference in
such documents). Requests to FASCO should be directed in writing to: Paul D.
Stevelman, Financial Asset Securities Corp., 600 Steamboat Road, Greenwich,
Connecticut 06830, telephone number (203) 625-2700. FASCO has determined that
its financial statements are not material to the offering of any Certificates.
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and Exchange
(the "SEC") at 450 Fifth Street, N.W., Washington, D.C. 20549. Investors may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding issuers, including each Trust Fund, that file
electronically with the SEC.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Trust Fund Assets or will be used by
the Depositor for general corporate purposes. The Depositor expects to sell
Securities in Series from time to time, but the timing and amount of offerings
of Securities will depend on a number of factors, including the volume of Trust
Fund Assets acquired by the Depositor, prevailing interest rates, availability
of funds and general market conditions.
THE DEPOSITOR
Financial Asset Securities Corp., the Depositor, is a Delaware
corporation organized on August 2, 1995 for the limited purpose of acquiring,
owning and transferring Trust Fund Assets and selling interests therein or bonds
secured thereby. It is an indirect limited purpose finance subsidiary of
National Westminster Bank Plc and an affiliate of Greenwich Capital Markets,
Inc., a registered securities broker-dealer. The Depositor maintains its
principal office at 600 Steamboat Road, Greenwich, Connecticut 06830. Its
telephone number is (203) 625-2700.
Neither the Depositor nor any of the Depositor's affiliates will insure
or guarantee distributions on the Securities of any Series.
16
<PAGE>
LOAN PROGRAM
The Loans will have been purchased by the Depositor, either directly or
through affiliates, from Sellers. Unless otherwise specified in the related
Prospectus Supplement, the Loans so acquired by the Depositor will have been
originated in accordance with the underwriting criteria specified below under
"Underwriting Standards".
UNDERWRITING STANDARDS
Each Seller will represent and warrant that all Loans originated and/or
sold by it to the Depositor or one of its affiliates will have been underwritten
in accordance with standards consistent with those utilized by mortgage lenders
generally during the period of origination for similar types of loans. As to any
Loan insured by the FHA or partially guaranteed by the VA, the Seller will
represent that it has complied with underwriting policies of the FHA or the VA,
as the case may be.
Underwriting standards are applied by or on behalf of a lender to
evaluate the borrower's credit standing and repayment ability, and the value and
adequacy of the Property as collateral. In general, a prospective borrower
applying for a Loan is required to fill out a detailed application designed to
provide to the underwriting officer pertinent credit information, including the
principal balance and payment history with respect to any senior mortgage, if
any, which, unless otherwise specified in the related Prospectus Supplement, the
borrower's income will be verified by the Seller.
As part of the description of the borrower's financial condition, the borrower
generally is required to provide a current list of assets and liabilities and a
statement of income and expenses, as well as an authorization to apply for a
credit report which summarizes the borrower's credit history with local
merchants and lenders and any record of bankruptcy.
In most cases, an employment verification is obtained from an independent source
(typically the borrower's employer) which verification reports the length of
employment with that organization, the current salary, and whether it is
expected that the borrower will continue such employment in the future. If a
prospective borrower is self-employed, the borrower may be required to submit
copies of signed tax returns. The borrower may also be required to authorize
verification of deposits at financial institutions where the borrower has demand
or savings accounts.
In determining the adequacy of the property to be used as collateral,
an appraisal will generally be made of each property considered for financing.
The appraiser is generally required to inspect the property, issue a report on
its condition and, if applicable, verify that construction, if new, has been
completed. The appraisal is based on the market value of comparable homes, the
estimated rental income (if considered applicable by the appraiser) and the cost
of replacing the home. The value of the property being financed, as indicated by
the appraisal, must be such that it currently supports, and is anticipated to
support in the future, the outstanding loan balance.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available (i) to meet the borrower's
monthly obligations on the proposed mortgage loan (generally determined on the
basis of the monthly payments due in the year of origination) and other expenses
related to the property (such as property taxes and hazard insurance) and (ii)
to meet monthly housing expenses and other financial obligations and monthly
living expenses. The underwriting standards applied by Sellers, particularly
with respect to the level of loan documentation and the mortgagor's income and
credit history, may be varied in appropriate cases where factors such as low
Combined Loan-to-Value Ratios or other favorable credit exist.
QUALIFICATIONS OF SELLERS
Unless otherwise specified in the related Prospectus Supplement, each
Seller will be required to satisfy the qualifications set forth herein. Each
Seller must be an institution experienced in originating and servicing loans of
the type contained in the related Pool in accordance with accepted practices and
prudent guidelines, and must maintain satisfactory facilities to originate and
service those loans. Unless otherwise specified in the related Prospectus
Supplement, each Seller will be a seller/servicer approved by either FNMA or
FHLMC.
17
<PAGE>
REPRESENTATIONS BY SELLERS; REPURCHASES OR SUBSTITUTIONS
Each Seller will have made representations and warranties in respect of
the Loans sold by such Seller and evidenced by all, or a part, of a Series of
Securities. Except as otherwise specified in the related Prospectus Supplement,
such representations and warranties include, among other things: (i) that title
insurance (or in the case of Properties located in areas where such policies are
generally not available, an attorney's certificate of title) and any required
hazard insurance policy (or certificate of title as applicable) remained in
effect on the date of purchase of the Loan from the Seller by or on behalf of
the Depositor; (ii) that the Seller had good title to each such Loan and such
Loan was subject to no offsets, defenses, counterclaims or rights of rescission
except to the extent that any buydown agreement described herein may forgive
certain indebtedness of a borrower; (iii) that each Loan constituted a valid
lien on the Property (subject only to permissible liens disclosed, if
applicable, title insurance exceptions, if applicable, and certain other
exceptions described in the Agreement) and that the Property was free from
damage and was in acceptable condition; (iv) that there were no delinquent tax
or assessment liens against the Property; (v) that no required payment on a Loan
was more than thirty days' delinquent; and (vi) that each Loan was made in
compliance with, and is enforceable under, all applicable local, state and
federal laws and regulations in all material respects.
If so specified in the related Prospectus Supplement, the
representations and warranties of a Seller in respect of a Loan will be made not
as of the Cut-off Date but as of the date on which such Seller sold the Loan to
the Depositor or one of its affiliates. Under such circumstances, a substantial
period of time may have elapsed between such date and the date of initial
issuance of the Series of Securities evidencing an interest in such Loan. Since
the representations and warranties of a Seller do not address events that may
occur following the sale of a Loan by such Seller, its repurchase obligation
described below will not arise if the relevant event that would otherwise have
given rise to such an obligation with respect to a Loan occurs after the date of
sale of such Loan by such Seller to the Depositor or its affiliates.
However, the Depositor will not include any Loan in the Trust Fund for any
Series of Securities if anything has come to the Depositor's attention that
would cause it to believe that the representationes and warranties of a Seller
will not be accurate and complete in all material respects in respect of such
Loan as of the date of initial issuance of the related Series of Securities. If
the Master Servicer is also a Seller of Loans with respect to a particular
Series, such representations will be in addition to the representations and
warranties made by the Master Servicer in its capacity as a Master Servicer.
The Master Servicer or the Trustee, if the Master Servicer is the
Seller, will promptly notify the relevant Seller of any breach of any
representation or warranty made by it in respect of a Loan which materially and
adversely affects the interests of the Securityholders in such Loan. Unless
otherwise specified in the related Prospectus Supplement, if such Seller cannot
cure such breach within 90 days following notice from the Master Servicer or the
Trustee, as the case may be, then such Seller will be obligated either (i) to
repurchase such Loan from the Trust Fund at a price (the "PURCHASE PRICE") equal
to 100% of the unpaid principal balance thereof as of the date of the repurchase
plus accrued interest thereon to the first day of the month following the month
of repurchase at the Loan Rate (less any Advances or amount payable as related
servicing compensation if the Seller is the Master Servicer) or (ii) to
substitute for such Loan a replacement loan that satisfies certain requirements
set forth in the Agreement. If a REMIC election is to be made with respect to a
Trust Fund, unless otherwise specified in the related Prospectus Supplement, the
Master Servicer or a holder of the related residual certificate generally will
be obligated to pay any prohibited transaction tax which may arise in connection
with any such repurchase or substitution and the Trustee must have received a
satisfactory opinion of counsel that such repurchase or substitution will not
cause the Trust Fund to lose its status as a REMIC or otherwise subject the
Trust Fund to a prohibited transaction tax. The Master Servicer may be entitled
to reimbursement for any such payment from the assets of the related Trust Fund
or from any holder of the related residual certificate. See "Description of the
Securities-General". Except in those cases in which the Master Servicer is the
Seller, the Master Servicer will be required under the applicable Agreement to
enforce this obligation for the benefit of the Trustee and the holders of the
Securities, following the practices it would employ in its good faith business
judgment were it the owner of such Loan. This repurchase or substitution
obligation will constitute the sole remedy available to holders of Securities or
the Trustee for a breach of representation by a Seller.
Neither the Depositor nor the Master Servicer (unless the Master
Servicer is the Seller) will be obligated to purchase or substitute a Loan if a
Seller defaults on its obligation to do so, and no assurance can be given that
Sellers will carry out their respective repurchase or substitution obligations
with respect to Loans. However, to the extent that a breach of a representation
and warranty of a Seller may also constitute a breach of a representation made
by the Master
18
<PAGE>
Servicer, the Master Servicer may have a repurchase or substitution obligation
as described below under "The Agreements-Assignment of Trust Fund Assets".
DESCRIPTION OF THE SECURITIES
Each Series of Certificates will be issued pursuant to a pooling and
servicing agreement (a "Pooling and Servicing Agreement") or a Trust Agreement
among the Depositor, the Servicer, if the Series relates to Loans, and the
Trustee. A form of Pooling and Servicing Agreement and Trust Agreement has been
filed as an exhibit to the Registration Statement of which this Prospectus forms
a part. Each Series of Notes will be issued pursuant to an indenture (the
"INDENTURE") between the related Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the "TRUSTEE") with respect to such Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. A Series may consist of both Notes and
Certificates.
Each Agreement, dated as of the related Cut-off Date, will be among the
Depositor, the Master Servicer and the Trustee for the benefit of the holders of
the Securities of such Series. The provisions of each Agreement will vary
depending upon the nature of the Securities to be issued thereunder and the
nature of the related Trust Fund. The following summaries describe certain
provisions which may appear in each Agreement. The Prospectus Supplement for a
Series of Securities will describe any provision of the Agreement relating to
such Series that mainly differs from the description thereof contained in this
Prospectus. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
Agreement for each Series of Securities and the applicable Prospectus
Supplement. The Depositor will provide a copy of the Agreement (without
exhibits) relating to any Series without charge upon written request of a holder
of record of a Security of such Series addressed to Financial Asset Securities
Corp., 600 Steamboat Road, Greenwich, Connecticut 06830, Attention: Asset Backed
Finance Group.
GENERAL
Unless otherwise specified in the related Prospectus Supplement, the
Certificates of each Series will be issued in book-entry or fully registered
form, in the authorized denominations specified in the related Prospectus
Supplement, will evidence specified beneficial ownership interests in the
related Trust Fund created pursuant to each Agreement and will not be entitled
to payments in respect of the assets included in any other Trust Fund
established by the Depositor.
Unless otherwise specified in the related Prospectus Supplement, the Notes of
each Series will be issued in book-entry or fully registered form, in the
authorized denominations specified in the related Prospectus Supplement, will be
secured by the pledge of the assets of the related Trust Fund and will not be
entitled to payments in respect of the assets included in any other Trust Fund
established by the Depositor. The Securities will not represent obligations of
the Depositor or any affiliate of the Depositor. Certain of the Loans may be
guaranteed or insured as set forth in the related Prospectus Supplement. Each
Trust Fund will consist of, to the extent provided in the Agreement, (i) the
Trust Fund Assets, as from time to time are subject to the related Agreement
(exclusive of any amounts specified in the related Prospectus Supplement
("RETAINED INTEREST")), including all payments of interest and principal
received with respect to the Loans after the Cut-off Date (to the extent not
applied in computing the Cut-off Date Principal Balance); (ii) such assets as
from time to time are required to be deposited in the related Security Account,
as described below under "The Agreements-Payments on Loans; Deposits to Security
Account"; (iii) property which secured a Loan and which is acquired on behalf of
the Securityholders by foreclosure or deed in lieu of foreclosure and (iv) any
insurance policies or other forms of credit enhancement required to be
maintained pursuant to the related Agreement. If so specified in the related
Prospectus Supplement, a Trust Fund may also include one or more of the
following: reinvestment income on payments received on the Trust Fund Assets, a
Reserve Account, a mortgage pool insurance policy, a Special Hazard Insurance
Policy, a Bankruptcy Bond, one or more letters of credit, a surety bond,
guaranties or similar instruments or other agreements.
Each Series of Securities will be issued in one or more classes. Each
class of Securities of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Trust Fund Assets in the related Trust Fund. A Series of
Securities may include one or more classes that are senior in right to payment
to one or more other classes of Securities of such Series. One or more classes
of Securities of a Series may be entitled to receive distributions of principal,
interest or any combination thereof. Distributions on one or more classes of a
Series of Securities may be made prior to one or more other classes, after the
occurrence of specified events, in accordance with a schedule or formula, on the
basis of collections from designated portions of the Trust Fund Assets in the
related
19
<PAGE>
Trust Fund or on a different basis, in each case as specified in the related
Prospectus Supplement. The timing and amounts of such distributions may vary
among classes or over time as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal only
or interest only) on the related Securities will be made by the Trustee on each
Distribution Date (i.e., monthly or at such other intervals and on the dates as
are specified in the Prospectus Supplement) in proportion to the percentages
specified in the related Prospectus Supplement. Distributions will be made to
the persons in whose names the Securities are registered at the close of
business on the dates specified in the related Prospectus Supplement (each, a
"RECORD DATE"). Distributions will be made in the manner specified in the
Prospectus Supplement to the persons entitled thereto at the address appearing
in the register maintained for holders of Securities (the "SECURITY REGISTER");
provided, however, that the final distribution in retirement of the Securities
will be made only upon presentation and surrender of the Securities at the
office or agency of the Trustee or other person specified in the notice to
Securityholders of such final distribution.
The Securities will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Securities of any Series but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding of a class of Securities
entitled only to a specified percentage of payments of either interest or
principal or a notional amount of other interest or principal on the related
Loans or a class of Securities entitled to receive payments of interest and
principal on the Loans only after payments to other classes or after the
occurrence of certain specified events by or on behalf of any employee benefit
plan or other retirement arrangement (including individual retirement accounts
and annuities, Keogh plans and collective investment funds in which such plans,
accounts or arrangements are invested) subject to provisions of ERISA or the
Code may result in prohibited transactions within the meaning of ERISA and the
Code. See "ERISA Considerations". Unless otherwise specified in the related
Prospectus Supplement, the transfer of Securities of such a class will not be
registered unless the transferee (i) represents that it is not, and is not
purchasing on behalf of, any such plan, account or arrangement or (ii) provides
an opinion of counsel satisfactory to the Trustee and the Depositor that the
purchase of Securities of such a class by or on behalf of such plan, account or
arrangement is permissible under applicable law and will not subject the
Trustee, the Master Servicer or the Depositor to any obligation or liability in
addition to those undertaken in the Agreements.
As to each Series, an election may be made to treat the related Trust
Fund or designated portions thereof as a "real estate mortgage investment
conduit" or "REMIC" as defined in the Code. The related Prospectus Supplement
will specify whether a REMIC election is to be made. Alternatively, the
Agreement for a Series may provide that a REMIC election may be made at the
discretion of the Depositor or the Master Servicer and may only be made if
certain conditions are satisfied. As to any such Series, the terms and
provisions applicable to the making of a REMIC election, as well as any material
federal income tax consequences to Securityholders not otherwise described
herein, will be set forth in the related Prospectus Supplement. If such an
election is made with respect to a Series, one of the classes will be designated
as evidencing the sole class of "residual interests" in the related REMIC, as
defined in the Code. All other classes of Securities in such a Series will
constitute "regular interests" in the related REMIC, as defined in the Code.
As to each Series with respect to which a REMIC election is to be made, the
Master Servicer or a holder of the related residual certificate will be
obligated to take all actions required in order to comply with applicable laws
and regulations and will be obligated to pay any prohibited transaction taxes.
The Master Servicer, to the extent set forth in the related Prospectus
Supplement, will be entitled to reimbursement for any such payment from the
assets of the Trust Fund or from any holder of the related residual certificate.
DISTRIBUTIONS ON SECURITIES
GENERAL. In general, the method of determining the amount of
distributions on a particular Series of Securities will depend on the type of
credit support, if any, that is used with respect to such Series. See "Credit
Enhancement" herein. Set forth below are descriptions of various methods that
may be used to determine the amount of distributions on the Securities of a
particular Series. The Prospectus Supplement for each Series of Securities will
describe the method to be used in determining the amount of distributions on the
Securities of such Series.
20
<PAGE>
Distributions allocable to principal and interest on the Securities
will be made by the Trustee out of, and only to the extent of, funds in the
related Security Account, including any funds transferred from any Reserve
Account (a "RESERVE ACCOUNT"). As between Securities of different classes and as
between distributions of principal (and, if applicable, between distributions of
Principal Prepayments, as defined below, and scheduled payments of principal)
and interest, distributions made on any Distribution Date will be applied as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, the distributions to any class of Securities
will be made pro rata to all Securityholders of that class.
AVAILABLE FUNDS. All distributions on the Securities of each Series on
each Distribution Date will be made from the Available Funds described below, in
accordance with the terms described in the related Prospectus Supplement and
specified in the Agreement. Unless otherwise provided in the related Prospectus
Supplement, "AVAILABLE FUNDS" for each Distribution Date will equal the sum of
the following amounts:
(i) the aggregate of all previously undistributed payments on
account of principal (including Principal Prepayments, if any,
and prepayment penalties, if so provided in the related
Prospectus Supplement) and interest on the Loans in the
related Trust Fund (including Liquidation Proceeds and
Insurance Proceeds and amounts drawn under letters of credit
or other credit enhancement instruments as permitted
thereunder and as specified in the related Agreement) received
by the Master Servicer after the Cut-off Date and on or prior
to the day of the month of the related Distribution Date
specified in the related Prospectus Supplement (the
"Determination Date") except
(a) all payments which were due on or before
the Cut-off Date;
(b) all Liquidation Proceeds and all
Insurance Proceeds, all Principal Prepayments and all other
proceeds of any Loan purchased by the Depositor, Master
Servicer, any Sub-Servicer or any Seller pursuant to the
Agreement that were received after the prepayment period
specified in the related Prospectus Supplement and all related
payments of interest representing interest for any period
after the interest accrual period;
(c) all scheduled payments of principal
and interest due on a date or dates subsequent to the Due
Period relating to such Distribution Date;
(d) amounts received on particular Loans as
late payments of principal or interest or other amounts
required to be paid by borrowers, but only to the extent of
any unreimbursed advance in respect thereof made by the Master
Servicer (including the related Sub-Servicers, Support
Servicers or the Trustee);
(e) amounts representing reimbursement, to
the extent permitted by the Agreement and as described under
"Advances" below, for advances made by the Master Servicer,
Sub-Servicers (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
21
<PAGE>
(v) if applicable, the amount of prepayment interest
shortfall.
DISTRIBUTIONS OF INTEREST. Unless otherwise specified in the related
Prospectus Supplement, interest will accrue on the aggregate Security Principal
Balance (or, in the case of Securities (i) entitled only to distributions
allocable to interest, the aggregate notional principal balance or (ii) which,
under certain circumstances, allow for the accrual of interest otherwise
scheduled for payment to remain unpaid until the occurrence of certain events
specified in the related Prospectus Supplement) of each class of Securities
entitled to interest from the date, at the Pass-Through Rate (which may be a
fixed rate or rate adjustable as specified in such Prospectus Supplement) and
for the periods specified in such Prospectus Supplement. To the extent funds are
available therefor, interest accrued during each such specified period on each
class of Securities entitled to interest (other than a class of Securities that
provides for interest that accrues, but is not currently payable, referred to
hereafter as "ACCRUAL SECURITIES") will be distributable on the Distribution
Dates specified in the related Prospectus Supplement until the aggregate
Security Principal Balance of the Securities of such class has been distributed
in full or, in the case of Securities entitled only to distributions allocable
to interest, until the aggregate notional principal balance of such Securities
is reduced to zero or for the period of time designated in the related
Prospectus Supplement. The original Security Principal Balance of each Security
will equal the aggregate distributions allocable to principal to which such
Security is entitled. Unless otherwise specified in the related Prospectus
Supplement, distributions allocable to interest on each Security that is not
entitled to distributions allocable to principal will be calculated based on the
notional principal balance of such Security. The notional principal balance of a
Security will not evidence an interest in or entitlement to distributions
allocable to principal but will be used solely for convenience in expressing the
calculation of interest and for certain other purposes.
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending two or
more days prior to a Distribution Date, the effective yield to Securityholders
will be reduced from the yield that would otherwise be obtainable if interest
payable on the Security were to accrue through the day immediately preceding
each Distribution Date, and the effective yield (at par) to Securityholders will
be less than the indicated coupon rate.
With respect to any class of Accrual Securities, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid on
a given Distribution Date will be added to the aggregate Security Principal
Balance of such class of Securities on that Distribution Date. Distributions of
interest on any class of Accrual Securities will commence only after the
occurrence of the events specified in the related Prospectus Supplement. Prior
to such time, the beneficial ownership interest of such class of Accrual
Securities in the Trust Fund, as reflected in the aggregate Security Principal
Balance of such class of Accrual Securities, will increase on each Distribution
Date by the amount of interest that accrued on such class of Accrual Securities
during the preceding interest accrual period but that was not required to be
distributed to such class on such Distribution Date. Any such class of Accrual
Securities will thereafter accrue interest on its outstanding Security Principal
Balance as so adjusted.
DISTRIBUTIONS OF PRINCIPAL. The related Prospectus Supplement will
specify the method by which the amount of principal to be distributed on the
Securities on each Distribution Date will be calculated and the manner in which
such amount will be allocated among the classes of Securities entitled to
distributions of principal. The aggregate Security Principal Balance of any
class of Securities entitled to distributions of principal generally will be the
aggregate original Security Principal Balance of such class of Securities
specified in such Prospectus Supplement, reduced by all distributions reported
to the holders of such Securities as allocable to principal and, (i) in the case
of Accrual Securities, increased by all interest accrued but not then
distributable on such Accrual Securities and (ii) in the case of adjustable rate
Securities, subject to the effect of negative amortization, if applicable.
If so provided in the related Prospectus Supplement, one or more
classes of Securities will be entitled to receive all or a disproportionate
percentage of the payments of principal which are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the month of such payments ("PRINCIPAL
PREPAYMENTS") in the percentages and under the circumstances or for the periods
specified in such Prospectus Supplement. Any such allocation of Principal
Prepayments to such class or classes of Securityholders will have the effect of
accelerating the amortization of such Securities while increasing the interests
evidenced by other Securities in the Trust Fund. Increasing the interests of the
other Securities relative to that of certain Securities allocated
22
<PAGE>
by the principal prepayments is intended to preserve the availability of the
subordination provided by such other Securities. See "Credit
Enhancement-Subordination".
UNSCHEDULED DISTRIBUTIONS. The Securities will be subject to receipt of
distributions before the next scheduled Distribution Date under the
circumstances and in the manner described below and in such Prospectus
Supplement. If applicable, the Trustee will be required to make such unscheduled
distributions on the day and in the amount specified in the related Prospectus
Supplement if, due to substantial payments of principal (including Principal
Prepayments) on the Trust Fund Assets, the Trustee or the Master Servicer
determines that the funds available or anticipated to be available from the
Security Account and, if applicable, any Reserve Account, may be insufficient to
make required distributions on the Securities on such Distribution Date. Unless
otherwise specified in the related Prospectus Supplement, the amount of any such
unscheduled distribution that is allocable to principal will not exceed the
amount that would otherwise have been required to be distributed as principal on
the Securities on the next Distribution Date.
Unless otherwise specified in the related Prospectus Supplement, the unscheduled
distributions will include interest at the applicable Pass-Through Rate (if any)
on the amount of the unscheduled distribution allocable to principal for the
period and to the date specified in such Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
Securities would have been made on the next Distribution Date, and with respect
to Securities of the same class, unscheduled distributions of principal will be
made on the same basis as such distributions would have been made on the next
Distribution Date on a pro rata basis. Notice of any unscheduled distribution
will be given by the Trustee prior to the date of such distribution.
ADVANCES
To the extent provided in the related Prospectus Supplement, the Master
Servicer will be required to advance on or before each Distribution Date (from
its own funds, funds advanced by Sub-Servicers or Support Servicers or funds
held in the Security Account for future distributions to the holders of such
Securities), an amount equal to the aggregate of payments of interest and/or
principal that were delinquent on the related Determination Date and were not
advanced by any Sub-Servicer, subject to the Master Servicer's determination
that such advances will be recoverable out of late payments by borrowers,
Liquidation Proceeds, Insurance Proceeds or otherwise. In addition, to the
extent provided in the related Prospectus Supplement, a cash account may be
established to provide for Advances to be made in the event of certain Trust
Fund Assets payment defaults or collection shortfalls.
In making Advances, the Master Servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to holders of the
Securities, rather than to guarantee or insure against losses. If Advances are
made by the Master Servicer from cash being held for future distribution to
Securityholders, the Master Servicer will replace such funds on or before any
future Distribution Date to the extent that funds in the applicable Security
Account on such Distribution Date would be less than the amount required to be
available for distributions to Securityholders on such date. Any Master Servicer
funds advanced will be reimbursable to the Master Servicer out of recoveries on
the specific Loans with respect to which such Advances were made (e.g., late
payments made by the related borrower, any related Insurance Proceeds,
Liquidation Proceeds or proceeds of any Loan purchased by a Sub-Servicer or a
Seller under the circumstances described hereinabove). Advances by the Master
Servicer (and any advances by a Sub-Servicer or a Support Servicer) also will be
reimbursable to the Master Servicer (or Sub-Servicer or a Support Servicer) from
cash otherwise distributable to Securityholders (including the holders of Senior
Securities) to the extent that the Master Servicer determines that any such
Advances previously made are not ultimately recoverable as described above. To
the extent provided in the related Prospectus Supplement, the Master Servicer
also will be obligated to make Advances, to the extent recoverable out of
Insurance Proceeds, Liquidation Proceeds or otherwise, in respect of certain
taxes and insurance premiums not paid by borrowers on a timely basis. Funds so
advanced are reimbursable to the Master Servicer to the extent permitted by the
Agreement. The obligations of the Master Servicer to make advances may be
supported by a cash advance reserve fund, a surety bond or other arrangement, in
each case as described in such Prospectus Supplement.
The Master Servicer or Sub-Servicer may enter into an agreement (a
"SUPPORT AGREEMENT") with a support servicer (each, a "SUPPORT SERVICER")
pursuant to which the Support Servicer agrees to provide funds on behalf of the
23
<PAGE>
Master Servicer or Sub-Servicer in connection with the obligation of the Master
Servicer or Sub-Servicer, as the case may be, to make Advances. The Support
Agreement will be delivered to the Trustee and the Trustee will be authorized to
accept a substitute Support Agreement in exchange for an original Support
Agreement, provided that such substitution of the Support Agreement will not
adversely affect the rating or ratings then in effect on the Securities.
Unless otherwise specified in the related Prospectus Supplement, in the
event the Master Servicer, a Sub-Servicer or a Support Servicer fails to make a
required Advance, the Trustee will be obligated to make such Advance in its
capacity as successor servicer. If the Trustee makes such an Advance, it will be
entitled to be reimbursed for such Advance to the same extent and degree as the
Master Servicer, a Sub-Servicer or a Support Servicer is entitled to be
reimbursed for Advances. See "Description of the Securities-Distributions on
Securities" herein.
COMPENSATING INTEREST
If so specified in the related Prospectus Supplement, the Master
Servicer will be required to remit to the Trustee, with respect to each Loan in
the related Trust Fund as to which a principal prepayment in full or a principal
payment which is in excess of the scheduled monthly payment and is not intended
to cure a delinquency was received during any Due Period, an amount, from and to
the extent of amounts otherwise payable to the Master Servicer as servicing
compensation, equal to the excess, if any, of (a) 30 days' interest on the
principal balance of the related Loan at the Loan Rate net of the per annum rate
at which the Master Servicer's servicing fee accrues, over (b) the amount of
interest actually received on such Loan during such Due Period, net of the
Master Servicer's servicing fee.
REPORTS TO SECURITYHOLDERS
Prior to or concurrently with each distribution on a Distribution Date,
the Master Servicer or the Trustee will furnish to each Securityholder of record
of the related Series a statement setting forth, to the extent applicable to
such Series of Securities, among other things:
(i) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any Principal
Prepayments and any applicable prepayment penalties included
therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the aggregate amount (a) otherwise allocable to the
Subordinated Securityholders on such Distribution Date, and
(b) withdrawn from the Reserve Fund, if any, that is included
in the amounts distributed to the Senior Securityholders;
(v) the outstanding principal balance or notional principal
balance of such class after giving effect to the distribution
of principal on such Distribution Date;
(vi) the percentage of principal payments on the Loans
(excluding prepayments), if any, which such class will be
entitled to receive on the following Distribution Date;
(vii) the percentage of Principal Prepayments on the Loans, if
any, which such class will be entitled to receive on the
following Distribution Date;
(viii) the related amount of the servicing compensation
retained or withdrawn from the Security Account by the Master
Servicer, and the amount of additional servicing compensation
received by the Master Servicer attributable to penalties,
fees, excess Liquidation Proceeds and other similar charges
and items;
(ix) the number and aggregate principal balances of Loans (A)
delinquent (exclusive of Loans in foreclosure) (1) 31 to 60
days, (2) 61 to 90 days and (3) 91 or more days and (B) in
foreclosure and
24
<PAGE>
delinquent (1) 31 to 60 days, (2) 61 to 90 days and (3) 91 or
more days, as of the close of business on the last day of the
calendar month preceding such Distribution Date;
(x) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure;
(xi) if a class is entitled only to a specified portion of
payments of interest on the Loans in the related Pool, the
Pass-Through Rate, if adjusted from the date of the last
statement, of the Loans expected to be applicable to the next
distribution to such class;
(xii) if applicable, the amount remaining in any Reserve
Account at the close of business on the Distribution Date;
(xiii) the Pass-Through Rate as of the day prior to the
immediately preceding Distribution Date; and
(xiv) any amounts remaining under letters of credit, pool
policies or other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a
dollar amount per single Security of the relevant class having the Percentage
Interest specified in the related Prospectus Supplement. The report to
Securityholders for any Series of Securities may include additional or other
information of a similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Securityholder of record at any time during such calendar year a report (a) as
to the aggregate of amounts reported pursuant to (i) and (ii) above for such
calendar year or, in the event such person was a Securityholder of record during
a portion of such calendar year, for the applicable portion of such year and (b)
such other customary information as may be deemed necessary or desirable for
Securityholders to prepare their tax returns.
BOOK-ENTRY REGISTRATION OF SECURITIES
As described in the Prospectus Supplement, if not issued in fully
registered form, each class of Securities will be registered as book-entry
certificates (the "BOOK-ENTRY SECURITIES"). Persons acquiring beneficial
ownership interests in the Securities ("SECURITY OWNERS") will hold their
Securities through the Depository Trust Company ("DTC") in the United States, or
Cedel Bank ("CEDEL") or the Euroclear System ("EUROCLEAR") (in Europe) if they
are participants ("PARTICIPANTS") of such systems, or indirectly through
organizations which are Participants in such systems. The Book-Entry Securities
will be issued in one or more certificates which equal the aggregate principal
balance of the Securities and will initially be registered in the name of Cede &
Co., the nominee of DTC. CEDEL and Euroclear will hold omnibus positions on
behalf of their Participants through customers' securities accounts in CEDEL's
and Euroclear's names on the books of their respective depositaries which in
turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank, N.A. will act as depositary
for CEDEL and The Chase Manhattan Bank will act as depositary for Euroclear (in
such capacities, individually the "RELEVANT DEPOSITARY" and collectively the
"EUROPEAN DEPOSITARIES"). Except as described below, no Security Owner will be
entitled to receive a physical certificate representing such Security (a
"DEFINITIVE SECURITY"). Unless and until Definitive Securities are issued, it is
anticipated that the only "Securityholders" of the Securities will be Cede & Co.
("CEDE"), as nominee of DTC. Security Owners are only permitted to exercise
their rights indirectly through Participants and DTC.
The Security Owner's ownership of a Book-Entry Security will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "FINANCIAL INTERMEDIARY") that maintains the
Security Owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Security will be recorded on the records of DTC (or
of a participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the Security Owner's
Financial Intermediary is not a Participant and on the records of CEDEL or
Euroclear, as appropriate).
25
<PAGE>
Security Owners will receive all distributions of principal of, and
interest on, the Securities from the Trustee through DTC and Participants. While
the Securities are outstanding (except under the circumstances described below),
under the rules, regulations and procedures creating and affecting DTC and its
operations (the "Rules"), DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit distributions of principal of, and interest on,
the Securities. Participants and indirect participants with whom Security Owners
have accounts with respect to Securities are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Security Owners. Accordingly, although Security Owners will not
possess certificates, the Rules provide a mechanism by which Security Owners
will receive distributions and will be able to transfer their interest.
Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive Securities
are issued, Security Owners who are not Participants may transfer ownership of
Securities only through Participants and indirect participants by instructing
such Participants and indirect participants to transfer Securities, by
book-entry transfer, through DTC for the account of the purchasers of such
Securities, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Securities will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
Participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Security
Owners.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL Participant
(as defined herein) or Euroclear Participant (as defined herein) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement in DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
PARTICIPANTS") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
26
<PAGE>
Euroclear was created in 1968 to hold securities for its participants
("EUROCLEAR PARTICIPANTS") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of
Morgan, under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "COOPERATIVE"). All operations are conducted by
Morgan, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear through
or maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
Morgan is the Belgian branch of a New York banking corporation which is
a member bank of the Federal Reserve System. As such, it is regulated and
examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan are
governed by the Terms and Conditions Governing Use of Euroclear and the related
Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "TERMS AND CONDITIONS"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Under a book-entry format, beneficial owners of the Book-Entry
Securities may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect to
Securities held through CEDEL or Euroclear will be credited to the cash accounts
of CEDEL Participants or Euroclear Participants in accordance with the relevant
system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. See "Certain Material
Federal Income Tax Considerations-Tax Treatment of Foreign Investors" and "-Tax
Consequences to Holders of the Notes-Backup Withholding" herein. Because DTC can
only act on behalf of Financial Intermediaries, the ability of a beneficial
owner to pledge Book-Entry Securities to persons or entities that do not
participate in the Depository system, or otherwise take actions in respect of
such Book-Entry Securities, may be limited due to the lack of physical
certificates for such Book-Entry Securities. In addition, issuance of the
Book-Entry Securities in book-entry form may reduce the liquidity of such
Securities in the secondary market since certain potential investors may be
unwilling to purchase Securities for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust will be provided to Cede, as
nominee of DTC, and may be made available by Cede to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Securities of such beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Securities are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Securities under the applicable Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Securities are credited, to the extent that such actions are taken on
behalf of Financial Intermediaries whose holdings include such Book-Entry
Securities. CEDEL or the Euroclear Operator, as the case may be, will take any
other action permitted to be taken by a Securityholder under the Agreement on
behalf of a CEDEL Participant or Euroclear Participant only in accordance with
its relevant rules and procedures and subject to the ability of the Relevant
Depositary to effect such actions on its behalf through DTC. DTC may take
actions, at the direction of the related Participants, with respect to some
Securities which conflict with actions taken with respect to other Securities.
27
<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 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
28
<PAGE>
has reached a specified amount and, following payments from the Reserve Account
to holders of Senior Securities or otherwise, thereafter to the extent necessary
to restore the balance in the Reserve Account to required levels, in each case
as specified in the related Prospectus Supplement. Amounts on deposit in the
Reserve Account may be released to the holders of certain classes of Securities
at the times and under the circumstances specified in such Prospectus
Supplement.
Various classes of Senior Securities and Subordinated Securities may
themselves be subordinate in their right to receive certain distributions to
other classes of Senior and Subordinated Securities, respectively, through a
cross support mechanism or otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the related Prospectus Supplement.
As between classes of Subordinated Securities, payments to holders of Senior
Securities on account of delinquencies or losses and payments to any Reserve
Account will be allocated as specified in the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
A separate special hazard insurance policy (each, a "SPECIAL HAZARD
INSURANCE POLICY") may be obtained for the Pool and issued by the insurer (the
"SPECIAL HAZARD INSURER") named in the related Prospectus Supplement. Each
Special Hazard Insurance Policy will, subject to limitations described below,
protect holders of the related Securities from (i) loss by reason of damage to
Properties caused by certain hazards (including earthquakes and, to a limited
extent, tidal waves and related water damage or as otherwise specified in the
related Prospectus Supplement) not insured against under the standard form of
hazard insurance policy for the respective states in which the Properties are
located or under a flood insurance policy if the Property is located in a
federally designated flood area, and (ii) loss caused by reason of the
application of the coinsurance clause contained in hazard insurance policies.
See "The Agreements-Hazard Insurance". Each Special Hazard Insurance Policy will
not cover losses occasioned by fraud or conversion by the Trustee or Master
Servicer, war, insurrection, civil war, certain governmental action, errors in
design, faulty workmanship or materials (except under certain circumstances),
nuclear or chemical reactions, flood (if the Property is located in a federally
designated flood area), nuclear or chemical contamination and certain other
risks. The amount of coverage under any Special Hazard Insurance Policy will be
specified in the related Prospectus Supplement. Each Special Hazard Insurance
Policy will provide that no claim may be paid unless hazard and, if applicable,
flood insurance on the Property securing the Loan have been kept in force and
other protection and preservation expenses have been paid.
Subject to the foregoing limitations, and unless otherwise specified in
the related Prospectus Supplement, each Special Hazard Insurance Policy will
provide that where there has been damage to Property securing a foreclosed Loan
(title to which has been acquired by the insured) and to the extent such damage
is not covered by the hazard insurance policy or flood insurance policy, if any,
maintained by the borrower or the Master Servicer, the Special Hazard Insurer
will pay the lesser of (i) the cost of repair or replacement of such property or
(ii) upon transfer of the Property to the Special Hazard Insurer, the unpaid
principal balance of such Loan at the time of acquisition of such Property by
foreclosure or deed in lieu of foreclosure, plus accrued interest to the date of
claim settlement and certain expenses incurred by the Master Servicer with
respect to such Property. If the unpaid principal balance of a Loan plus accrued
interest and certain expenses is paid by the Special Hazard Insurer, the amount
of further coverage under the related Special Hazard Insurance Policy will be
reduced by such amount less any net proceeds from the sale of the Property.
Any amount paid as the cost of repair of the Property will further reduce
coverage by such amount.
The Master Servicer may deposit cash, an irrevocable letter of credit
or any other instrument acceptable to each Rating Agency rating the Securities
of the related Series in a special trust account to provide protection in lieu
of or in addition to that provided by a Special Hazard Insurance Policy. The
amount of any Special Hazard Insurance Policy or of the deposit to the special
trust account relating to such Securities in lieu thereof may be reduced so long
as any such reduction will not result in a downgrading of the rating of such
Securities by any such Rating Agency.
29
<PAGE>
BANKRUPTCY BONDS
A bankruptcy bond ("Bankruptcy Bond") for proceedings under the federal
Bankruptcy Code may be issued by an insurer named in such Prospectus Supplement.
Each Bankruptcy Bond will cover certain losses resulting from a reduction by a
bankruptcy court of scheduled payments of principal and interest on a Loan or a
reduction by such court of the principal amount of a Loan and will cover certain
unpaid interest on the amount of such a principal reduction from the date of the
filing of a bankruptcy petition. The required amount of coverage under each
Bankruptcy Bond will be set forth in the related Prospectus Supplement. The
Master Servicer may deposit cash, an irrevocable letter of credit or any other
instrument acceptable to each Rating Agency rating the Securities of the related
Series in a special trust account to provide protection in lieu of or in
addition to that provided by a Bankruptcy Bond. Coverage under a Bankruptcy Bond
may be cancelled or reduced by the Master Servicer if such cancellation or
reduction would not adversely affect the then current rating or ratings of the
related Securities. See "Certain Legal Aspects of the Loans-Anti-Deficiency
Legislation and Other Limitations on Lenders".
RESERVE ACCOUNTS
Credit support with respect to a Series of Securities may be provided
by the establishment and maintenance with the Trustee for such Series of
Securities, in trust, of one or more Reserve Accounts for such Series. The
related Prospectus Supplement will specify whether or not any such Reserve
Accounts will be included in the Trust Fund for such Series.
The Reserve Account for a Series will be funded (i) by the deposit
therein of cash, United States Treasury securities, instruments evidencing
ownership of principal or interest payments thereon, letters of credit, demand
notes, certificates of deposit or a combination thereof in the aggregate amount
specified in the related Prospectus Supplement, (ii) by the deposit therein from
time to time of certain amounts, as specified in the related Prospectus
Supplement to which the Subordinate Securityholders, if any, would otherwise be
entitled or (iii) in such other manner as may be specified in the related
Prospectus Supplement.
Any amounts on deposit in the Reserve Account and the proceeds of any
other instrument upon maturity will be held in cash or will be invested in
Permitted Investments which may include obligations of the United States and
certain agencies thereof, certificates of deposit, certain commercial paper,
time deposits and bankers acceptances sold by eligible commercial banks and
certain repurchase agreements of United States government securities with
eligible commercial banks. If a letter of credit is deposited with the Trustee,
such letter of credit will be irrevocable. Any instrument deposited therein will
name the Trustee, in its capacity as trustee for the holders of the Securities,
as beneficiary and will be issued by an entity acceptable to each Rating Agency
that rates the Securities. Additional information with respect to such
instruments deposited in the Reserve Accounts will be set forth in the related
Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the Reserve Account for distribution to the
holders of Securities for the purposes, in the manner and at the times specified
in the related Prospectus Supplement.
POOL INSURANCE POLICIES
A separate pool insurance policy ("POOL INSURANCE POLICY") may be
obtained for the Pool and issued by the insurer (the "POOL INSURER") named in
the related Prospectus Supplement. Each Pool Insurance Policy will, subject to
the limitations described below, cover loss by reason of default in payment on
Loans in the Pool in an amount equal to a percentage specified in such
Prospectus Supplement of the aggregate principal balance of such Loans on the
Cut-off Date which are not covered as to their entire outstanding principal
balances by Primary Mortgage Insurance Policies.
As more fully described below, the Master Servicer will present claims
thereunder to the Pool Insurer on behalf of itself, the Trustee and the holders
of the Securities. The Pool Insurance Policies, however, are not blanket
policies against loss, since claims thereunder may only be made respecting
particular defaulted Loans and only upon satisfaction of certain conditions
precedent described below. Unless otherwise specified in the related Prospectus
Supplement, the Pool Insurance Policies will not cover losses due to a failure
to pay or denial of a claim under a Primary Mortgage Insurance Policy.
30
<PAGE>
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will provide that no claims may be validly presented
unless (i) any required Primary Mortgage Insurance Policy is in effect for the
defaulted Loan and a claim thereunder has been submitted and settled; (ii)
hazard insurance on the related Property has been kept in force and real estate
taxes and other protection and preservation expenses have been paid; (iii) if
there has been physical loss or damage to the Property, it has been restored to
its physical condition (reasonable wear and tear excepted) at the time of
issuance of the policy; and (iv) the insured has acquired good and merchantable
title to the Property free and clear of liens except certain permitted
encumbrances. Upon satisfaction of these conditions, the Pool Insurer will have
the option either (a) to purchase the property securing the defaulted Loan at a
price equal to the principal balance thereof plus accrued and unpaid interest at
the Loan Rate to the date of purchase and certain expenses incurred by the
Master Servicer on behalf of the Trustee and Securityholders, or (b) to pay the
amount by which the sum of the principal balance of the defaulted Loan plus
accrued and unpaid interest at the Loan Rate to the date of payment of the claim
and the aforementioned expenses exceeds the proceeds received from an approved
sale of the Property, in either case net of certain amounts paid or assumed to
have been paid under the related Primary Mortgage Insurance Policy. If any
Property securing a defaulted Loan is damaged and proceeds, if any, from the
related hazard insurance policy or the applicable Special Hazard Insurance
Policy are insufficient to restore the damaged Property to a condition
sufficient to permit recovery under the Pool Insurance Policy, the Master
Servicer will not be required to expend its own funds to restore the damaged
Property unless it determines that (i) such restoration will increase the
proceeds to securityholders on liquidation of the Loan after reimbursement of
the Master Servicer for its expenses and (ii) such expenses will be recoverable
by it through proceeds of the sale of the Property or proceeds of the related
Pool Insurance Policy or any related Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will not insure (and many Primary Mortgage Insurance
Policies do not insure) against loss sustained by reason of a default arising
from, among other things, (i) fraud or negligence in the origination or
servicing of a Loan, including misrepresentation by the borrower, the originator
or persons involved in the origination thereof, or (ii) failure to construct a
Property in accordance with plans and specifications. A failure of coverage
attributable to one of the foregoing events might result in a breach of the
related Seller's representations described above, and, in such events might give
rise to an obligation on the part of such Seller to purchase the defaulted Loan
if the breach cannot be cured by such Seller. No Pool Insurance Policy will
cover (and many Primary Mortgage Insurance Policies do not cover) a claim in
respect of a defaulted Loan occurring when the servicer of such Loan, at the
time of default or thereafter, was not approved by the applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Pool Insurance Policy will be reduced
over the life of the related Securities by the aggregate dollar amount of claims
paid less the aggregate of the net amounts realized by the Pool Insurer upon
disposition of all foreclosed properties. The amount of claims paid may include
certain expenses incurred by the Master Servicer as well as accrued interest on
delinquent Loans to the date of payment of the claim. Accordingly, if aggregate
net claims paid under any Pool Insurance Policy reach the original policy limit,
coverage under that Pool Insurance Policy will be exhausted and any further
losses will be borne by the Securityholders.
FHA INSURANCE; VA GUARANTEES
Loans designated in the related Prospectus Supplement as insured by the
FHA will be insured by the FHA as authorized under the United States Housing Act
of 1934, as amended. In addition to the Title I Program of the FHA (see "Certain
Legal Aspects of the Loans - The Title I Program" herein), certain Loans will be
insured under various FHA programs which generally limit the principal amount
and interest rates of the mortgage loans insured.
The insurance premiums for Loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development ("HUD") or
by the Master Servicer or any Sub-Servicer and are paid to the FHA.
The regulations governing FHA single-family mortgage insurance programs provide
that insurance benefits are payable either upon foreclosure (or other
acquisition of possession) and conveyance of the mortgaged premises to the
United States of America or upon assignment of the defaulted Loan to the United
States of America. With respect to a defaulted FHA-insured Loan, the Master
Servicer or any Sub-Servicer is limited in its ability to initiate foreclosure
proceedings. When it is determined, either by the Master Servicer or any
Sub-Servicer or HUD, that default was caused by circumstances beyond the
mortgagor's control, the Master Servicer or any Sub-Servicer is expected to make
an effort
31
<PAGE>
to avoid foreclosure by entering, if feasible, into one of a number of available
forms of forbearance plans with the mortgagor. Such plans may involve the
reduction or suspension of regular mortgage payments for a specified period,
with such payments to be made upon or before the maturity date of the mortgage,
or the recasting of payments due under the mortgage up to or, other than Loans
originated under the Title I Program of the FHA, beyond the maturity date. In
addition, when a default caused by such circumstances is accompanied by certain
other criteria, HUD may provide relief by making payments to the Master Servicer
or any Sub-Servicer in partial or full satisfaction of amounts due under the
Loan (which payments are to be repaid by the mortgagor to HUD) or by accepting
assignment of the loan from the Master Servicer or any Sub-Servicer. With
certain exceptions, at least three full monthly installments must be due and
unpaid under the Loan, and HUD must have rejected any request for relief from
the mortgagor before the Master Servicer or any Sub-Servicer may initiate
foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. The Master Servicer or any Sub-Servicer of each
FHA-insured Single Family Loan will be obligated to purchase any such debenture
issued in satisfaction of such Loan upon default for an amount equal to the
principal amount of any such debenture.
Other than in relation to the Title I Program of the FHA, the amount of
insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted Loan adjusted to reimburse the Master Servicer
or Sub-Servicer for certain costs and expenses and to deduct certain amounts
received or retained by the Master Servicer or Sub-Servicer after default. When
entitlement to insurance benefits results from foreclosure (or other acquisition
of possession) and conveyance to HUD, the Master Servicer or Sub-Servicer is
compensated for no more than two-thirds of its foreclosure costs, and is
compensated for interest accrued and unpaid prior to such date but in general
only to the extent it was allowed pursuant to a forbearance plan approved by
HUD. When entitlement to insurance benefits results from assignment of the Loan
to HUD, the insurance payment includes full compensation for interest accrued
and unpaid to the assignment date. The insurance payment itself, upon
foreclosure of an FHA-insured Loan, bears interest from a date 30 days after the
borrower's first uncorrected failure to perform any obligation to make any
payment due under the mortgage and, upon assignment, from the date of assignment
to the date of payment of the claim, in each case at the same interest rate as
the applicable HUD debenture interest rate as described above.
Loans designated in the related Prospectus Supplement as guaranteed by
the VA will be partially guaranteed by the VA under the Serviceman's
Readjustment Act of 1944, as amended (a "VA GUARANTY POLICY"). The Serviceman's
Readjustment Act of 1944, as amended, permits a veteran (or in certain instances
the spouse of a veteran) to obtain a mortgage loan guarantee by the VA covering
mortgage financing of the purchase of a one- to four-family dwelling unit at
interest rates permitted by the VA. The program has no mortgage loan limits,
requires no down payment from the purchaser and permits the guarantee of
mortgage loans of up to 30 years' duration. However, no Loan guaranteed by the
VA will have an original principal amount greater than five times the partial VA
guarantee for such Loan.
The maximum guarantee that may be issued by the VA under a VA
guaranteed mortgage loan depends upon the original principal amount of the
mortgage loan, as further described in 38 United States Code Section 1803(a), as
amended. As of November 1, 1998, the maximum guarantee that may be issued by the
VA under a VA guaranteed mortgage loan of more than $144,000 is the lesser of
25% of the original principal amount of the mortgage loan and $50,750. The
liability on the guarantee is reduced or increased pro rata with any reduction
or increase in the amount of indebtedness, but in no event will the amount
payable on the guarantee exceed the amount of the original guarantee.
The VA may, at its option and without regard to the guarantee, make full payment
to a mortgage holder of unsatisfied indebtedness on a mortgage upon its
assignment to the VA.
With respect to a defaulted VA guaranteed Loan, the Master Servicer or
Sub-Servicer is, absent exceptional circumstances, authorized to announce its
intention to foreclose only when the default has continued for three months.
Generally, a claim for the guarantee is submitted after liquidation of the
Property.
The amount payable under the guarantee will be the percentage of the
VA-insured Loan originally guaranteed applied to indebtedness outstanding as of
the applicable date of computation specified in the VA regulations. Payments
under the guarantee will be equal to the unpaid principal amount of the Loan,
interest accrued on the unpaid balance
32
<PAGE>
of the Loan to the appropriate date of computation and limited expenses of the
mortgagee, but in each case only to the extent that such amounts have not been
recovered through liquidation of the Property. The amount payable under the
guarantee may in no event exceed the amount of the original guarantee.
CROSS-SUPPORT
The beneficial ownership of separate groups of assets included in a
Trust Fund may be evidenced by separate classes of the related Series of
Securities. In such case, credit support may be provided by a cross-support
feature which requires that distributions be made with respect to Securities
evidencing a beneficial ownership interest in, or secured by, other asset groups
within the same Trust Fund. The related Prospectus Supplement for a Series which
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
The coverage provided by one or more forms of credit support may apply
concurrently to two or more related Trust Funds. If applicable, the related
Prospectus Supplement will identify the Trust Funds to which such credit support
relates and the manner of determining the amount of the coverage provided
thereby and of the application of such coverage to the identified Trust Funds.
OTHER INSURANCE, SURETY BONDS, GUARANTIES, LETTERS OF CREDIT AND SIMILAR
INSTRUMENTS OR AGREEMENTS
A Trust Fund may also include insurance, guaranties, surety bonds,
letters of credit or similar arrangements for the purpose of (i) maintaining
timely payments or providing additional protection against losses on the assets
included in such Trust Fund, (ii) paying administrative expenses or (iii)
establishing a minimum reinvestment rate on the payments made in respect of such
assets or principal payment rate on such assets. Such arrangements may include
agreements under which Securityholders are entitled to receive amounts deposited
in various accounts held by the Trustee upon the terms specified in such
Prospectus Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Securities
will be affected primarily by the amount and timing of principal payments
received on or in respect of the Trust Fund Assets included in the related Trust
Fund. With respect to a Trust Fund which includes Private Asset Backed
Securities, the possible effects of the amount and timing of principal payments
received with respect to the underlying mortgage loans will be described in the
related Prospectus Supplement. The original terms to maturity of the Loans in a
given Pool will vary depending upon the type of Loans included therein. Each
Prospectus Supplement will contain information with respect to the type and
maturities of the Loans in the related Pool. Unless otherwise specified in the
related Prospectus Supplement, Loans may be prepaid without penalty in full or
in part at any time. The prepayment experience on the Loans in a Pool will
affect the life of the related Series of Securities.
The rate of prepayment on the Loans cannot be predicted. Home equity
loans and home improvement contracts have been originated in significant volume
only during the past few years and the Depositor is not aware of any publicly
available studies or statistics on the rate of prepayment of such loans.
Generally, home equity loans and home improvement contracts are not viewed by
borrowers as permanent financing. Accordingly, the Loans may experience a higher
rate of prepayment than traditional first mortgage loans. On the other hand,
because home equity loans such as the Revolving Credit Line Loans generally are
not fully amortizing, the absence of voluntary borrower prepayments could cause
rates of principal payments lower than, or similar to, those of traditional
fully-amortizing first mortgages. The prepayment experience of the related Trust
Fund may be affected by a wide variety of factors, including general economic
conditions, prevailing interest rate levels, the availability of alternative
financing and homeowner mobility and the frequency and amount of any future
draws on any Revolving Credit Line Loans. Other factors that might be expected
to affect the prepayment rate of a pool of home equity mortgage loans or home
improvement contracts include the amounts of, and interest rates on, the
underlying senior mortgage loans, and the use of first mortgage loans as
long-term financing for home purchase and subordinate mortgage loans as
shorter-term financing for a variety of purposes, including home improvement,
education expenses and purchases of consumer durables such as automobiles.
Accordingly, the Loans may experience a higher rate of prepayment than
traditional fixed-rate mortgage loans. In addition, any future limitations on
the right of borrowers to deduct interest payments on home equity loans for
federal income tax purposes may further increase the rate of prepayments of the
Loans. The enforcement of a "due-on-sale"
33
<PAGE>
provision (as described below) will have the same effect as a prepayment of the
related Loan. See "Certain Legal Aspects of the Loans-Due-on-Sale Clauses"
herein. The yield to an investor who purchases Securities in the secondary
market at a price other than par will vary from the anticipated yield if the
rate of prepayment on the Loans is actually different than the rate anticipated
by such investor at the time such Securities were purchased.
Collections on Revolving Credit Line Loans may vary because, among
other things, borrowers may (i) make payments during any month as low as the
minimum monthly payment for such month or, during the interest-only period for
certain Revolving Credit Line Loans and, in more limited circumstances,
Closed-End Loans, with respect to which an interest-only payment option has been
selected, the interest and the fees and charges for such month or (ii) make
payments as high as the entire outstanding principal balance plus accrued
interest and the fees and charges thereon. It is possible that borrowers may
fail to make the required periodic payments. In addition, collections on the
Loans may vary due to seasonal purchasing and the payment habits of borrowers.
Unless otherwise specified in the related Prospectus Supplement, the
Loans will contain due-on-sale provisions permitting the mortgagee to accelerate
the maturity of the loan upon sale or certain transfers by the borrower. Loans
insured by the FHA, and Single Family Loans partially guaranteed by the VA, are
assumable with the consent of the FHA and the VA, respectively. Thus, the rate
of prepayments on such Loans may be lower than that of conventional Loans
bearing comparable interest rates. Unless otherwise specified in the related
Prospectus Supplement, the Master Servicer generally will enforce any
due-on-sale or due-on-encumbrance clause, to the extent it has knowledge of the
conveyance or further encumbrance or the proposed conveyance or proposed further
encumbrance of the Property and reasonably believes that it is entitled to do so
under applicable law; provided, however, that the Master Servicer will not take
any enforcement action that would impair or threaten to impair any recovery
under any related insurance policy. See "The Agreements-Collection Procedures"
and "Certain Legal Aspects of the Loans" for a description of certain provisions
of each Agreement and certain legal developments that may affect the prepayment
experience on the Loans.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. If prevailing rates fall significantly
below the Loan Rates borne by the Loans, such Loans may be subject to higher
prepayment rates than if prevailing interest rates remain at or above such Loan
Rates. Conversely, if prevailing interest rates rise appreciably above the Loan
Rates borne by the Loans, such Loans may experience a lower prepayment rate than
if prevailing rates remain at or below such Loan Rates. However, there can be no
assurance that such will be the case.
When a full prepayment is made on a Loan, the borrower is charged
interest on the principal amount of the Loan so prepaid only for the number of
days in the month actually elapsed up to the date of the prepayment, rather than
for a full month. Unless the Master Servicer remits amounts otherwise payable to
it as servicing compensation, see "Description of the Securities-Compensating
Interest", the effect of prepayments in full will be to reduce the amount of
interest passed through in the following month to holders of Securities because
interest on the principal amount of any Loan so prepaid will be paid only to the
date of prepayment. Partial prepayments in a given month may be applied to the
outstanding principal balances of the Loans so prepaid on the first day of the
month of receipt or the month following receipt. In the latter case, partial
prepayments will not reduce the amount of interest passed through in such month.
Unless otherwise specified in the related Prospectus Supplement, neither full
nor partial prepayments will be passed through until the month following
receipt.
Even assuming that the Properties provide adequate security for the
Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Loans and corresponding delays in the receipt of
related proceeds by Securityholders could occur. An action to foreclose on a
Property securing a Loan is regulated by state statutes and rules and is subject
to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a property. In the event of a default
by a borrower, these restrictions among other things, may impede the ability of
the Master Servicer to foreclose on or sell the Property or to obtain
liquidation proceeds sufficient to repay all amounts due on the related Loan. In
addition, the Master Servicer will be entitled to deduct from related
liquidation proceeds all expenses reasonably incurred in attempting to recover
amounts due on defaulted Loans and not yet repaid, including payments to senior
lienholders, legal fees and costs of legal action, real estate taxes and
maintenance and preservation expenses.
34
<PAGE>
Liquidation expenses with respect to defaulted mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a large remaining
principal balance, the amount realized after expenses of liquidation would be
smaller as a percentage of the remaining principal balance of the small mortgage
loan than would be the case with the other defaulted mortgage loan having a
large remaining principal balance.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of certain
originators and servicers of Loans. In addition, most have other laws, public
policy and general principles of equity relating to the protection of consumers,
unfair and deceptive practices and practices which may apply to the origination,
servicing and collection of the Loans. Depending on the provisions of the
applicable law and the specific facts and circumstances involved, violations of
these laws, policies and principles may limit the ability of the Master Servicer
to collect all or part of the principal of or interest on the Loans, may entitle
the borrower to a refund of amounts previously paid and, in addition, could
subject the Master Servicer to damages and administrative sanctions.
If the rate at which interest is passed through to the holders of
Securities of a Series is calculated on a Loan-by-Loan basis, disproportionate
principal prepayments among Loans with different Loan Rates will affect the
yield on such Securities. In most cases, the effective yield to Securityholders
will be lower than the yield otherwise produced by the applicable Pass-Through
Rate and purchase price, because while interest will accrue on each Loan from
the first day of the month (unless otherwise specified in the related Prospectus
Supplement), the distribution of such interest will not be made earlier than the
month following the month of accrual.
Under certain circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or any person specified in the related Prospectus
Supplement may have the option to purchase the assets of a Trust Fund thereby
effecting earlier retirement of the related Series of Securities. See "The
Agreements-Termination; Optional Termination".
Factors other than those identified herein and in the related
Prospectus Supplement could significantly affect principal prepayments at any
time and over the lives of the Securities. The relative contribution of the
various factors affecting prepayment may also vary from time to time. There can
be no assurance as to the rate of payment of principal of the Trust Fund Assets
at any time or over the lives of the Securities.
The Prospectus Supplement relating to a Series of Securities will
discuss in greater detail the effect of the rate and timing of principal
payments (including prepayments), delinquencies and losses on the yield,
weighted average lives and maturities of such Securities.
THE AGREEMENTS
Set forth below is a summary of certain provisions of each Agreement
which are not described elsewhere in this Prospectus. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of each Agreement. Where particular provisions or
terms used in the Agreements are referred to, such provisions or terms are as
specified in the Agreements. Except as otherwise specified, the Agreement
described herein contemplates a Trust Fund comprised of Loans. The provisions of
an Agreement with respect to a Trust Fund which consists of or includes Private
Asset Backed Securities may contain provisions similar to those described herein
but will be more fully described in the related Prospectus Supplement.
ASSIGNMENT OF THE TRUST FUND ASSETS
ASSIGNMENT OF THE LOANS. At the time of issuance of the Securities of a
Series, the Depositor will cause the Loans comprising the related Trust Fund to
be assigned to the Trustee, together with all principal and interest received by
or on behalf of the Depositor on or with respect to such Loans after the Cut-off
Date, other than principal and interest due on or before the Cut-off Date and
other than any Retained Interest specified in the related Prospectus Supplement.
The Trustee will, concurrently with such assignment, deliver the Securities to
the Depositor in exchange for the Loans. Each Loan will be identified in a
schedule appearing as an exhibit to the related Agreement. Such schedule will
include information as to the outstanding principal balance of each Loan after
application of payments due on or before the
35
<PAGE>
Cut-off Date, as well as information regarding the Loan Rate or APR, the current
scheduled monthly payment of principal and interest, the maturity of the Loan,
the Combined Loan-to-Value Ratios at origination and certain other information.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will as to each Home Improvement Contract, deliver or cause to be
delivered to the Trustee the original Home Improvement Contract and copies of
documents and instruments related to each Home Improvement Contract and, other
than in the case of unsecured Home Improvement Contracts, the security interest
in the Property securing such Home Improvement Contract. In order to give notice
of the right, title and interest of Securityholders to the Home Improvement
Contracts, the Depositor will cause a UCC-1 financing statement to be executed
by the Depositor or the Seller identifying the Trustee as the secured party and
identifying all Home Improvement Contracts as collateral. Unless otherwise
specified in the related Prospectus Supplement, the Home Improvement Contracts
will not be stamped or otherwise marked to reflect their assignment to the
Trustee. Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the Home Improvement
Contracts without notice of such assignment, the interest of Securityholders in
the Home Improvement Contracts could be defeated. See "Certain Legal Aspects of
the Loans-The Home Improvement Contracts" herein.
Unless otherwise specified in the related Prospectus Supplement, the
Agreement will require that, within the time period specified therein, the
Depositor will also deliver or cause to be delivered to the Trustee (or to the
custodian hereinafter referred to) as to each Home Equity Loan, among other
things, (i) the mortgage note or contract endorsed without recourse in blank or
to the order of the Trustee, (ii) the mortgage, deed of trust or similar
instrument (a "MORTGAGE") with evidence of recording indicated thereon (except
for any Mortgage not returned from the public recording office, in which case
the Depositor will deliver or cause to be delivered a copy of such Mortgage
together with a certificate that the original of such Mortgage was delivered to
such recording office), (iii) an assignment of the Mortgage to the Trustee,
which assignment will be in recordable form in the case of a Mortgage
assignment, and (iv) such other security documents, including those relating to
any senior interests in the Property, as may be specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, the Depositor will promptly cause the assignments of the related
Loans to be recorded in the appropriate public office for real property records,
except in states in which, in the opinion of counsel acceptable to the Trustee,
such recording is not required to protect the Trustee's interest in such Loans
against the claim of any subsequent transferee or any successor to or creditor
of the Depositor or the originator of such Loans.
The Trustee (or the custodian hereinafter referred to) will review such
Loan documents within the time period specified in the related Prospectus
Supplement after receipt thereof, and the Trustee will hold such documents in
trust for the benefit of the Securityholders. Unless otherwise specified in the
related Prospectus Supplement, if any such document is found to be missing or
defective in any material respect, the Trustee (or such custodian) will notify
the Master Servicer and the Depositor, and the Master Servicer will notify the
related Seller. If the Seller cannot cure the omission or defect within a
specified number of days after receipt of such notice (or such other period as
may be specified in the related Prospectus Supplement), the Seller will be
obligated either (i) to purchase the related Loan from the Trust at the Purchase
Price or (ii) to remove such Loan from the Trust Fund and substitute in its
place one or more other Loans. There can be no assurance that a Seller will
fulfill this purchase or substitution obligation. Although the Master Servicer
may be obligated to enforce such obligation to the extent described above under
"Loan Program-Representations by Sellers; Repurchases", neither the Master
Servicer nor the Depositor will be obligated to purchase or replace such Loan if
the Seller defaults on its obligation, unless such breach also constitutes a
breach of the representations or warranties of the Master Servicer or the
Depositor, as the case may be. Unless otherwise specified in the related
Prospectus Supplement, this purchase obligation constitutes the sole remedy
available to the Securityholders or the Trustee for omission of, or a material
defect in, a constituent document.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Loans as agent of the Trustee.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Agreement. Upon a breach of any such representation of
the Master Servicer which materially and adversely affects the interests of the
Securityholders in a Loan, the Master Servicer will be obligated either to cure
the breach in all material respects or to purchase or replace the Loan at the
Purchase Price.
36
<PAGE>
Unless otherwise specified in the related Prospectus Supplement, this obligation
to cure, purchase or substitute constitutes the sole remedy available to the
Securityholders or the Trustee for such a breach of representation by the Master
Servicer.
ASSIGNMENT OF PRIVATE ASSET BACKED SECURITIES. The Depositor will cause
Private Asset Backed Securities to be registered in the name of the Trustee. The
Trustee (or the custodian) will have possession of any certificated Private
Asset Backed Securities. Unless otherwise specified in the related Prospectus
Supplement, the Trustee will not be in possession of or be assignee of record of
any underlying assets for a Private Asset Backed Security. See "The Trust
Fund-Private Asset Backed Securities" herein. Each Private Asset Backed Security
will be identified in a schedule appearing as an exhibit to the related
Agreement which will specify the original principal amount, outstanding
principal balance as of the Cut-off Date, annual pass-through rate or interest
rate and maturity date and certain other pertinent information for each Private
Asset Backed Security conveyed to the Trustee.
Notwithstanding the foregoing provisions, with respect to a Trust Fund
for which a REMIC election is to be made, no purchase or substitution of a Loan
will be made if such purchase or substitution would result in a prohibited
transaction tax under the Code.
PAYMENTS ON LOANS; DEPOSITS TO SECURITY ACCOUNT
Each Sub-Servicer servicing a Loan pursuant to a Sub-Servicing
Agreement (as defined below under "-Sub-Servicing of Loans") will establish and
maintain an account (the "SUB-SERVICING ACCOUNT") which meets the following
requirements and is otherwise acceptable to the Master Servicer. A Sub-Servicing
Account must be established with a Federal Home Loan Bank or with a depository
institution (including the Sub-Servicer itself) whose accounts are insured by
either the Bank Insurance Fund (the "BIF") of the FDIC or the Savings
Association Insurance Fund (as successor to the Federal Savings and Loan
Insurance Corporation ("SAIF")) of the Federal Deposit Insurance Corporation
(the "FDIC"). If a Sub-Servicing Account is maintained at an institution that is
a Federal Home Loan Bank or an FDIC-insured institution and, in either case, the
amount on deposit in the Sub-Servicing Account exceeds the FDIC insurance
coverage amount, then such excess amount must be remitted to the Master Servicer
within one business day of receipt. In addition, the Sub-Servicer must maintain
a separate account for escrow and impound funds relating to the Loans. Each
Sub-Servicer is required to deposit into its Sub-Servicing Account on a daily
basis all amounts described below under "-Sub-Servicing of Loans" that are
received by it in respect of the Loans, less its servicing or other
compensation. On or before the date specified in the Sub-Servicing Agreement,
the Sub-Servicer will remit or cause to be remitted to the Master Servicer or
the Trustee all funds held in the Sub-Servicing Account with respect to Loans
that are required to be so remitted. The Sub-Servicer may also be required to
advance on the scheduled date of remittance an amount corresponding to any
monthly installment of interest and/or principal, less its servicing or other
compensation, on any Loan for which payment was not received from the mortgagor.
Unless otherwise specified in the related Prospectus Supplement, any such
obligation of the Sub-Servicer to advance will continue up to and including the
first of the month following the date on which the related Property is sold at a
foreclosure sale or is acquired on behalf of the Securityholders by deed in lieu
of foreclosure, or until the related Loan is liquidated.
The Master Servicer will establish and maintain or cause to be
established and maintained with respect to the related Trust Fund a separate
account or accounts for the collection of payments on the related Trust Fund
Assets in the Trust Fund (the "SECURITY ACCOUNT") must be either (i) maintained
with a depository institution the debt obligations of which (or in the case of a
depository institution that is the principal subsidiary of a holding company,
the obligations of which) are rated in one of the two highest rating categories
by the Rating Agency or Rating Agencies that rated one or more classes of the
related Series of Securities, (ii) an account or accounts the deposits in which
are fully insured by either the BIF or SAIF, (iii) an account or accounts the
deposits in which are insured by the BIF or SAIF (to the limits established by
the FDIC), and the uninsured deposits in which are otherwise secured such that,
as evidenced by an opinion of counsel, the Securityholders have a claim with
respect to the funds in the Security Account or a perfected first priority
security interest against any collateral securing such funds that is superior to
the claims of any other depositors or general creditors of the depository
institution with which the Security Account is maintained, or (iv) an account or
accounts otherwise acceptable to each Rating Agency. The collateral eligible to
secure amounts in the Security Account is limited to United States government
securities and other high-quality investments ("PERMITTED INVESTMENTS"). A
Security Account may be maintained as an interest bearing account or the funds
held therein may be invested pending each succeeding Distribution Date in
Permitted Investments. Unless otherwise specified in the
37
<PAGE>
related Prospectus Supplement, the Master Servicer or its designee will be
entitled to receive any such interest or other income earned on funds in the
Security Account as additional compensation and will be obligated to deposit in
the Security Account the amount of any loss immediately as realized. The
Security Account may be maintained with the Master Servicer or with a depository
institution that is an affiliate of the Master Servicer, provided it meets the
standards set forth above.
The Master Servicer will deposit or cause to be deposited in the
Security Account for each Trust Fund on a daily basis, to the extent applicable
and provided in the Agreement, the following payments and collections received
or advances made by or on behalf of it subsequent to the Cut-off Date (other
than payments due on or before the Cut-off Date and exclusive of any amounts
representing Retained Interest):
(i) all payments on account of principal, including Principal
Prepayments and any applicable prepayment penalties, on the
Loans;
(ii) all payments on account of interest on the Loans, net of
applicable servicing compensation;
(iii) all proceeds (net of unreimbursed payments of property
taxes, insurance premiums and similar items ("Insured
Expenses") incurred, and unreimbursed advances made, by the
related Sub-Servicer, if any) of the hazard insurance policies
and any Primary Mortgage Insurance Policies, to the extent
such proceeds are not applied to the restoration of the
property or released to the Mortgagor in accordance with the
Master Servicer's normal servicing procedures (collectively,
"Insurance Proceeds") and all other cash amounts (net of
unreimbursed expenses incurred in connection with liquidation
or foreclosure ("Liquidation Expenses") and unreimbursed
advances made, by the related Sub-Servicer, if any) received
and retained in connection with the liquidation of defaulted
Loans, by foreclosure or otherwise ("Liquidation Proceeds"),
together with any net proceeds received on a monthly basis
with respect to any properties acquired on behalf of the
Securityholders by foreclosure or deed in lieu of foreclosure;
(iv) all proceeds of any Loan or property in respect thereof
purchased by the Master Servicer, the Depositor, any
Sub-Servicer or any Seller as described under "Loan
Program-Representations by Sellers; Repurchases or
Substitutions" herein or "-Assignment of Trust Fund Assets"
above and all proceeds of any Loan repurchased as described
under "-Termination; Optional Termination" below;
(v) all payments required to be deposited in the Security
Account with respect to any deductible clause in any blanket
insurance policy described under "-Hazard Insurance" below;
(vi) any amount required to be deposited by the Master
Servicer in connection with losses realized on investments for
the benefit of the Master Servicer of funds held in the
Security Account; and
(vii) all other amounts required to be deposited in the
Security Account pursuant to the Agreement.
PRE-FUNDING ACCOUNT
If so provided in the related Prospectus Supplement, the Master
Servicer will establish and maintain a pre-funding account (a "PRE-FUNDING
ACCOUNT"), in the name of the related Trustee on behalf of the related
Securityholders, into which the Depositor will deposit the pre-funded amount
(the "PRE-FUNDED AMOUNT") on the related Closing Date. The Pre-Funded Amount
will not exceed 25% of the initial aggregate principal amount of the
Certificates and Notes of the related Series. The Pre-Funded Amount will be used
by the related Trustee to purchase Subsequent Loans from the Depositor from time
to time during the Funding Period. The Funding Period, if any, for a Trust Fund
will begin on the related Closing Date and will end on the date specified in the
related Prospectus Supplement, which in no event will be later than the date
that is three months after the Closing Date. Any amounts remaining in the
Pre-Funding Account at the end of the Funding Period will be distributed to the
related Securityholders
38
<PAGE>
in the manner and priority specified in the related Prospectus Supplement, as a
prepayment of principal of the related Securities.
SUB-SERVICING OF LOANS
Each Seller of a Loan or any other servicing entity may act as the
Sub-Servicer for such Loan pursuant to an agreement (each, a "SUB-SERVICING
AGREEMENT"), which will not contain any terms inconsistent with the related
Agreement. While each Sub-Servicing Agreement will be a contract solely between
the Master Servicer and the Sub-Servicer, the Agreement pursuant to which a
Series of Securities is issued will provide that, if for any reason the Master
Servicer for such Series of Securities is no longer the Master Servicer of the
related Loans, the Trustee or any successor Master Servicer must recognize the
Sub-Servicer's rights and obligations under such Sub-Servicing Agreement.
With the approval of the Master Servicer, a Sub-Servicer may delegate
its servicing obligations to third-party servicers, but such Sub-Servicer will
remain obligated under the related Sub-Servicing Agreement. Each Sub-Servicer
will be required to perform the customary functions of a servicer of mortgage
loans. Such functions generally include collecting payments from mortgagors or
obligors and remitting such collections to the Master Servicer; maintaining
hazard insurance policies as described herein and in any related Prospectus
Supplement, and filing and settling claims thereunder, subject in certain cases
to the right of the Master Servicer to approve in advance any such settlement;
maintaining escrow or impoundment accounts of mortgagors or obligors for payment
of taxes, insurance and other items required to be paid by the mortgagor or
obligor pursuant to the related Loan; processing assumptions or substitutions,
although, the Master Servicer is generally required to exercise due-on-sale
clauses to the extent such exercise is permitted by law and would not adversely
affect insurance coverage; attempting to cure delinquencies; supervising
foreclosures; inspecting and managing Properties under certain circumstances;
maintaining accounting records relating to the Loans; and, to the extent
specified in the related Prospectus Supplement, maintaining additional insurance
policies or credit support instruments and filing and settling claims
thereunder. A Sub-Servicer will also be obligated to make advances in respect of
delinquent installments of interest and/or principal on Loans, as described more
fully above under "-Payments on Loans; Deposits to Security Account", and in
respect of certain taxes and insurance premiums not paid on a timely basis by
mortgagors or obligors.
As compensation for its servicing duties, each Sub-Servicer will be
entitled to a monthly servicing fee (to the extent the scheduled payment on the
related Loan has been collected) in the amount set forth in the related
Prospectus Supplement. Each Sub-Servicer is also entitled to collect and retain,
as part of its servicing compensation, any prepayment or late charges provided
in the Mortgage Note or related instruments. Each Sub-Servicer will be
reimbursed by the Master Servicer for certain expenditures which it makes,
generally to the same extent the Master Servicer would be reimbursed under the
Agreement. The Master Servicer may purchase the servicing of Loans if the
Sub-Servicer elects to release the servicing of such Loans to the Master
Servicer. See "-Servicing and Other Compensation and Payment of Expenses".
Each Sub-Servicer may be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Sub-Servicer in its servicing
capacity. Each Sub-Servicer will be required to maintain a fidelity bond and an
errors and omissions policy with respect to its officers, employees and other
persons acting on its behalf or on behalf of the Master Servicer.
Each Sub-Servicer will be required to service each Loan pursuant to the
terms of the Sub-Servicing Agreement for the entire term of such Loan, unless
the Sub-Servicing Agreement is earlier terminated by the Master Servicer or
unless servicing is released to the Master Servicer. The Master Servicer may
terminate a Sub-Servicing Agreement without cause, upon written notice to the
Sub-Servicer in the manner specified in such Sub-Servicing Agreement.
The Master Servicer may agree with a Sub-Servicer to amend a
Sub-Servicing Agreement or, upon termination of the Sub-Servicing Agreement, the
Master Servicer may act as servicer of the related Loans or enter into new
Sub-Servicing Agreements with other Sub-Servicers. If the Master Servicer acts
as servicer, it will not assume liability for the representations and warranties
of the Sub-Servicer which it replaces. Each Sub-Servicer must be a Seller or
meet the standards for becoming a Seller or have such servicing experience as to
be otherwise satisfactory to the Master Servicer and the Depositor. The Master
Servicer will make reasonable efforts to have the new Sub-Servicer assume
39
<PAGE>
liability for the representations and warranties of the terminated Sub-Servicer,
but no assurance can be given that such an assumption will occur. In the event
of such an assumption, the Master Servicer may in the exercise of its business
judgment release the terminated Sub-Servicer from liability in respect of such
representations and warranties. Any amendments to a Sub-Servicing Agreement or
new Sub-Servicing Agreements may contain provisions different from those which
are in effect in the original Sub-Servicing Agreement. However, each Agreement
will provide that any such amendment or new agreement may not be inconsistent
with or violate such Agreement.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers,
will make reasonable efforts to collect all payments called for under the Loans
and will, consistent with each Agreement and any Pool Insurance Policy, Primary
Mortgage Insurance Policy, FHA Insurance, VA Guaranty Policy and Bankruptcy Bond
or alternative arrangements, follow such collection procedures as are customary
with respect to loans that are comparable to the Loans.
Consistent with the above, the Master Servicer may, in its discretion, (i) waive
any assumption fee, late payment or other charge in connection with a Loan and
(ii) to the extent not inconsistent with the coverage of such Loan by a Pool
Insurance Policy, Primary Mortgage Insurance Policy, FHA Insurance, VA Guaranty
or Bankruptcy Bond or alternative arrangements, if applicable, arrange with a
borrower a schedule for the liquidation of delinquencies running for no more
than 125 days after the applicable due date for each payment. Both the
Sub-Servicer and the Master Servicer may be obligated to make Advances during
any period of such an arrangement.
Except as otherwise specified in the related Prospectus Supplement, in
any case in which property securing a Loan has been, or is about to be, conveyed
by the mortgagor or obligor, the Master Servicer will, to the extent it has
knowledge of such conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of such Loan under any
due-on-sale clause applicable thereto, but only if the exercise of such rights
is permitted by applicable law. If these conditions are not met or if the Master
Servicer reasonably believes it is unable under applicable law to enforce such
due-on-sale clause, or the Master Servicer will enter into or cause to be
entered into an assumption and modification agreement with the person to whom
such property has been or is about to be conveyed, pursuant to which such person
becomes liable for repayment of the Loan and, to the extent permitted by
applicable law, the mortgagor remains liable thereon. Any fee collected by or on
behalf of the Master Servicer for entering into an assumption agreement will be
retained by or on behalf of the Master Servicer as additional servicing
compensation. See "Certain Legal Aspects of the Loans-Due-on-Sale Clauses". In
connection with any such assumption, the terms of the related Loan may not be
changed.
HAZARD INSURANCE
Except as otherwise specified in the related Prospectus Supplement, the
Master Servicer will require the mortgagor or obligor on each Loan to maintain a
hazard insurance policy providing for no less than the coverage of the standard
form of fire insurance policy with extended coverage customary for the type of
Property in the state in which such Property is located. All amounts collected
by the Master Servicer under any hazard policy (except for amounts to be applied
to the restoration or repair of the Property or released to the mortgagor or
obligor in accordance with the Master Servicer's normal servicing procedures)
will be deposited in the related Security Account. In the event that the Master
Servicer maintains a blanket policy insuring against hazard losses on all the
Loans comprising part of a Trust Fund, it will conclusively be deemed to have
satisfied its obligation relating to the maintenance of hazard insurance.
Such blanket policy may contain a deductible clause, in which case the Master
Servicer will be required to deposit from its own funds into the related
Security Account the amounts which would have been deposited therein but for
such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements securing a Loan by
fire, lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Loans may have been underwritten
by different insurers under different state laws in accordance with different
applicable forms and therefore may not contain identical terms and conditions,
the basic terms thereof are dictated by respective state laws, and most such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flows),
nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic animals,
theft and, in
40
<PAGE>
certain cases, vandalism. The foregoing list is merely indicative of certain
kinds of uninsured risks and is not intended to be all inclusive. If the
Property securing a Loan is located in a federally designated special flood area
at the time of origination, the Master Servicer will require the mortgagor or
obligor to obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Loans
typically contain a clause which in effect requires the insured at all time to
carry insurance of a specified percentage of the full replacement value of the
insured property in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, then the insurer's
liability in the event of partial loss will not exceed the larger of (i) the
actual cash value (generally defined as replacement cost at the time and place
of loss, less physical depreciation) of the improvements damaged or destroyed or
(ii) such proportion of the loss as the amount of insurance carried bears to the
specified percentage of the full replacement cost of such improvements. Since
the amount of hazard insurance the Master Servicer may cause to be maintained on
the improvements securing the Loans declines as the principal balances owing
thereon decrease, and since improved real estate generally has appreciated in
value over time in the past, the effect of this requirement in the event of
partial loss may be that hazard insurance proceeds will be insufficient to
restore fully the damaged property. If specified in the related Prospectus
Supplement, a special hazard insurance policy will be obtained to insure against
certain of the uninsured risks described above. See "Credit Enhancement-Special
Hazard Insurance Policies".
If the Property securing a defaulted Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged Property, the Master Servicer is not required to expend its own funds to
restore the damaged Property unless it determines (i) that such restoration will
increase the proceeds to Securityholders on liquidation of the Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
If recovery on a defaulted Loan under any related Insurance Policy is
not available for the reasons set forth in the preceding paragraph, or if the
defaulted Loan is not covered by an Insurance Policy, the Master Servicer will
be obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Loan. If the proceeds of any liquidation of the Property securing the defaulted
Loan are less than the principal balance of such Loan plus interest accrued
thereon that is payable to Securityholders, the Trust Fund will realize a loss
in the amount of such difference plus the aggregate of expenses incurred by the
Master Servicer in connection with such proceedings and which are reimbursable
under the Agreement. In the unlikely event that any such proceedings result in a
total recovery which is, after reimbursement to the Master Servicer of its
expenses, in excess of the principal balance of such Loan plus interest accrued
thereon that is payable to Securityholders, the Master Servicer will be entitled
to withdraw or retain from the Security Account amounts representing its normal
servicing compensation with respect to such Loan and, unless otherwise specified
in the related Prospectus Supplement, amounts representing the balance of such
excess, exclusive of any amount required by law to be forwarded to the related
borrower, as additional servicing compensation.
Unless otherwise specified in the related Prospectus Supplement, if the
Master Servicer or its designee recovers Insurance Proceeds which, when added to
any related Liquidation Proceeds and after deduction of certain expenses
reimbursable to the Master Servicer, exceed the principal balance of such Loan
plus interest accrued thereon that is payable to Securityholders, the Master
Servicer will be entitled to withdraw or retain from the Security Account
amounts representing its normal servicing compensation with respect to such
Loan. In the event that the Master Servicer has expended its own funds to
restore the damaged Property and such funds have not been reimbursed under the
related hazard insurance policy, it will be entitled to withdraw from the
Security Account out of related Liquidation Proceeds or Insurance Proceeds in an
amount equal to such expenses incurred by it, in which event the Trust Fund may
realize a loss up to the amount so charged. Since Insurance Proceeds cannot
exceed deficiency claims and certain expenses incurred by the Master Servicer,
no such payment or recovery will result in a recovery to the Trust Fund which
exceeds the principal balance of the defaulted Loan together with accrued
interest thereon. See "Credit Enhancement".
REALIZATION UPON DEFAULTED LOANS
PRIMARY MORTGAGE INSURANCE POLICIES. The Master Servicer will maintain
or cause each Sub-Servicer to maintain, as the case may be, in full force and
effect, to the extent specified in the related Prospectus Supplement, a Primary
Mortgage Insurance Policy with regard to each Loan for which such coverage is
required. The Master Servicer
41
<PAGE>
will not cancel or refuse to renew any such Primary Mortgage Insurance Policy in
effect at the time of the initial issuance of a Series of Securities that is
required to be kept in force under the applicable Agreement unless the
replacement Primary Mortgage Insurance Policy for such cancelled or nonrenewed
policy is maintained with an insurer whose claims-paying ability is sufficient
to maintain the current rating of the classes of Securities of such Series that
have been rated.
Although the terms and conditions of primary mortgage insurance vary,
the amount of a claim for benefits under a Primary Mortgage Insurance Policy
covering a Loan will consist of the insured percentage of the unpaid principal
amount of the covered Loan and accrued and unpaid interest thereon and
reimbursement of certain expenses, less (i) all rents or other payments
collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to the Property, (ii)
hazard insurance proceeds in excess of the amount required to restore the
Property and which have not been applied to the payment of the Loan, (iii)
amounts expended but not approved by the issuer of the related Primary Mortgage
Insurance Policy (the "PRIMARY INSURER"), (iv) claim payments previously made by
the Primary Insurer and (v) unpaid premiums.
Primary Mortgage Insurance Policies reimburse certain losses sustained
by reason of defaults in payments by borrowers. Primary Mortgage Insurance
Policies will not insure against, and exclude from coverage, a loss sustained by
reason of a default arising from or involving certain matters, including (i)
fraud or negligence in origination or servicing of the Loans, including
misrepresentation by the originator, borrower or other persons involved in the
origination of the Loans; (ii) failure to construct the Property subject to the
Loan in accordance with specified plans; (iii) physical damage to the Property;
and (iv) the related Master Servicer or Sub-servicer not being approved as a
servicer by the Primary Insurer.
RECOVERIES UNDER A PRIMARY MORTGAGE INSURANCE POLICY. As conditions
precedent to the filing of or payment of a claim under a Primary Mortgage
Insurance Policy covering a Loan, the insured will be required to (i) advance or
discharge (a) all hazard insurance policy premiums and (b) as necessary and
approved in advance by the Primary Insurer, (1) real estate property taxes, (2)
all expenses required to maintain the related Property in at least as good a
condition as existed at the effective date of such Primary Mortgage Insurance
Policy, ordinary wear and tear excepted, (3) Property sales expenses, (4) any
outstanding liens (as defined in such Primary Mortgage Insurance Policy) on the
Property and (5) foreclosure costs, including court costs and reasonable
attorneys' fees; (ii) in the event of any physical loss or damage to the
Property, to have the Property restored and repaired to at least as good a
condition as existed at the effective date of such Primary Mortgage Insurance
Policy, ordinary wear and tear excepted; and (iii) tender to the Primary Insurer
good and merchantable title to and possession of the Property.
In those cases in which a Loan is serviced by a Sub-Servicer, the
Sub-Servicer, on behalf of itself, the Trustee and Securityholders, will present
claims to the Primary Insurer, and all collection thereunder will be deposited
in the Sub-Servicing Account. In all other cases, the Master Servicer, on behalf
of itself, the Trustee and the Securityholders, will present claims to the
insurer under each Primary Mortgage Insurance Policy, and will take such
reasonable steps as are necessary to receive payment or to permit recovery
thereunder with respect to defaulted Loans. As set forth above, all collections
by or on behalf of the Master Servicer under any Primary Mortgage Insurance
Policy and, when the Property has not been restored, the hazard insurance
policy, are to be deposited in the Security Account, subject to withdrawal as
heretofore described.
If the Property securing a defaulted Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged Property to a condition sufficient to permit recovery under the related
Primary Mortgage Insurance Policy, if any, the Master Servicer is not required
to expend its own funds to restore the damaged Property unless it determines (i)
that such restoration will increase the proceeds to Securityholders on
liquidation of the Loan after reimbursement of the Master Servicer for its
expenses and (ii) that such expenses will be recoverable by it from related
Insurance Proceeds or Liquidation Proceeds.
If recovery on a defaulted Loan under any related Primary Mortgage
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Loan is not covered by a Primary Mortgage
Insurance Policy, the Master Servicer will be obligated to follow or cause to be
followed such normal practices and procedures as it deems necessary or advisable
to realize upon the defaulted Loan. If the proceeds of any liquidation of the
Property securing the defaulted Loan are less than the principal balance of such
Loan plus interest accrued thereon that is payable
42
<PAGE>
to Securityholders, the Trust Fund will realize a loss in the amount of such
difference plus the aggregate of expenses incurred by the Master Servicer in
connection with such proceedings and which are reimbursable under the Agreement.
In the unlikely event that any such proceedings result in a total recovery which
is, after reimbursement to the Master Servicer of its expenses, in excess of the
principal balance of such Loan plus interest accrued thereon that is payable to
Securityholders, the Master Servicer will be entitled to withdraw or retain from
the Security Account amounts representing its normal servicing compensation with
respect to such Loan and, except as otherwise specified in the Prospectus
Supplement, amounts representing the balance of such excess, exclusive of any
amount required by law to be forwarded to the related borrower, as additional
servicing compensation.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer's primary servicing compensation with respect to a Series of
Securities will come from the monthly payment to it, out of each interest
payment on a Loan, of an amount equal to the percentage per annum specified in
the related Prospectus Supplement of the outstanding principal balance thereof.
Since the Master Servicer's primary compensation is a percentage of the
outstanding principal balance of each Loan, such amounts will decrease as the
Loans amortize. In addition to primary compensation, the Master Servicer or the
Sub-Servicers may be entitled to retain all assumption fees and late payment
charges, to the extent collected from borrowers, and, if so provided in the
related Prospectus Supplement, any prepayment penalties and any interest or
other income which may be earned on funds held in the Security Account or any
Sub-Servicing Account. Unless otherwise specified in the related Prospectus
Supplement, any Sub-Servicer will receive a portion of the Master Servicer's
primary compensation as its sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, the Master Servicer
will, unless otherwise specified in the related Prospectus Supplement, pay from
its servicing compensation certain expenses incurred in connection with its
servicing of the Loans, including, without limitation, payment of any premium
for any insurance policy, guaranty, surety or other form of credit enhancement
as specified in the related Prospectus Supplement, payment of the fees and
disbursements of the Trustee and independent accountants, payment of expenses
incurred in connection with distributions and reports to Securityholders, and
payment of any other expenses described in the related Prospectus Supplement.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to the
Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with the Uniform Single Audit Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC, the
servicing by or on behalf of the Master Servicer of mortgage loans or private
asset backed securities, or under pooling and servicing agreements substantially
similar to each other (including the related Agreement) was conducted in
compliance with such agreements except for any significant exceptions or errors
in records that, in the opinion of the firm, the Audit Program for Mortgages
serviced for FHLMC, or the Uniform Single Audit Program for Mortgage Bankers, it
is required to report. In rendering its statement such firm may rely, as to
matters relating to the direct servicing of Loans or Private Asset Backed
Securities by Sub-Servicers, upon comparable statements for examinations
conducted substantially in compliance with the Uniform Single Audit Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC (rendered
within one year of such statement) of firms of independent public accountants
with respect to the related Sub-Servicer.
Each Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of
officers of the Master Servicer may be obtained by Securityholders of the
related Series without charge upon written request to the Master Servicer at the
address set forth in the related Prospectus Supplement.
43
<PAGE>
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The Master Servicer under each Agreement will be named in the related
Prospectus Supplement. The entity serving as Master Servicer may have normal
business relationships with the Depositor or the Depositor's affiliates.
Each Agreement will provide that the Master Servicer may not resign
from its obligations and duties under the Agreement except upon a determination
that its duties thereunder are no longer permissible under applicable law. The
Master Servicer may, however, be removed from its obligations and duties as set
forth in the Agreement. No such resignation will become effective until the
Trustee or a successor servicer has assumed the Master Servicer's obligations
and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer,
the Depositor nor any director, officer, employee, or agent of the Master
Servicer or the Depositor will be under any liability to the related Trust Fund
or Securityholders for any action taken or for refraining from the taking of any
action in good faith pursuant to the Agreement, or for errors in judgment;
provided, however, that neither the Master Servicer, the Depositor nor any such
person will be protected against any liability which would otherwise be imposed
by reason of wilful misfeasance or gross negligence in the performance of duties
thereunder or by reasons of reckless disregard of obligations and duties
thereunder. To the extent provided in the related Agreement, the Master
Servicer, the Depositor and any director, officer, employee or agent of the
Master Servicer or the Depositor may be entitled to indemnification by the
related Trust Fund and may be held harmless against any loss, liability or
expense incurred in connection with any legal action relating to the Agreement
or the Securities, other than any loss, liability or expense related to any
specific Loan or Loans (except any such loss, liability or expense otherwise
reimbursable pursuant to the Agreement) and any loss, liability or expense
incurred by reason of willful misfeasance or gross negligence in the performance
of duties thereunder or by reason of reckless disregard of obligations and
duties thereunder. In addition, each Agreement will provide that neither the
Master Servicer nor the Depositor will be under any obligation to appear in,
prosecute or defend any legal action which is not incidental to its respective
responsibilities under the Agreement and which in its opinion may involve it in
any expense or liability. The Master Servicer or the Depositor may, however, in
its discretion undertake any such action which it may deem necessary or
desirable with respect to the Agreement and the rights and duties of the parties
thereto and the interests of the Securityholders thereunder. In such event, the
legal expenses and costs of such action and any liability resulting therefrom
will be expenses, costs and liabilities of the Trust Fund and the Master
Servicer or the Depositor, as the case may be, will be entitled to be reimbursed
therefor out of funds otherwise distributable to Securityholders.
Except as otherwise specified in the related Prospectus Supplement, any
person into which the Master Servicer may be merged or consolidated, or any
person resulting from any merger or consolidation to which the Master Servicer
is a party, or any person succeeding to the business of the Master Servicer,
will be the successor of the Master Servicer under each Agreement.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
POOLING AND SERVICING AGREEMENT; SERVICING AGREEMENT. Except as
otherwise specified in the related Prospectus Supplement, Events of Default
under each Agreement will consist of (i) any failure by the Master Servicer to
distribute or cause to be distributed to Securityholders of any class any
required payment (other than an Advance) which continues unremedied for five
business days after the giving of written notice of such failure to the Master
Servicer by the Trustee or the Depositor, or to the Master Servicer, the
Depositor and the Trustee by the holders of Securities of such class evidencing
not less than 25% of the aggregate Percentage Interests evidenced by such class;
(ii) any failure by the Master Servicer to make an Advance as required under the
Agreement, unless cured as specified therein; (iii) any failure by the Master
Servicer duly to observe or perform in any material respect any of its other
covenants or agreements in the Agreement which continues unremedied for thirty
days after the giving of written notice of such failure to the Master Servicer
by the Trustee or the Depositor, or to the Master Servicer, the Depositor and
the Trustee by the holders of Securities of any class evidencing not less than
25% of the aggregate Percentage Interests constituting such class; and (iv)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceeding and certain actions by or on behalf of the
Master Servicer indicating its insolvency, reorganization or inability to pay
its obligations.
44
<PAGE>
If specified in the related Prospectus Supplement, the Agreement will
permit the Trustee to sell the Trust Fund Assets and the other assets of the
Trust Fund in the event that payments in respect thereto are insufficient to
make payments required in the Agreement. The assets of the Trust Fund will be
sold only under the circumstances and in the manner specified in the related
Prospectus Supplement.
So long as an Event of Default under an Agreement remains unremedied,
the Depositor or the Trustee may, and at the direction of holders of Securities
of any class evidencing not less than 51% of the aggregate Percentage Interests
constituting such class and under such other circumstances as may be specified
in such Agreement, the Trustee shall, terminate all of its rights and
obligations of the Master Servicer under the Agreement relating to such Trust
Fund and in and to the Trust Fund Assets, whereupon the Trustee will succeed to
all of the responsibilities, duties and liabilities of the Master Servicer under
the Agreement, including, if specified in the related Prospectus Supplement, the
obligation to make advances, and will be entitled to similar compensation
arrangements. In the event that the Trustee is unwilling or unable so to act, it
may appoint, or petition a court of competent jurisdiction for the appointment
of, a mortgage loan servicing institution with a net worth of a least
$10,000,000 to act as successor to the Master Servicer under the Agreement.
Pending such appointment, the Trustee is obligated to act in such capacity. The
Trustee and any such successor may agree upon the servicing compensation to be
paid, which in no event may be greater than the compensation payable to the
Master Servicer under the Agreement.
No Securityholder, solely by virtue of such holder's status as a
Securityholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Securities of any class of such Series evidencing not less than 25% of the
aggregate Percentage Interests constituting such class have made written request
upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for 60 days has neglected or refused to institute any such proceeding.
Indenture. Except as otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for five (5) days or more in the payment of any principal
of or interest on any Note of such Series; (ii) failure to perform any other
covenant of the Depositor or the Trust Fund in the Indenture which continues for
a period of thirty (30) days after notice thereof is given in accordance with
the procedures described in the related Prospectus Supplement; (iii) any
representation or warranty made by the Depositor or the Trust Fund in the
Indenture or in any certificate or other writing delivered pursuant thereto or
in connection therewith with respect to or affecting such Series having been
incorrect in a material respect as of the time made, and such breach is not
cured within thirty (30) days after notice thereof is given in accordance with
the procedures described in the related Prospectus Supplement; (iv) certain
events of bankruptcy, insolvency, receivership or liquidation of the Depositor
or the Trust Fund; or (v) any other Event of Default provided with respect to
Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, either the Trustee or the holders of
a majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount (or, if the Notes of that Series have a
Pass-Through Rate of 0%, such portion of the principal amount as may be
specified in the terms of that Series, as provided in the related Prospectus
Supplement) of all the Notes of such Series to be due and payable immediately.
Such declaration may, under certain circumstances, be rescinded and annulled by
the holders of more than 50% of the Percentage Interests of the Notes of such
Series.
If, following an Event of Default with respect to any Series of Notes,
the Notes of such Series have been declared to be due and payable, the Trustee
may, in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default, unless (a) the holders of 100% of the
Percentage Interests of the Notes of such Series consent to such sale, (b) the
proceeds of such sale or liquidation are sufficient to pay in full the principal
of and accrued interest, due and unpaid, on the outstanding Notes of such Series
at the date of such sale or (c) the Trustee determines that such collateral
would not be sufficient on an ongoing basis to make all payments on such Notes
as such payments would have become due if such Notes had not been declared due
and payable, and the Trustee obtains the consent of the holders of 66% of the
Percentage Interests of each Class of Notes of such Series.
45
<PAGE>
Except as otherwise specified in the related Prospectus Supplement, in
the event the principal of the Notes of a Series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default shall occur and be continuing with
respect to a Series of Notes, the Trustee shall be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of Notes of such Series, unless such holders
offered to the Trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying with
such request or direction. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, the holders of a majority of the
then aggregate outstanding amount of the Notes of such Series shall have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee with respect to the Notes of such Series, and the holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may, in certain cases, waive any default with respect thereto, except a default
in the payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the holders of the outstanding Notes of such Series affected thereby.
AMENDMENT
Except as otherwise specified in the related Prospectus Supplement,
each Agreement may be amended by the Depositor, the Master Servicer and the
Trustee, without the consent of any of the Securityholders, (i) to cure any
ambiguity; (ii) to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein; or (iii) to make any
other revisions with respect to matters or questions arising under the Agreement
which are not inconsistent with the provisions thereof, provided that such
action will not adversely affect in any material respect the interests of any
Securityholder. In addition, to the extent provided in the related Agreement, an
Agreement may be amended without the consent of any of the Securityholders, to
change the manner in which the Security Account is maintained, provided that any
such change does not adversely affect the then current rating on the class or
classes of Securities of such Series that have been rated. In addition, if a
REMIC election is made with respect to a Trust Fund, the related Agreement may
be amended to modify, eliminate or add to any of its provisions to such extent
as may be necessary to maintain the qualification of the related Trust Fund as a
REMIC, provided that the Trustee has received an opinion of counsel to the
effect that such action is necessary or helpful to maintain such qualification.
Except as otherwise specified in the related Prospectus Supplement, each
Agreement may also be amended by the Depositor, the Master Servicer and the
Trustee with consent of holders of Securities of such Series evidencing not less
than 66% of the aggregate Percentage Interests of each class affected thereby
for the purpose of adding any provisions to or changing in an manner or
eliminating any of the provisions of the Agreement or of modifying in any manner
the rights of the holders of the related Securities; provided, however, that no
such amendment may (i) reduce in any manner the amount of or delay the timing
of, payments received on Loans which are required to be distributed on any
Security without the consent of the holder of such Security, or (ii) reduce the
aforesaid percentage of Securities of any class of holders which are required to
consent to any such amendment without the consent of the holders of all
Securities of such class covered by such Agreement then outstanding. If a REMIC
election is made with respect to a Trust Fund, the Trustee will not be entitled
to consent to an amendment to the related Agreement without having first
received an opinion of counsel to the effect that such amendment will not cause
such Trust Fund to fail to qualify as a REMIC.
TERMINATION; OPTIONAL TERMINATION
POOLING AND SERVICING AGREEMENT; TRUST AGREEMENT. Unless otherwise
specified in the related Agreement, the obligations created by each Pooling and
Servicing Agreement and Trust Agreement for each Series of Securities will
terminate upon the payment to the related Securityholders of all amounts held in
the Security Account or by the Master Servicer and required to be paid to them
pursuant to such Agreement following the later of (i) the final payment of or
other liquidation of the last of the Trust Fund Assets subject thereto or the
disposition of all property acquired upon foreclosure of any such Trust Fund
Assets remaining in the Trust Fund and (ii) the purchase by the Master Servicer
or, if REMIC treatment has been elected and if specified in the related
Prospectus Supplement, by the holder of the residual interest in the REMIC (see
"Certain Material Federal Income Tax Considerations" below), from the related
Trust Fund of all of the remaining Trust Fund Assets and all property acquired
in respect of such Trust Fund Assets.
46
<PAGE>
Unless otherwise specified by the related Prospectus Supplement, any
such purchase of Trust Fund Assets and property acquired in respect of Trust
Fund Assets evidenced by a Series of Securities will be made at the option of
the Master Servicer or, if applicable, such holder of the REMIC residual
interest, at a price, and in accordance with the procedures, specified in the
related Prospectus Supplement. The exercise of such right will effect early
retirement of the Securities of that Series, but the right of the Master
Servicer or, if applicable, such holder of the REMIC residual interest, to so
purchase is subject to the principal balance of the related Trust Fund Assets
being less than the percentage specified in the related Prospectus Supplement of
the aggregate principal balance of the Trust Fund Assets at the Cut-off Date for
the Series. The foregoing is subject to the provision that if a REMIC election
is made with respect to a Trust Fund, any repurchase pursuant to clause (ii)
above will be made only in connection with a "qualified liquidation" of the
REMIC within the meaning of Section 860F(g)(4) of the Code.
INDENTURE. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture
will provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which through the payment
of interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of and each
installment of interest on the Notes of such Series on the last scheduled
Distribution Date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
THE TRUSTEE
The Trustee under each Agreement will be named in the applicable
Prospectus Supplement. The commercial bank or trust company serving as Trustee
may have normal banking relationships with the Depositor, the Master Servicer
and any of their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the Loans. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Loans is situated. The summaries are qualified in their
entirety by reference to the applicable federal laws and the appropriate laws of
the states in which Loans may be originated.
GENERAL
The Loans for a Series may be secured by deeds of trust, mortgages,
security deeds or deeds to secure debt, depending upon the prevailing practice
in the state in which the property subject to the loan is located. A mortgage
creates a lien upon the real property encumbered by the mortgage, which lien is
generally not prior to the lien for real estate taxes and assessments. Priority
between mortgages depends on their terms and generally on the order of recording
with a state or county office. There are two parties to a mortgage, the
mortgagor, who is the borrower and owner of the mortgaged property, and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. Although a deed of
trust is similar to a mortgage, a deed of trust formally has three parties, the
borrower-property owner called the trustor (similar to a mortgagor), a lender
(similar to a mortgagee) called the beneficiary, and a third-party grantee
called the trustee. Under a deed of trust, the borrower
47
<PAGE>
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the obligation. A
security deed and a deed to secure debt are special types of deeds which
indicate on their face that they are granted to secure an underlying debt. By
executing a security deed or deed to secure debt, the grantor conveys title to,
as opposed to merely creating a lien upon, the subject property to the grantee
until such time as the underlying debt is repaid. The trustee's authority under
a deed of trust, the mortgagee's authority under a mortgage and the grantee's
authority under a security deed or deed to secure debt are governed by law and,
with respect to some deeds of trust, the directions of the beneficiary.
FORECLOSURE/REPOSSESSION
Foreclosure of a deed of trust is generally accomplished by a
non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In addition to any
notice requirements contained in a deed of trust, in some states, the trustee
must record a notice of default and send a copy to the borrower-trustor, to any
person who has recorded a request for a copy of any notice of default and notice
of sale, to any successor in interest to the borrower-trustor, to the
beneficiary of any junior deed of trust and to certain other persons. In
general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a statutorily prescribed reinstatement period, cure a
monetary default by paying the entire amount in arrears plus other designated
costs and expenses incurred in enforcing the obligation. Generally, state law
controls the amount of foreclosure expenses and costs, including attorney's
fees, which may be recovered by a lender. After the reinstatement period has
expired without the default having been cured, the borrower or junior lienholder
no longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale. If the deed of trust is not reinstated,
a notice of sale must be posted in a public place and, in most states, published
for a specific period of time in one or more newspapers. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the foreclosure
may occasionally result from difficulties in locating necessary parties.
Judicial foreclosure proceedings are often not contested by any of the parties.
When the mortgagee's right to foreclosure is contested, the legal proceedings
necessary to resolve the issue can be time consuming. After the completion of a
judicial foreclosure proceeding, the court generally issues a judgment of
foreclosure and appoints a referee or other court officer to conduct the sale of
the property. In some states, mortgages may also be foreclosed by advertisement,
pursuant to a power of sale provided in the mortgage.
Although foreclosure sales are typically public sales, frequently no
third party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure in which event
the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where such judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burden of ownership,
including obtaining hazard insurance and making such repairs at its own expense
as are necessary to render the property suitable for sale. The lender will
commonly obtain the services of a real estate broker and pay the broker's
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Any loss may be reduced by the receipt of
any mortgage guaranty insurance proceeds.
Courts have imposed general equitable principles upon foreclosure,
which are generally designed to mitigate the legal consequences to the borrower
of the borrower's defaults under the loan documents. Some courts have been faced
with the issue of whether federal or state constitutional provisions reflecting
due process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
48
<PAGE>
When the beneficiary under a junior mortgage or deed of trust cures the
default and reinstates or redeems by paying the full amount of the senior
mortgage or deed of trust, the amount paid by the beneficiary so to cure or
redeem becomes a part of the indebtedness secured by the junior mortgage or deed
of trust. See "-Junior Mortgages; Rights of Senior Mortgagees" below.
ENVIRONMENTAL RISKS
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and safety.
These include laws and regulations governing air pollutant emissions, hazardous
and toxic substances, impacts to wetlands, leaks from underground storage tanks,
and the management, removal and disposal of lead- and asbestos-containing
materials. In certain circumstances, these laws and regulations impose
obligations on the owners or operators of residential properties such as those
subject to the Loans. The failure to comply with such laws and regulations may
result in fines and penalties.
Moreover, under various federal, state and local laws and regulations,
an owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs. Such
liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of such substances, and could exceed
the value of the property and the aggregate assets of the owner or operator. In
addition, persons who transport or dispose of hazardous substances, or arrange
for the transportation, disposal or treatment of hazardous substances, at
off-site locations may also be held liable if there are releases or threatened
releases of hazardous substances at such off-site locations.
In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
contamination of property may give rise to a lien on the property to assure the
payment of the costs of clean-up. In several states, such a lien has priority
over the lien of an existing mortgage against such property. Under CERCLA, such
a lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, there is a possibility
that a lender may be held liable as an "owner" or "operator" for costs of
addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by a current or prior owner or operator. CERCLA imposes liability for
such costs on any and all "responsible parties," including owners or operators.
However, CERCLA excludes from the definition of "owner or operator" a secured
creditor who holds indicia of ownership primarily to protect its security
interest but does not "participate in the management" of the property (the
"secured creditor exclusion"). Thus, if a lender's activities begin to encroach
on the actual management of a contaminated facility or property, the lender may
incur liability as an "owner or operator" under CERCLA. Similarly, if a lender
forecloses and takes title to a contaminated facility or property, the lender
may incur CERCLA liability in various circumstances, including, but not limited
to, when it holds the facility or property as an investment (including leasing
the facility or property to a third party), or fails to market the property in a
timely fashion.
Whether actions taken by a lender would constitute such participation
in the management of a property, so that the lender would lose the protection of
the secured creditor exclusion, has been a matter of judicial interpretation of
the statutory language, and court decisions have historically been inconsistent.
In 1990, the United States Court of Appeals for the Eleventh Circuit suggested,
in United States v. Fleet Factors Corp., that the mere capacity of the lender to
influence a borrower's decisions regarding disposal of hazardous substances was
sufficient participation in the management of the borrower's business to deny
the protection of the secured creditor exclusion to the lender, regardless of
whether the lender actually exercised such influence. Other judicial decisions
did not interpret the secured creditor exclusion as narrowly as did the Eleventh
Circuit.
This ambiguity appears to have been resolved by the enactment of the
Asset Conservation, Lender Liabiltiy and Deposit Insurance Protection Act of
1996 (the "ASSET CONSERVATION ACT"), which took effect on September 30, 1996.
The Asset Conservation Act provides that in order to be deemed to have
participated in the management of a secured property, a lender must actually
participate in the operational affairs of the property or of the borrower. The
Asset Conservation Act also provides that participation in the management of the
property does not include "merely having the capacity to influence, or
unexercised right to control" operations. Rather, a lender will lose the
protection of the secured creditor exclusion only if it exercises
decision-making control over the borrower's environmental
49
<PAGE>
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of all operational functions of the secured property.
If a lender is or becomes liable, it can bring an action for
contribution against any other "responsible parties," including a previous owner
or operator, who crated the environmental hazard, but those persons or entities
may be bankrupt or otherwise judgment proof. The costs associated with
environmental cleanup may be substantial. It is conceivable that such costs
arising from the circumstances set forth above would result in a loss to
Certificateholders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks
(except heating oil tanks). The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under such rule, a holder of
a security interest in an underground storage tank or real property containing
an underground storage tank is not considered an operator of the underground
storage tank as long as petroleum is not added to, stored in or dispensed from
the tank. Moreover, under the Asset Conservation Act, the protections accorded
to lenders under CERCLA are also accorded to holders of security interests in
underground petroleum storage tanks. It should be noted, however, that liability
for cleanup of petroleum contamination may be governed by state law, which may
not provide for any specific protection for secured creditors.
The Asset Conservation Act specifically addresses the potential
liability of lenders who hold mortgages or similar conventional security
interests in real property, such as the Trust Fund does in connection with the
Home Equity Loans and the Home Improvement Contracts. The Asset Conservation
Act, however, does not clearly address the potential liability of lenders who
retain legal title to a property and enter into an agreement with the purchaser
for the payment of the purchase price and interest over the term of the
contract, such as the Trust Fund does in connection with the Installment
Contracts.
If a lender (including a lender under an Installment Contract) is or
becomes liable under CERCLA, it may be authorized to bring a statutory action
for contribution against any other "responsible parties", including a previous
owner or operator. However, such persons or entities may be bankrupt or
otherwise judgment proof, and the costs associated with environmental cleanup
and related actions may be substantial. Moreover, some state laws imposing
liability for addressing hazardous substances do not contain exemptions from
liability for lenders. Whether the costs of addressing a release or threatened
release at a property pledged as collateral for one of the Loans (or at a
property subject to an Installment Contract), would be imposed on the Trust
Fund, and thus occasion a loss to the Securityholders, therefore depends on the
specific factual and legal circumstances at issue.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption would defeat the title
of any purchaser from the lender subsequent to foreclosure or sale under a deed
of trust. Consequently, the practical effect of the redemption right is to force
the lender to retain the property and pay the expenses of ownership until the
redemption period has run. In some states, there is no right to redeem property
after a trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have adopted statutory prohibitions restricting the
right of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or certain other foreclosure proceedings. A deficiency judgment is
a personal judgment against the borrower equal in most cases to the difference
between the amount due to the lender and the fair market value of the real
property sold at the foreclosure sale. Other statutes require the beneficiary or
mortgagee to exhaust the security afforded under a deed of trust or mortgage by
foreclosure in an attempt to satisfy the full debt before bringing a personal
action against the borrower. In certain other states, the lender has the option
of bringing a personal action against the borrower on the debt
50
<PAGE>
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.
Certain Loans may be subject to the Riegle Community Development and
Regulatory Improvement Act of 1994, known as the Riegle Act, which incorporates
the Home Ownership and Equity Protection Act of 1994. These provisions impose
additional disclosure and other requirements on creditors with respect to
non-purchase money mortgage loans with high interest rates or high up-front fees
and charges. The provisions of the Riegle Act apply on a mandatory basis to all
mortgage loans originated on or after October 1, 1995. These provisions can
impose specific statutory liabilities upon creditors who fail to comply with
these provisions and may affect the enforceability of the related loans. In
addition, any assignee of the creditor would generally be subject to all claims
and defenses that the consumer could assert against the creditor, including the
right to rescind the mortgage loan.
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.
51
<PAGE>
As to loans secured by an owner-occupied residence, the Garn-St.
Germain Act sets forth nine specific instances in which a mortgagee covered by
the Act may not exercise its rights under a due-on-sale clause, notwithstanding
the fact that a transfer of the property may have occurred. The inability to
enforce a due-on-sale clause may result in transfer of the related Property to
an uncreditworthy person, which could increase the likelihood of default or may
result in a mortgage bearing an interest rate below the current market rate
being assumed by a new home buyer, which may affect the average life of the
Loans and the number of Loans which may extend to maturity.
In addition, under federal bankruptcy law, due-on-sale clauses may not
be enforceable in bankruptcy proceedings and may, under certain circumstances,
be eliminated in any modified mortgage resulting from such bankruptcy
proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may
contain provisions obligating the borrower to pay a late charge if payments are
not timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in some cases
involving the sale by a trustee under a deed of trust or by a mortgagee under a
mortgage having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V") provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1993 deadline. In addition, even
where Title V is not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on mortgage loans covered by
Title V. Certain states have taken action to reimpose interest rate limits
and/or to limit discount points or other charges.
THE HOME IMPROVEMENT CONTRACTS
General. The Home Improvement Contracts, other than those Home
Improvement Contracts that are unsecured or secured by mortgages on real estate
(such Home Improvement Contracts are hereinafter referred to in this section as
"contracts") generally are "chattel paper" or constitute "purchase money
security interests" each as defined in the
52
<PAGE>
Uniform Commercial Code (the "UCC"). Pursuant to the UCC, the sale of chattel
paper is treated in a manner similar to perfection of a security interest in
chattel paper. Under the related Agreement, the Depositor will transfer physical
possession of the contracts to the Trustee or a designated custodian or may
retain possession of the contracts as custodian for the Trustee. In addition,
the Depositor will make an appropriate filing of a UCC-1 financing statement in
the appropriate states to give notice of the Trustee's ownership of the
contracts. Unless otherwise specified in the related Prospectus Supplement, the
contracts will not be stamped or otherwise marked to reflect their assignment
from the Depositor to the Trustee. Therefore, if through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
contracts without notice of such assignment, the Trustee's interest in the
contracts could be defeated.
SECURITY INTERESTS IN HOME IMPROVEMENTS. The contracts that are secured
by the Home Improvements financed thereby grant to the originator of such
contracts a purchase money security interest in such Home Improvements to secure
all or part of the purchase price of such Home Improvements and related
services. A financing statement generally is not required to be filed to perfect
a purchase money security interest in consumer goods. Such purchase money
security interests are assignable. In general, a purchase money security
interest grants to the holder a security interest that has priority over a
conflicting security interest in the same collateral and the proceeds of such
collateral. However, to the extent that the collateral subject to a purchase
money security interest becomes a fixture, in order for the related purchase
money security interest to take priority over a conflicting interest in the
fixture, the holder's interest in such Home Improvement must generally be
perfected by a timely fixture filing. In general, a security interest does not
exist under the UCC in ordinary building material incorporated into an
improvement on land. Home Improvement Contracts that finance lumber, bricks,
other types of ordinary building material or other goods that are deemed to lose
such characterization upon incorporation of such materials into the related
property, will not be secured by a purchase money security interest in the Home
Improvement being financed.
ENFORCEMENT OF SECURITY INTEREST IN HOME IMPROVEMENTS. So long as the
Home Improvement has not become subject to the real estate law, a creditor can
repossess a Home Improvement securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit that the debtor may redeem
at or before such resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments, and in many cases
the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
CONSUMER PROTECTION LAWS. The so-called "Holder-in-Due Course" rule of
the Federal Trade Commission is intended to defeat the ability of the transferor
of a consumer credit contract which is the seller of goods which gave rise to
the transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of such a contract to all claims and defenses
which the debtor could assert against the seller of goods. Liability under this
rule is limited to amounts paid under a contract; however, the obligor also may
be able to assert the rule to set off remaining amounts due as a defense against
a claim brought by the Trustee against such obligor. Numerous other federal and
state consumer protection laws impose requirements applicable to the origination
and lending pursuant to the contracts, including the Truth in Lending Act, the
Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection
Practices Act and the Uniform Consumer Credit Code. In the case of some of these
laws, the failure to comply with their provisions may affect the enforceability
of the related contract.
53
<PAGE>
APPLICABILITY OF USURY LAWS. Title V provides that, subject to the
following conditions, state usury limitations shall not apply to any contract
which is secured by a first lien on certain kinds of consumer goods. The
contracts would be covered if they satisfy certain conditions, among other
things, governing the terms of any prepayments, late charges and deferral fees
and requiring a 30-day notice period prior to instituting any action leading to
repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
INSTALLMENT CONTRACTS
The Loans may also consist of installment contracts. Under an
installment contract ("INSTALLMENT CONTRACT") the seller (hereinafter referred
to in this section as the "lender") retains legal title to the property and
enters into an agreement with the purchaser hereinafter referred to in this
section as the "borrower") for the payment of the purchase price, plus interest,
over the term of such contract. Only after full performance by the borrower of
the contract is the lender obligated to convey title to the property to the
purchaser. As with mortgage or deed of trust financing, during the effective
period of the Installment Contract, the borrower is generally responsible for
maintaining the property in good condition and for paying real estate taxes,
assessments and hazard insurance premiums associated with the property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated, and
the buyer's equitable interest in the property is forfeited. The lender in such
a situation does not have to foreclose in order to obtain title to the property,
although in some cases a quiet title action is in order if the borrower has
filed the Installment Contract in local land records and an ejectment action may
be necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an Installment Contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under Installment Contracts from
the harsh consequences of forfeiture. Under such statutes, a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during which
the Installment Contract may be reinstated upon full payment of the default
amount and the borrower may have a post-foreclosure statutory redemption right.
In other states, courts in equity may permit a borrower with significant
investment in the property under an Installment Contract for the sale of real
estate to share in the proceeds of sale of the property after the indebtedness
is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally speaking, the lender's procedures for obtaining
possession and clear title under an Installment Contract in a given state are
simpler and less time-consuming and costly than are the procedures for
foreclosing and obtaining clear title to a property subject to one or more
liens.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "RELIEF ACT"), a borrower who enters military
service after the origination of such borrower's Loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the Loan and is later called to active duty) may not be charged
interest above an annual rate of 6% during the period of such borrower's active
duty status, unless a court orders otherwise upon application of the lender. It
is possible that such interest rate limitation could have an effect, for an
indeterminate period of time, on the ability of the Master Servicer to collect
full amounts of interest on certain of the Loans. Any shortfall in interest
collections resulting from the application of the Relief Act could result in
losses to the Securityholders. The Relief Act also imposes limitations which
would impair the ability of the Master Servicer to foreclose on an affected Loan
during the borrower's period of active duty status. Moreover, the Relief Act
permits the extension of a Loan's maturity and the re-adjustment of its payment
schedule beyond the completion of
54
<PAGE>
military service. Thus, in the event that such a Loan goes into default, there
may be delays and losses occasioned by the inability to realize upon the
Property in a timely fashion.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
To the extent that the Loans comprising the Trust Fund for a Series are
secured by mortgages which are junior to other mortgages held by other lenders
or institutional investors, the rights of the Trust Fund (and therefore the
Securityholders), as mortgagee under any such junior mortgage, are subordinate
to those of any mortgagee under any senior mortgage. The senior mortgagee has
the right to receive hazard insurance and condemnation proceeds and to cause the
property securing the Loan to be sold upon default of the mortgagor, thereby
extinguishing the junior mortgagee's lien unless the junior mortgagee asserts
its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure such
default and bring the senior loan current, in either event adding the amounts
expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make Revolving Credit Line Loans typically contains
a "future advance" clause, which provides, in essence, that additional amounts
advanced to or on behalf of the borrower by the beneficiary or lender are to be
secured by the deed of trust or mortgage. Any amounts so advanced after the
Cut-off Date with respect to any mortgage will not be included in the Trust
Fund. The priority of the lien securing any advance made under the clause may
depend in most states on whether the deed of trust or mortgage is called and
recorded as a credit line deed of trust or mortgage. If the beneficiary or
lender advances additional amounts, the advance is entitled to receive the same
priority as amounts initially advanced under the trust deed or mortgage,
notwithstanding the fact that there may be junior trust deeds or mortgages and
other liens which intervene between the date of recording of the trust deed or
mortgage and the date of the future advance, and notwithstanding that the
beneficiary or lender had actual knowledge of such intervening junior trust
deeds or mortgages and other liens at the time of the advance. In most states,
the trust deed or mortgage lien securing mortgage loans of the type which
includes home equity credit lines applies retroactively to the date of the
original recording of the trust deed or mortgage, provided that the total amount
of advances under the home equity credit line does not exceed the maximum
specified principal amount of the recorded trust deed or mortgage, except as to
advances made after receipt by the lender of a written notice of lien from a
judgment lien creditor of the trustor.
55
<PAGE>
THE TITLE I PROGRAM
General. Certain of the Loans contained in a Trust Fund may be loans
insured under the FHA Title I Credit Insurance program created pursuant to
Sections 1 and 2(a) of the National Housing Act of 1934 (the "TITLE I PROGRAM").
Under the Title I Program, the FHA is authorized and empowered to insure
qualified lending institutions against losses on eligible loans. The Title I
Program operates as a coinsurance program in which the FHA insures up to 90% of
certain losses incurred on an individual insured loan, including the unpaid
principal balance of the loan, but only to the extent of the insurance coverage
available in the lender's FHA insurance coverage reserve account. The owner of
the loan bears the uninsured loss on each loan.
The types of loans which are eligible for insurance by the FHA under
the Title I Program include property improvement loans ("PROPERTY IMPROVEMENT
LOANS" or "TITLE I LOANS"). A Property Improvement Loan or Title I Loan means a
loan made to finance actions or items that substantially protect or improve the
basic livability or utility of a property and includes single family improvement
loans.
There are two basic methods of lending or originating such loans which
include a "direct loan" or a "dealer loan". With respect to a direct loan, the
borrower makes application directly to a lender without any assistance from a
dealer, which application may be filled out by the borrower or by a person
acting at the direction of the borrower who does not have a financial interest
in the loan transaction, and the lender may disburse the loan proceeds solely to
the borrower or jointly to the borrower and other parties to the transaction.
With respect to a dealer loan, the dealer, who has a direct or indirect
financial interest in the loan transaction, assists the borrower in preparing
the loan application or otherwise assists the borrower in obtaining the loan
from the lender. The lender may disburse proceeds solely to the dealer or the
borrower or jointly to the borrower and the dealer or other parties to the
transaction. With respect to a dealer Title I Loan, a dealer may include a
seller, a contractor or supplier of goods or services.
Loans insured under the Title I Program are required to have fixed
interest rates and generally provide for equal installment payments due weekly,
biweekly, semi-monthly or monthly, except that a loan may be payable quarterly
or semi-annually where a borrower has an irregular flow of income. The first or
last payments (or both) may vary in amount but may not exceed 150% of the
regular installment payment, and the first payment may be due no later than two
months from the date of the loan. The note must contain a provision permitting
full or partial prepayment of the loan. The interest rate must be negotiated and
agreed to by the borrower and the lender and must be fixed for the term of the
loan and recited in the note. Interest on an insured loan must accrue from the
date of the loan and be calculated according to the actuarial method. The lender
must assure that the note and all other documents evidencing the loan are in
compliance with applicable federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence and
diligence to determine whether the borrower and any co-maker is solvent and an
acceptable credit risk, with a reasonable ability to make payments on the loan
obligation. The lender's credit application and review must determine whether
the borrower's income will be adequate to meet the periodic payments required by
the loan, as well as the borrower's other housing and recurring expenses, which
determination must be made in accordance with the expense-to-income ratios
published by the Secretary of HUD unless the lender determines and documents in
the loan file the existence of compensating factors concerning the borrower's
creditworthiness which support approval of the loan.
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the time
of approval by the lending institution (as is typically the case with other
federal loan programs). If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the FHA.
In such case, provided that the validity of any lien on the property has not
been impaired, the insurance of the loan under the Title I Program will not be
affected unless such material misstatements of fact or misuse of loan proceeds
was caused by (or was knowingly sanctioned by) the lender or its employees.
REQUIREMENTS FOR TITLE I LOANS. The maximum principal amount for Title
I Loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that such maximum
56
<PAGE>
amount does not exceed $25,000 (or the current applicable amount) for a single
family property improvement loan. Generally, the term of a Title I Loan may not
be less than six months nor greater than 20 years and 32 days. A borrower may
obtain multiple Title I Loans with respect to multiple properties, and a
borrower may obtain more than one Title I Loan with respect to a single
property, in each case as long as the total outstanding balance of all Title I
Loans in the same property does not exceed the maximum loan amount for the type
of Title I Loan thereon having the highest permissible loan amount.
Borrower eligibility for a Title I Loan requires that the borrower have
at least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I Loan or a recorded land installment contract for the purchase of
the real property. In the case of a Title I Loan with a total principal balance
in excess of $15,000, if the property is not occupied by the owner, the borrower
must have equity in the property being improved at least equal to the principal
amount of the loan, as demonstrated by a current appraisal. Any Title I Loan in
excess of $7,500 must be secured by a recorded lien on the improved property
which is evidenced by a mortgage or deed of trust executed by the borrower and
all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend such list of items and activities. With respect to any dealer Title I
Loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan, the lender is
required to obtain, promptly upon completion of the improvements but not later
than 6 months after disbursement of the loan proceeds with one 6 month extension
if necessary, a completion certificate, signed by the borrower. The lender is
required to conduct an on-site inspection on any Title I Loan where the
principal obligation is $7,500 or more, and on any direct Title I Loan where the
borrower fails to submit a completion certificate.
FHA INSURANCE COVERAGE. Under the Title I Program, the FHA establishes
an insurance coverage reserve account for each lender which has been granted a
Title I contract of insurance. The amount of insurance coverage in this account
is a maximum of 10% of the amount disbursed, advanced or expended by the lender
in originating or purchasing eligible loans registered with the FHA for Title I
insurance, with certain adjustments. The balance in the insurance coverage
reserve account is the maximum amount of insurance claims the FHA is required to
pay to the Title I lender. Loans to be insured under the Title I Program will be
registered for insurance by the FHA and the insurance coverage attributable to
such loans will be included in the insurance coverage reserve account for the
originating or purchasing lender following the receipt and acknowledgment by the
FHA of a loan report on the prescribed form pursuant to the Title I regulations.
For each eligible loan reported and acknowledged for insurance, the FHA charges
a fee (the "PREMIUM"). For loans having a maturity of 25 months or less, the FHA
bills the lender for the entire Premium in an amount equal to the product of
0.50% of the original loan amount and the loan term. For home improvement loans
with a maturity greater than 25 months, each year that a loan is outstanding the
FHA bills the lender for a Premium in an amount equal to 0.50% of the original
loan amount. If a loan is prepaid during the year, the FHA will not refund or
abate the Premium paid for such year.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect to
loans insured under the lender's contract of insurance by (i) the amount of the
FHA insurance claims approved for payment relating to such insured loans and
(ii) the amount of insurance coverage attributable to insured loans sold by the
lender, and such insurance coverage may be reduced for any FHA insurance claims
rejected by the FHA. The balance of the lender's FHA insurance coverage reserve
account will be further adjusted as required under Title I or by the FHA, and
the insurance coverage therein may be earmarked with respect to each or any
eligible loans insured thereunder, if a determination is made by the Secretary
of HUD that it is in its interest to do so. Originations and acquisitions of new
eligible loans will continue to increase a lender's insurance coverage reserve
account balance by 10% of the amount disbursed, advanced or expended in
originating or acquiring such eligible loans registered with the FHA for
insurance under the Title I Program. The Secretary of HUD may transfer insurance
coverage between insurance coverage reserve accounts with earmarking with
respect to a particular insured loan or group of insured loans when a
determination is made that it is in the Secretary's interest to do so.
57
<PAGE>
The lender may transfer (except as collateral in a bona fide
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an insured
loan is transferred with recourse or with a guaranty or repurchase agreement,
the FHA, upon receipt of written notification of the transfer of such loan in
accordance with the Title I regulations, will transfer from the transferor's
insurance coverage reserve account to the transferee's insurance coverage
reserve account an amount, if available, equal to 10% of the actual purchase
price or the net unpaid principal balance of such loan (whichever is less).
However, under the Title I Program not more than $5,000 in insurance coverage
shall be transferred to or from a lender's insurance coverage reserve account
during any October 1 to September 30 period without the prior approval of the
Secretary of HUD. Amounts which may be recovered by the Secretary of HUD after
payment of an insurance claim are not added to the amount of insurance coverage
in the related lender's insurance coverage reserve account.
CLAIMS PROCEDURES UNDER TITLE I. Under the Title I Program the lender
may accelerate an insured loan following a default on such loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the
lender may either (a) proceed against the property under any security
instrument, or (b) make a claim under the lender's contract of insurance. If the
lender chooses to proceed against the property under a security instrument (or
if it accepts a voluntary conveyance or surrender of the property), the lender
may file an insurance claim only with the prior approval of the Secretary of
HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation of
the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims, where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any Title I Loan must be filed
with the FHA no later than 9 months after the date of default of such loan.
Concurrently with filing the insurance claim, the lender shall assign to the
United States of America the lender's entire interest in the loan note (or a
judgment in lien of the note), in any security held and in any claim filed in
any legal proceedings. If, at the time the note is assigned to the United
States, the Secretary has reason to believe that the note is not valid or
enforceable against the borrower, the FHA may deny the claim and reassign the
note to the lender. If either such defect is discovered after the FHA has paid a
claim, the FHA may require the lender to repurchase the paid claim and to accept
a reassignment of the loan note. If the lender subsequently obtains a valid and
enforceable judgment against the borrower, the lender may resubmit a new
insurance claim with an assignment of the judgment. Although the FHA may contest
any insurance claim and make a demand for repurchase of the loan at any time up
to two years from the date the claim was certified for payment and may do so
thereafter in the event of fraud or misrepresentation on the part of the lender,
the FHA has expressed an intention to limit the period of time within which it
will take such action to one year from the date the claim was certified for
payment.
Under the Title I Program the amount of an FHA insurance claim payment,
when made, is equal to the Claimable Amount, up to the amount of insurance
coverage in the lender's insurance coverage reserve account. For the purposes
hereof, the "Claimable Amount" means an amount equal to 90% of the sum of: (a)
the unpaid loan obligation (net unpaid principal and the uncollected interest
earned to the date of default) with adjustments thereto if the lender has
proceeded against property securing such loan; (b) the interest on the unpaid
amount of the loan obligation from the date of default to the date of the
claim's initial submission for payment plus 15 calendar days (but not to exceed
9 months from the date of default), calculated at the rate of 7% per annum; (c)
the uncollected court costs; (d) the attorney's fees not to exceed $500; and (e)
the expenses for recording the assignment of the security to the United States.
The Secretary of HUD may deny a claim for insurance in whole or in part
for any violations of the regulations governing the Title I Program; however,
the Secretary of HUD may waive such violations if it determines that enforcement
of the regulations would impose an injustice upon a lender which has
substantially complied with the regulations in good faith.
58
<PAGE>
OTHER LEGAL CONSIDERATIONS
The Loans are also subject to federal laws, including: (i) Regulation
Z, which requires certain disclosures to the borrowers regarding the terms of
the Loans; (ii) the Equal Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of public assistance or the
exercise of any right under the Consumer Credit Protection Act, in the extension
of credit; and (iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience. Violations
of certain provisions of these federal laws may limit the ability of the Sellers
to collect all or part of the principal of or interest on the Loans and in
addition could subject the Sellers to damages and administrative enforcement.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of certain anticipated material federal
income tax consequences of the purchase, ownership, and disposition of the
Securities and is based on the opinion of Brown & Wood LLP and Thacher Proffitt
& Wood, 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 change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances. This summary focuses primarily upon investors who will hold
Securities as "capital assets" (generally, property held for investment) within
the meaning of section 1221 of the Code.
Prospective investors may wish to consult their own tax advisers concerning the
federal, state, local and any other tax consequences as relates specifically to
such investors in connection with the purchase, ownership and disposition of the
Securities.
The federal income tax consequences to holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a REMIC under the Internal Revenue Code of 1986, as amended (the
"CODE"); (iii) the Securities represent an ownership interest in some or all of
the assets included in the Trust Fund for a Series; (iv) an election is made to
treat the Trust Fund relating to a particular Series of Certificates as a
partnership or (v) an election is made to treat the Trust Fund as a FASIT under
the Code. 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; provided that, for
purposes solely of the restrictions on the transfer of REMIC residual interests,
no partnership or other entity treated as a partnership for United States
federal income tax purposes shall be treated as a U.S. Person unless all persons
that own an interest in such partnership either directly or through any entity
that is not a corporation for United States federal income tax purposes are
required by the applicable operative agreement to be U.S. Persons), an estate
whose income is subject to U.S. federal income tax regardless of its source, or
a trust with respect to which (i) a court within the United States is able to
exercise primary supervision over the administration of the trust and (ii) one
or more U.S. persons have the authority to control all substantial decisions of
the trust. Notwithstanding the preceding sentence, to the extent provided in
regulations, certain trusts in existence on August 20, 1996 and treated as
United States Persons prior to such date that elect to continue to be treated as
United States persons shall be considered U.S. Persons as well.
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
59
<PAGE>
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.
TAXATION OF DEBT SECURITIES
INTEREST AND ACQUISITION DISCOUNT. In the opinion of Tax Counsel,
Regular Interest Securities are generally taxable to holders in the same manner
as evidences of indebtedness issued by the REMIC. Stated interest on the Regular
Interest Securities will be taxable as ordinary income and taken into account
using the accrual method of accounting, regardless of the holder's normal
accounting method. Interest (other than original issue discount) on Securities
(other than Regular Interest Securities) that are characterized as indebtedness
for federal income tax purposes will be includible in income by holders thereof
in accordance with their usual methods of accounting. Securities characterized
as debt for federal income tax purposes and Regular Interest Securities will be
referred to hereinafter collectively as "DEBT SECURITIES."
Tax Counsel is of the opinion that Debt Securities that are Compound
Interest Securities will, and certain of the other Debt Securities issued at a
discount may, be issued with "original issue discount" ("OID"). The following
discussion is based in part on the rules governing OID which are set forth in
sections 1271 through 1275 of the Code and the Treasury regulations issued
thereunder on February 2, 1994, as amended on June 11, 1996 (the "OID
REGULATIONS"). A holder should be aware, however, that the OID Regulations do
not adequately address certain issues relevant to prepayable securities, such as
the Debt Securities.
In general, OID, if any, will equal the excess of the stated redemption
price at maturity of a Debt Security over its issue price. In the opinion of Tax
Counsel, a holder of a Debt Security must include such OID in gross income as
ordinary interest income as it accrues under a method taking into account an
economic accrual of the discount. In general, OID must be included in income in
advance of the receipt of the cash representing that income. The amount of OID
on a Debt Security will be considered to be zero if it is less than a de minimis
amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such class will be treated as
the fair market value of such class on the Closing Date. The issue price of a
Debt Security also includes the amount paid by an initial Debt Security holder
for accrued interest that relates to a period prior to the issue date of the
Debt Security. The stated redemption price at maturity of a Debt Security
includes the original principal amount of the Debt Security, but generally will
not include distributions of interest if such distributions constitute
"qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below) provided that such interest payments are unconditionally payable at
intervals of one year or less during the entire term of the Debt Security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Certain Debt Securities may provide for default
remedies in the event of late payment or nonpayment of interest. In the opinion
of Tax Counsel, the interest on such Debt Securities will be unconditionally
payable and constitute qualified stated interest, not OID. However, absent
clarification of the OID Regulations, where Debt Securities do not provide for
default remedies, the interest payments will be included in the Debt Security's
stated redemption price at maturity and taxed as OID. Interest is payable at a
single fixed rate only if the rate appropriately takes into account the length
of the interval between payments. Distributions of interest on Debt Securities
with respect to which deferred interest will accrue, will not constitute
qualified stated interest payments, in which case the stated redemption price at
maturity of such Debt Securities includes all distributions of interest as well
as principal thereon. Where the interval between the issue date and the first
Distribution Date on a Debt Security is either longer or shorter than the
interval between subsequent Distribution Dates, all or part of the interest
foregone, in the case of the longer interval, and all of the additional
interest, in the case of the shorter interval, will be included in the stated
redemption
60
<PAGE>
price at maturity and tested under the de minimis rule described below. In the
case of a Debt Security with a long first period which has non-de minimis OID,
all stated interest in excess of interest payable at the effective interest rate
for the long first period will be included in the stated redemption price at
maturity and the Debt Security will generally have OID. Holders of Debt
Securities should consult their own tax advisors to determine the issue price
and stated redemption price at maturity of a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered to
be zero if such OID is less than 0.25% of the stated redemption price at
maturity of the Debt Security multiplied by the weighted average maturity of the
Debt Security. For this purpose, the weighted average maturity of the Debt
Security is computed as the sum of the amounts determined by multiplying the
number of full years (i.e., rounding down partial years) from the issue date
until each distribution in reduction of stated redemption price at maturity is
scheduled to be made by a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity of the Debt
Security and the denominator of which is the stated redemption price at maturity
of the Debt Security. Holders generally must report de minimis OID pro rata as
principal payments are received, and such income will be capital gain if the
Debt Security is held as a capital asset. However, accrual method holders may
elect to accrue all de minimis OID as well as market discount under a constant
interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest is
unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
interest is based on a "qualified floating rate," an "objective rate," or a
combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such Debt Security. In
the case of Compound Interest Securities, certain Interest Weighted Securities,
and certain of the other Debt Securities, none of the payments under the
instrument will be considered qualified stated interest, and thus the aggregate
amount of all payments will be included in the stated redemption price.
The Internal Revenue Service (the "IRS") issued regulations (the
"CONTINGENT REGULATIONS") governing the calculation of OID on instruments having
contingent interest payments. The Contingent Regulations represent the only
guidance regarding the views of the IRS with respect to contingent interest
instruments and specifically do not apply for purposes of calculating OID on
debt instruments subject to section 1272(a)(6) of the Code, such as the Debt
Securities. Additionally, the OID Regulations do not contain provisions
specifically interpreting section 1272(a)(6) of the Code. Until the Treasury
issues guidance to the contrary, the Trustee intends to base its computation on
section 1272(a)(6) of the Code and the OID Regulations as described in this
Prospectus. However, because no regulatory guidance currently exists under
section 1272(a)(6) of the Code, there can be no assurance that such methodology
represents the correct manner of calculating OID.
The holder of a Debt Security issued with OID must include in gross
income, for all days during its taxable year on which it holds such Debt
Security, the sum of the "daily portions" of such original issue discount. The
amount of OID includible in income by a holder will be computed by allocating to
each day during a taxable year a PRO RATA portion of the original issue discount
that accrued during the relevant accrual period. In the case of a Debt Security
that is not a Regular Interest Security and the principal payments on which are
not subject to acceleration resulting from prepayments on the Loans, the amount
of OID includible in income of a holder for an accrual period (generally the
period over which interest accrues on the debt instrument) will equal the
product of the yield to maturity of the Debt Security and the adjusted issue
price of the Debt Security, reduced by any payments of qualified stated
interest. The adjusted issue price is the sum of its issue price plus prior
accruals or OID, reduced by the total payments made with respect to such Debt
Security in all prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "PAY-THROUGH SECURITY"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"PREPAYMENT ASSUMPTION"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be
61
<PAGE>
determined on the basis of three factors: (i) the original yield to maturity of
the Pay-Through Security (determined on the basis of compounding at the end of
each accrual period and properly adjusted for the length of the accrual period),
(ii) events which have occurred before the end of the accrual period and (iii)
the assumption that the remaining payments will be made in accordance with the
original Prepayment Assumption. The effect of this method is to increase the
portions of OID required to be included in income by a holder to take into
account prepayments with respect to the Loans at a rate that exceeds the
Prepayment Assumption, and to decrease (but not below zero for any period) the
portions of original issue discount required to be included in income by a
holder of a Pay-Through Security to take into account prepayments with respect
to the Loans at a rate that is slower than the Prepayment Assumption. Although
original issue discount will be reported to holders of Pay-Through Securities
based on the Prepayment Assumption, no representation is made to holders that
Loans will be prepaid at that rate or at any other rate.
The Depositor may adjust the accrual of OID on a Class of Regular
Interest Securities (or other regular interests in a REMIC) in a manner that it
believes to be appropriate, to take account of realized losses on the Loans,
although the OID Regulations do not provide for such adjustments. If the
Internal Revenue Service were to require that OID be accrued without such
adjustments, the rate of accrual of OID for a Class of Regular Interest
Securities could increase.
Certain classes of Regular Interest Securities may represent more than
one class of REMIC regular interests. Unless otherwise provided in the related
Prospectus Supplement, the Trustee intends, based on the OID Regulations, to
calculate OID on such Securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent holder of a Debt Security will also be required to include
OID in gross income, but such a holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial holder who pays more than a Debt Security's issue price) to offset such
OID by comparable economic accruals of portions of such excess.
EFFECTS OF DEFAULTS AND DELINQUENCIES. In the opinion of Tax Counsel,
holders will be required to report income with respect to the related Securities
under an accrual method without giving effect to delays and reductions in
distributions attributable to a default or delinquency on the Loans, except
possibly to the extent that it can be established that such amounts are
uncollectible. As a result, the amount of income (including OID) reported by a
holder of such a Security in any period could significantly exceed the amount of
cash distributed to such holder in that period. The holder will eventually be
allowed a loss (or will be allowed to report a lesser amount of income) to the
extent that the aggregate amount of distributions on the Securities is reduced
as a result of a Loan default. However, the timing and character of such losses
or reductions in income are uncertain and, accordingly, holders of Securities
should consult their own tax advisors on this point.
INTEREST WEIGHTED SECURITIES. It is not clear how income should be
accrued with respect to Regular Interest Securities or Stripped Securities (as
defined under "-Tax Status as a Grantor Trust; General" below) the payments on
which consist solely or primarily of a specified portion of the interest
payments on qualified mortgages held by the REMIC or on Loans underlying
Pass-Through Securities ("INTEREST WEIGHTED SECURITIES"). The Issuer intends to
take the position that all of the income derived from an Interest Weighted
Security should be treated as OID and that the amount and rate of accrual of
such OID should be calculated by treating the Interest Weighted Security as a
Compound Interest Security. However, in the case of Interest Weighted Securities
that are entitled to some payments of principal and that are Regular Interest
Securities the IRS could assert that income derived from an Interest Weighted
Security should be calculated as if the Security were a security purchased at a
premium equal to the excess of the price paid by such holder for such Security
over its stated principal amount, if any. Under this approach, a holder would be
entitled to amortize such premium only if it has in effect an election under
section 171 of the Code with respect to all taxable debt instruments held by
such holder, as described below. Alternatively, the IRS could assert that an
Interest Weighted Security should be taxable under the rules governing bonds
issued with contingent payments. Such treatment may be more likely in the case
of Interest Weighted Securities that are Stripped Securities as described below.
See "-Tax Status as a Grantor Trust-Discount or Premium on Pass-Through
Securities" below.
VARIABLE RATE DEBT SECURITIES. In the opinion of Tax Counsel, in the
case of Debt Securities bearing interest at a rate that varies directly,
according to a fixed formula, with an objective index, it appears that (i) the
yield to maturity of such Debt Securities and (ii) in the case of Pay-Through
Securities, the present value of all payments remaining to
62
<PAGE>
be made on such Debt Securities, should be calculated as if the interest index
remained at its value as of the issue date of such Securities. Because the
proper method of adjusting accruals of OID on a variable rate Debt Security is
uncertain, holders of variable rate Debt Securities should consult their own tax
advisers regarding the appropriate treatment of such Securities for federal
income tax purposes.
MARKET DISCOUNT. In the opinion of Tax Counsel, a purchaser of a
Security may be subject to the market discount rules of sections 1276 through
1278 of the Code. A Holder that acquires a Debt Security with more than a
prescribed de minimis amount of "market discount" (generally, the excess of the
principal amount of the Debt Security over the purchaser's purchase price) will
be required to include accrued market discount in income as ordinary income in
each month, but limited to an amount not exceeding the principal payments on the
Debt Security received in that month and, if the Securities are sold, the gain
realized. Such market discount would accrue in a manner to be provided in
Treasury regulations but, until such regulations are issued, such market
discount would in general accrue either (i) on the basis of a constant yield (in
the case of a Pay-Through Security, taking into account a prepayment assumption)
or (ii) in the ratio of (a) in the case of Securities (or in the case of a
Pass-Through Security, as set forth below, the Loans underlying such Security)
not originally issued with original issue discount, stated interest payable in
the relevant period to total stated interest remaining to be paid at the
beginning of the period or (b) in the case of Securities (or, in the case of a
Pass-Through Security, as described below, the Loans underlying such Security)
originally issued at a discount, OID in the relevant period to total OID
remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination
date of the Debt Security (or, in the case of a Pass-Through Security, the
Loans), the excess of interest paid or accrued to purchase or carry a Security
(or, in the case of a Pass-Through Security, as described below, the underlying
Loans) with market discount over interest received on such Security is allowed
as a current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the Security (or in the case of a
Pass-Through Security, an underlying Loan). A holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not apply.
PREMIUM. In the opinion of Tax Counsel, a holder who purchases a Debt
Security (other than an Interest Weighted Security to the extent described
above) at a cost greater than its stated redemption price at maturity, generally
will be considered to have purchased the Security at a premium, which it may
elect to amortize as an offset to interest income on such Security (and not as a
separate deduction item) on a constant yield method. The legislative history of
the 1986 Act indicates that premium is to be accrued in the same manner as
market discount. Accordingly, it appears that the accrual of premium on a class
of Pay-Through Securities will be calculated using the prepayment assumption
used in pricing such class. If a holder makes an election to amortize premium on
a Debt Security, such election will apply to all taxable debt instruments
(including all REMIC regular interests and all pass-through certificates
representing ownership interests in a trust holding debt obligations) held by
the holder at the beginning of the taxable year in which the election is made,
and to all taxable debt instruments acquired thereafter by such holder, and will
be irrevocable without the consent of the IRS. Purchasers who pay a premium for
the Securities should consult their tax advisers regarding the election to
amortize premium and the application of recently finalized regulations under
Section 171 issued December 30, 1997.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. The OID
Regulations permit a holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Debt Security with market discount, the holder of the Debt Security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such holder of the Debt Security acquires during the year of the election or
thereafter. Similarly, a holder of a Debt Security that makes this election for
a Debt Security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Debt Security is irrevocable.
63
<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.
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
64
<PAGE>
entities, but not including real estate investment trusts) will be unable to
deduct servicing fees payable on the loans or other administrative expenses of
the REMIC for a given taxable year, to the extent that such expenses, when
aggregated with such holder's other miscellaneous itemized deductions for that
year, do not exceed two percent of such holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC
should have an initial aggregate tax basis in its assets equal to the aggregate
fair market value of the regular interests and the residual interests on the
Startup Day (generally, the day that the interests are issued). That aggregate
basis will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated
on or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of Pay-Through Securities
accrue original issue discount (i.e., under the constant yield method taking
into account the Prepayment Assumption). The REMIC will deduct OID on the
Regular Interest Securities in the same manner that the holders of the Regular
Interest Securities include such discount in income, but without regard to the
de minimis rules. See "Taxation of Debt Securities" above. However, a REMIC that
acquires loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
PROHIBITED TRANSACTIONS AND CONTRIBUTIONS TAX. The REMIC will be
subject to a 100% tax on any net income derived from a "prohibited transaction."
For this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include: (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject to
a limited exception, the sale or other disposition of a cash flow investment;
(iii) the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or (iv) the receipt of any fees or other
compensation for services rendered by the REMIC. It is anticipated that a REMIC
will not engage in any prohibited transactions in which it would recognize a
material amount of net income. In addition, subject to a number of exceptions, a
tax is imposed at the rate of 100% on amounts contributed to a REMIC after the
close of the three-month period beginning on the Startup Day. The holders of
Residual Interest Securities will generally be responsible for the payment of
any such taxes imposed on the REMIC. To the extent not paid by such holders or
otherwise, however, such taxes will be paid out of the Trust Fund and will be
allocated pro rata to all outstanding classes of Securities of such REMIC.
RESIDUAL INTEREST SECURITIES
In the opinion of Tax Counsel, the holder of a Certificate representing
a residual interest (a "RESIDUAL INTEREST SECURITY") will take into account the
"daily portion" of the taxable income or net loss of the REMIC for each day
during the taxable year on which such holder held the Residual Interest
Security. The daily portion is determined by allocating to each day in any
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC for such quarter, and by allocating that amount among the holders (on such
day) of the Residual Interest Securities in proportion to their respective
holdings on such day.
In the opinion of Tax Counsel, the holder of a Residual Interest
Security must report its proportionate share of the taxable income of the REMIC
whether or not it receives cash distributions from the REMIC attributable to
such income or loss. The reporting of taxable income without corresponding
distributions could occur, for example, in certain REMIC issues in which the
loans held by the REMIC were issued or acquired at a discount, since mortgage
prepayments cause recognition of discount income, while the corresponding
portion of the prepayment could be used in whole or in part to make principal
payments on REMIC Regular Interests issued without any discount or at an
insubstantial discount (if this occurs, it is likely that cash distributions
will exceed taxable income in later years).
65
<PAGE>
Taxable income may also be greater in earlier years of certain REMIC issues as a
result of the fact that interest expense deductions, as a percentage of
outstanding principal on REMIC Regular Interest Securities, will typically
increase over time as lower yielding Securities are paid, whereas interest
income with respect to loans will generally remain constant over time as a
percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the
net income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
LIMITATION ON LOSSES. In the opinion of Tax Counsel, the amount of the
REMIC's net loss that a holder may take into account currently is limited to the
holder's adjusted basis at the end of the calendar quarter in which such loss
arises. A holder's basis in a Residual Interest Security will initially equal
such holder's purchase price, and will subsequently be increased by the amount
of the REMIC's taxable income allocated to the holder, and decreased (but not
below zero) by the amount of distributions made and the amount of the REMIC's
net loss allocated to the holder. Any disallowed loss may be carried forward
indefinitely, but may be used only to offset income of the REMIC generated by
the same REMIC. The ability of holders of Residual Interest Securities to deduct
net losses may be subject to additional limitations under the Code, as to which
such holders should consult their tax advisers.
DISTRIBUTIONS. In the opinion of Tax Counsel, distributions on a
Residual Interest Security (whether at their scheduled times or as a result of
prepayments) will generally not result in any additional taxable income or loss
to a holder of a Residual Interest Security. If the amount of such payment
exceeds a holder's adjusted basis in the Residual Interest Security, however,
the holder will recognize gain (treated as gain from the sale of the Residual
Interest Security) to the extent of such excess.
SALE OR EXCHANGE. In the opinion of Tax Counsel, a holder of a Residual
Interest Security will recognize gain or loss on the sale or exchange of a
Residual Interest Security equal to the difference, if any, between the amount
realized and such holder's adjusted basis in the Residual Interest Security at
the time of such sale or exchange. Except to the extent provided in regulations,
which have not yet been issued, any loss upon disposition of a Residual Interest
Security will be disallowed if the selling holder acquires any residual interest
in a REMIC or similar mortgage pool within six months before or after such
disposition.
EXCESS INCLUSIONS. In the opinion of Tax Counsel, the portion of the
REMIC taxable income of a holder of a Residual Interest Security consisting of
"excess inclusion" income may not be offset by other deductions or losses,
including net operating losses, on such holder's federal income tax return.
Further, if the holder of a Residual Interest Security is an organization
subject to the tax on unrelated business income imposed by section 511 of the
Code, such holder's excess inclusion income will be treated as unrelated
business taxable income of such holder. In addition, under Treasury regulations
yet to be issued, if a real estate investment trust, a regulated investment
company, a common trust fund, or certain cooperatives were to own a Residual
Interest Security, a portion of dividends (or other distributions) paid by the
real estate investment trust (or other entity) would be treated as excess
inclusion income. If a Residual Security is owned by a foreign person excess
inclusion income is subject to tax at a rate of 30% which may not be reduced by
treaty, is not eligible for treatment as "portfolio interest" and is subject to
certain additional limitations. See "-Tax Treatment of Foreign Investors" below.
The Small Business Job Protection Act of 1996 has eliminated the special rule
permitting section 593 institutions ("thrift institutions") to use net operating
losses and other allowable deductions to offset their excess inclusion income
from REMIC residual certificates that have "significant value" within the
meaning of the REMIC Regulations, effective for taxable years beginning after
December 31, 1995, except with respect to residual certificates continuously
held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect on excess inclusions on the alternative
minimum taxable income of a residual holder. First, alternative minimum taxable
income for such residual holder is determined without regard to the special rule
that taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum taxable income for a tax year cannot be less than
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
66
<PAGE>
The excess inclusion portion of a REMIC's income is generally equal to
the excess, if any, of REMIC taxable income for the quarterly period allocable
to a Residual Interest Security, over the daily accruals for such quarterly
period of (i) 120% of the long term applicable federal rate on the Startup Day
multiplied by (ii) the adjusted issue price of such Residual Interest Security
at the beginning of such quarterly period. The adjusted issue price of a
Residual Interest at the beginning of each calendar quarter will equal its issue
price (calculated in a manner analogous to the determination of the issue price
of a Regular Interest), increased by the aggregate of the daily accruals for
prior calendar quarters, and decreased (but not below zero) by the amount of
loss allocated to a holder and the amount of distributions made on the Residual
Interest Security before the beginning of the quarter. The long-term federal
rate, which is announced monthly by the Treasury Department, is an interest rate
that is based on the average market yield of outstanding marketable obligations
of the United States government having remaining maturities in excess of nine
years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See "-RESTRICTIONS ON OWNERSHIP AND
TRANSFER OF RESIDUAL INTEREST SECURITIES" and "-Tax Treatment of Foreign
Investors" below.
RESTRICTIONS ON OWNERSHIP AND TRANSFER OF RESIDUAL INTEREST SECURITIES.
As a condition to qualification as a REMIC, reasonable arrangements must be made
to prevent the ownership of a REMIC residual interest by any "Disqualified
Organization." Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by sections 1 through 1399 of
the Code, if such entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Pooling and Servicing Agreement will prohibit
Disqualified Organizations from owning a Residual Interest Security. In
addition, no transfer of a Residual Interest Security will be permitted unless
the proposed transferee shall have furnished to the Trustee an affidavit
representing and warranting that it is neither a Disqualified Organization nor
an agent or nominee acting on behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a "noneconomic
residual interest" unless, at the time of the transfer (i) the present value of
the expected future distributions on the Residual Interest Security at least
equals the product of the present value of the anticipated excess inclusions and
the highest rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. If a
transfer of a Residual Interest is disregarded, the transferor would be liable
for any Federal income tax imposed upon taxable income derived by the transferee
from the REMIC. The REMIC Regulations provide no guidance as to how to determine
if a significant purpose of a transfer is to impede the assessment or collection
of tax. A similar type of limitation exists with respect to certain transfers of
residual interests by foreign persons to United States persons. See "-Tax
Treatment of Foreign Investors" below.
The IRS has issued proposed changes to the REMIC regulations that would
add to the conditions necessary to assure that a transfer of a noneconomic
residual interest would be respected. The proposed additional condition would
require that the amount received by the transferee be no less on a present value
basis than the present value of the net tax detriment attributable to holding a
residual interest reduced by the present value of the projected payments to be
received on the residual interest. The change is proposed to be effective for
transfers of residual interests occurring after February 4, 2000.
67
<PAGE>
MARK TO MARKET RULES. Prospective purchasers of a REMIC Residual
Interest Security should be aware that the IRS finalized regulations (the
"MARK-TO-MARKET REGULATIONS") which provide that a REMIC Residual Interest
Security acquired after January 3, 1995 cannot be marked-to-market. Prospective
purchasers of a REMIC Residual Interest Security should consult their tax
advisors regarding the possible application of the Mark-to-Market Regulations.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS in a
unified administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
GENERAL. As further specified in the related Prospectus Supplement, if
a REMIC election is not made and the Trust Fund is not structured as a
partnership, then, in the opinion of Tax Counsel, the Trust Fund relating to a
Series of Securities will be classified for federal income tax purposes as a
grantor trust under subpart E, part 1 of subchapter J of the Code and not as an
association taxable as a corporation (the Securities of such Series,
"PASS-THROUGH SECURITIES"). In some Series there will be no separation of the
principal and interest payments on the Loans. In such circumstances, a holder
will be considered to have purchased a pro rata undivided interest in each of
the Loans. In other cases ("STRIPPED SECURITIES"), sale of the Securities will
produce a separation in the ownership of all or a portion of the principal
payments from all or a portion of the interest payments on the Loans.
In the opinion of Tax Counsel, each holder must report on its federal
income tax return its share of the gross income derived from the Loans (not
reduced by the amount payable as fees to the Trustee and the Servicer and
similar fees (collectively, the "SERVICING FEE")), at the same time and in the
same manner as such items would have been reported under the Holder's tax
accounting method had it held its interest in the Loans directly, received
directly its share of the amounts received with respect to the Loans, and paid
directly its share of the Servicing Fees. In the case of Pass-Through Securities
other than Stripped Securities, such income will consist of a pro rata share of
all of the income derived from all of the Loans and, in the case of Stripped
Securities, such income will consist of a pro rata share of the income derived
from each stripped bond or stripped coupon in which the holder owns an interest.
The holder of a Security will generally be entitled to deduct such Servicing
Fees under section 162 or section 212 of the Code to the extent that such
Servicing Fees represent "reasonable" compensation for the services rendered by
the Trustee and the Servicer (or third parties that are compensated for the
performance of services). In the case of a noncorporate holder, however,
Servicing Fees (to the extent not otherwise disallowed, e.g., because they
exceed reasonable compensation) will be deductible in computing such holder's
regular tax liability only to the extent that such fees, when added to other
miscellaneous itemized deductions, exceed 2% of adjusted gross income and may
not be deductible to any extent in computing such holder's alternative minimum
tax liability. In addition, for taxable years beginning after December 31, 1990,
the amount of itemized deductions otherwise allowable for the taxable year for
an individual whose adjusted gross income exceeds the applicable amount (which
amount will be adjusted for inflation in taxable years beginning after 1990)
will be reduced by the lesser of (i) 3% of the excess of adjusted gross income
over the applicable amount or (ii) 80% of the amount of itemized deductions
otherwise allowable for such taxable year.
DISCOUNT OR PREMIUM ON PASS-THROUGH SECURITIES. In the opinion of Tax
Counsel, the holder's purchase price of a Pass-Through Security is to be
allocated among the Loans in proportion to their fair market values, determined
as of the time of purchase of the Securities. In the typical case, the Trustee
(to the extent necessary to fulfill its reporting obligations) will treat each
Loan as having a fair market value proportional to the share of the aggregate
principal balances of all of the Loans that it represents, since the Securities,
unless otherwise specified in the related Prospectus Supplement, will have a
relatively uniform interest rate and other common characteristics. To the extent
that the portion of the purchase price of a Pass-Through Security allocated to a
Loan (other than to a right to receive any accrued interest thereon and any
undistributed principal payments) is less than or greater than the portion of
the principal balance of the Loan allocable to the Security, the interest in the
Loan allocable to the Pass-Through Security will be deemed to have been acquired
at a discount or premium, respectively.
68
<PAGE>
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess of a
prescribed de minimis amount or a Stripped Security, a holder of a Security will
be required to report as interest income in each taxable year its share of the
amount of OID that accrues during that year in the manner described above. OID
with respect to a Loan could arise, for example, by virtue of the financing of
points by the originator of the Loan, or by virtue of the charging of points by
the originator of the Loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a Loan
will be includible in income, generally in the manner described above, except
that in the case of Pass-Through Securities, market discount is calculated with
respect to the Loans underlying the Certificate, rather than with respect to the
Security. A holder that acquires an interest in a Loan originated after July 18,
1984 with more than a de minimis amount of market discount (generally, the
excess of the principal amount of the Loan over the purchaser's allocable
purchase price) will be required to include accrued market discount in income in
the manner set forth above. See "-Taxation of Debt Securities; Market Discount"
and "-Premium" above.
In the case of market discount on a Pass-Through Security attributable
to Loans originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of such discount that is allocable to a loan
among the principal payments on the Loan and to include the discount allocable
to each principal payment in ordinary income at the time such principal payment
is made. Such treatment would generally result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described in the preceding paragraph.
STRIPPED SECURITIES. A Stripped Security may represent a right to
receive only a portion of the interest payments on the Loans, a right to receive
only principal payments on the Loans, or a right to receive certain payments of
both interest and principal. Certain Stripped Securities ("RATIO STRIP
SECURITIES") may represent a right to receive differing percentages of both the
interest and principal on each Loan. Pursuant to section 1286 of the Code, the
separation of ownership of the right to receive some or all of the interest
payments on an obligation from ownership of the right to receive some or all of
the principal payments results in the creation of "stripped bonds" with respect
to principal payments and "stripped coupons" with respect to interest payments.
Section 1286 of the Code applies the OID rules to stripped bonds and stripped
coupons. For purposes of computing original issue discount, a stripped bond or a
stripped coupon is treated as a debt instrument issued on the date that such
stripped interest is purchased with an issue price equal to its purchase price
or, if more than one stripped interest is purchased, the ratable share of the
purchase price allocable to such stripped interest.
Servicing fees in excess of reasonable servicing fees ("excess
servicing") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (i.e., 1% interest on the Loan
principal balance) or the Securities are initially sold with a de minimis
discount (assuming no prepayment assumption is required), any non-de minimis
discount arising from a subsequent transfer of the Securities should be treated
as market discount. The IRS appears to require that reasonable servicing fees be
calculated on a Loan by Loan basis, which could result in some Loans being
treated as having more than 100 basis points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and original issue discount rules are to apply
to Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the "CASH FLOW BOND METHOD"), a
prepayment assumption is used and periodic recalculations are made which take
into account with respect to each accrual period the effect of prepayments
during such period. However, the 1986 Act does not, absent Treasury regulations,
appear specifically to cover instruments such as the Stripped Securities which
technically represent ownership interests in the underlying Loans, rather than
being debt instruments "secured by" those loans. Nevertheless, it is believed
that the Cash Flow Bond Method is a reasonable method of reporting income for
such Securities, and it is expected that OID will be reported on that basis
unless otherwise specified in the related Prospectus Supplement. In applying the
calculation to Pass-Through Securities, the Trustee will treat all payments to
be received by a holder with respect to the underlying Loans as payments on a
single installment obligation. The IRS could, however, assert that original
issue discount must be calculated separately for each Loan underlying a
Security.
Under certain circumstances, if the Loans prepay at a rate faster than
the Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
holder's recognition of income. If, however, the Loans prepay at a rate
69
<PAGE>
slower than the Prepayment Assumption, in some circumstances the use of this
method may decelerate a holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted
Security, the Trustee intends, absent contrary authority, to report income to
Security holders as OID, in the manner described above for Interest Weighted
Securities.
POSSIBLE ALTERNATIVE CHARACTERIZATIONS. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the Internal Revenue
Service could contend that (i) in certain Series, each non-Interest Weighted
Security is composed of an unstripped undivided ownership interest in Loans and
an installment obligation consisting of stripped principal payments; (ii) the
non-Interest Weighted Securities are subject to the contingent payment
provisions of the Proposed Regulations; or (iii) each Interest Weighted Stripped
Security is composed of an unstripped undivided ownership interest in Loans and
an installment obligation consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped
Securities and the different federal income tax consequences that result from
each alternative, potential purchasers are urged to consult their own tax
advisers regarding the proper treatment of the Securities for federal income tax
purposes.
CHARACTER AS QUALIFYING LOANS. In the case of Stripped Securities,
there is no specific legal authority existing regarding whether the character of
the Securities, for federal income tax purposes, will be the same as the Loans.
The IRS could take the position that the Loans character is not carried over to
the Securities in such circumstances. Pass-Through Securities will be, and,
although the matter is not free from doubt, Stripped Securities should be
considered to represent "real estate assets" within the meaning of section
856(c)(4)(A) of the Code, and "loans secured by an interest in real property"
within the meaning of section 7701(a)(19)(C)(v) of the Code; and interest income
attributable to the Securities should be considered to represent "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of section 856(c)(3)(B) of the Code. Reserves or
funds underlying the Securities may cause a proportionate reduction in the
above-described qualifying status categories of Securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to Trust Funds as to which
a partnership election is made, in the opinion of Tax Counsel, a holder's tax
basis in its Security is the price such holder pays for a Security, plus amounts
of original issue or market discount included in income and reduced by any
payments received (other than qualified stated interest payments) and any
amortized premium. Gain or loss recognized on a sale, exchange, or redemption of
a Security, measured by the difference between the amount realized and the
Security's basis as so adjusted, will generally be capital gain or loss,
assuming that the Security is held as a capital asset and will generally be
long-term capital gain or loss if the holding period of the security is one year
or more. Non-corporate taxpayers are subject to reduced maximum rates on
long-term capital gains and are generally subject to tax at ordinary income
rates on short-term capital gains. The deductibility of capital losses is
subject to certain limitations. Prospective investors should consult their own
tax advisors concerning these tax law provisions.
In the case of a Security held by a bank, thrift, or similar
institution described in section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Regular Interest Security will be taxable as
ordinary income or loss. In addition, gain from the disposition of a Regular
Interest Security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of the amount that would
have been includible in the holder's income if the yield on such Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of such holder's holding period, over the amount of ordinary income
actually recognized by the holder with respect to such Regular Interest
Security.
MISCELLANEOUS TAX ASPECTS
BACKUP WITHHOLDING. Subject to the discussion below with respect to
Trust Funds as to which a partnership election is made, a holder, other than a
holder of a REMIC Residual Security, may, under certain circumstances, be
subject to "backup withholding" at a rate of 31% with respect to distributions
or the proceeds of a sale of certificates
70
<PAGE>
to or through brokers that represent interest or original issue discount on the
Securities. This withholding generally applies if the holder of a Security (i)
fails to furnish the Trustee with its taxpayer identification number ("TIN");
(ii) furnishes the Trustee an incorrect TIN; (iii) fails to report properly
interest, dividends or other "reportable payments" as defined in the Code; or
(iv) under certain circumstances, fails to provide the Trustee or such holder's
securities broker with a certified statement, signed under penalty of perjury,
that the TIN provided is its correct number and that the holder is not subject
to backup withholding. Backup withholding will not apply, however, with respect
to certain payments made to holders, including payments to certain exempt
recipients (such as exempt organizations) and to certain Nonresidents (as
defined below). Holders should consult their tax advisers as to their
qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
The Trustee will report to the holders and to the Servicer for each
calendar year the amount of any "reportable payments" during such year and the
amount of tax withheld, if any, with respect to payments on the Securities.
NEW WITHHOLDING REGULATIONS
The Treasury Department has issued regulations (the "NEW REGULATIONS")
which make certain modifications to the withholding, backup withholding and
information reporting rules described above. The New Regulations attempt to
unify certification requirements and modify reliance standards. The New
Regulations will generally be effective for payments made after December 31,
2000, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds as to which
a partnership election is made, under the Code, unless interest (including OID)
paid on a Security (other than a Residual Interest Security) is considered to be
"effectively connected" with a trade or business conducted in the United States
by a nonresident alien individual, foreign partnership or foreign corporation
("NONRESIDENTS"), in the opinion of Tax Counsel, such interest will normally
qualify as portfolio interest (except where (i) the recipient is a holder,
directly or by attribution, of 10% or more of the capital or profits interest in
the issuer, (ii) the recipient is a controlled foreign corporation to which the
issuer is a related person) and will be exempt from federal income tax, or (iii)
the recipient is a bank receiving interest described in section 881(c)(3)(A) of
the Code). Upon receipt of appropriate ownership statements, the issuer normally
will be relieved of obligations to withhold tax from such interest payments.
These provisions supersede the generally applicable provisions of United States
law that would otherwise require the issuer to withhold at a 30% rate (unless
such rate were reduced or eliminated by an applicable tax treaty) on, among
other things, interest and other fixed or determinable, annual or periodic
income paid to Nonresidents. It is possible that the IRS may assert that the
foregoing tax exemption should not apply with respect to a Regular Interest
Security held by a Residual Interest Securityholder that owns directly or
indirectly a 10% or greater interest in the Residual Interest Securities. If the
holder does not qualify for exemption, distributions of interest, including
distributions in respect of accrued original issue discount, to such holder may
be subject to a tax rate of 30%, subject to reduction under any applicable tax
treaty. 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,
71
<PAGE>
require withholding prior to the distribution of cash in the case of Residual
Interest Securities that do not have significant value. Under the REMIC
Regulations, if a Residual Interest Security has tax avoidance potential, a
transfer of a Residual Interest Security to a Nonresident will be disregarded
for all Federal tax purposes. A Residual Interest Security has tax avoidance
potential unless, at the time of the transfer the transferor reasonably expects
that the REMIC will distribute to the transferee residual interest holder
amounts that will equal at least 30% of each excess inclusion, and that such
amounts will be distributed at or after the time at which the excess inclusions
accrue and not later than the calendar year following the calendar year of
accrual. If a Nonresident transfers a Residual Interest Security to a United
States person, and if the transfer has the effect of allowing the transferor to
avoid tax on accrued excess inclusions, then the transfer is disregarded and the
transferor continues to be treated as the owner of the Residual Interest
Security for purposes of the withholding tax provisions of the Code. See
"-Residential Interest Securities-Excess Inclusions" above.
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Tax Counsel is of the opinion that a Trust Fund structured as a
partnership will not be an association (or publicly traded partnership) taxable
as a corporation for federal income tax purposes. This opinion is based on the
assumption that the terms of the Trust Agreement and related documents will be
complied with, and on counsel's conclusions that the nature of the income of the
Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Certificates has
been structured as a private placement under an IRS safe harbor, so that the
Trust Fund will not be characterized as a publicly traded partnership taxable as
a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, in the opinion of Tax Counsel, the Trust Fund would be subject to
corporate income tax on its taxable income. The Trust Fund's taxable income
would include all its income, possibly reduced by its interest expense on the
Notes. Any such corporate income tax could materially reduce cash available to
make payments on the Notes and distributions on the Certificates, and
Certificateholders could be liable for any such tax that is unpaid by the Trust
Fund.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
TREATMENT OF THE NOTES AS INDEBTEDNESS. The Trust Fund will agree, and
the Noteholders will agree by their purchase of Notes, to treat the Notes as
debt for federal income tax purposes. In such a circumstance, Tax Counsel is,
except as otherwise provided in the related Prospectus Supplement, of the
opinion that the Notes will be classified as debt for federal income tax
purposes. The discussion below assumes this characterization of the Notes is
correct.
OID, INDEXED SECURITIES, ETC. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that the
interest formula for the Notes meets the requirements for "qualified stated
interest" under the OID regulations, and that any OID on the Notes (i.e., any
excess of the principal amount of the Notes over their issue price) does not
exceed a DE MINIMIS amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID regulations. If these conditions are not satisfied with respect to any given
series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
INTEREST INCOME ON THE NOTES. Based on the above assumptions, except as
discussed in the following paragraph, in the opinion of Tax Counsel, the Notes
will not be considered issued with OID. The stated interest thereon will be
taxable to a Noteholder as ordinary interest income when received or accrued in
accordance with such Noteholder's method of tax accounting. Under the OID
regulations, a holder of a Note issued with a de minimis amount of OID must
include such OID in income, on a pro rata basis, as principal payments are made
on the Note. It is believed that any prepayment premium paid as a result of a
mandatory redemption will be taxable as contingent interest when it becomes
fixed and unconditionally payable. A purchaser who buys a Note for more or less
than its principal amount will generally be subject, respectively, to the
premium amortization or market discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (a "SHORT-TERM NOTE") may be subject to
special rules. An accrual basis holder of a Short-Term Note (and certain cash
72
<PAGE>
method holders, including regulated investment companies, as set forth in
section 1281 of the Code) generally would be required to report interest income
as interest accrues on a straight-line basis over the term of each interest
period. Other cash basis holders of a Short-Term Note would, in general, be
required to report interest income as interest is paid (or, if earlier, upon the
taxable disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
SALE OR OTHER DISPOSITION. In the opinion of Tax Counsel, if a
Noteholder sells a Note, the holder will recognize gain or loss in an amount
equal to the difference between the amount realized on the sale and the holder's
adjusted tax basis in the Note. The adjusted tax basis of a Note to a particular
Noteholder will equal the holder's cost for the Note, increased by any market
discount, acquisition discount, OID and gain previously included by such
Noteholder in income with respect to the Note and decreased by the amount of
bond premium (if any) previously amortized and by the amount of principal
payments previously received by such Noteholder with respect to such Note.
Any such gain or loss will be capital gain or loss if the Note was held as a
capital asset, except for gain representing accrued interest and accrued market
discount not previously included in income. Capital losses generally may be used
only to offset capital gains.
FOREIGN HOLDERS. In the opinion of Tax Counsel, interest payments made
(or accrued) to a Noteholder who is a nonresident alien, foreign corporation or
other non-United States person (a "foreign person") generally will be considered
"portfolio interest", and generally will not be subject to United States federal
income tax and withholding tax, if the interest is not effectively connected
with the conduct of a trade or business within the United States by the foreign
person and the foreign person (i) is not actually or constructively a "10
percent shareholder" of the Trust or the Seller (including a holder of 10% of
the outstanding Certificates) or a "controlled foreign corporation" with respect
to which the Trust or the Seller is a "related person" within the meaning of the
Code and (ii) provides the Owner Trustee or other person who is otherwise
required to withhold U.S. tax with respect to the Notes with an appropriate
statement (on Form W-8 or a similar form), signed under penalties of perjury,
certifying that the beneficial owner of the Note is a foreign person and
providing the foreign person's name and address. If a Note is held through a
securities clearing organization or certain other financial institutions, the
organization or institution may provide the relevant signed statement to the
withholding agent; in that case, however, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the foreign person that
owns the Note. If such interest is not portfolio interest, then it will be
subject to United States federal income and withholding tax at a rate of 30
percent, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
BACKUP WITHHOLDING. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt Noteholder fail
to provide the required certification, the Trust Fund will be required to
withhold 31 percent of the amount otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES. If, contrary to the
opinion of Tax Counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for federal income tax purposes, the Notes might be
treated as equity interests in the Trust Fund. If so treated, the Trust Fund
might be treated as a publicly traded partnership that would not be taxable as a
corporation because it would meet certain qualifying income tests. Nonetheless,
treatment
73
<PAGE>
of the Notes as equity interests in such a publicly traded partnership could
have adverse tax consequences to certain holders. For example, income to certain
tax-exempt entities (including pension funds) would be "unrelated business
taxable income", income to foreign holders generally would be subject to U.S.
tax and U.S. tax return filing and withholding requirements, and individual
holders might be subject to certain limitations on their ability to deduct their
share of the Trust Fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
TREATMENT OF THE TRUST FUND AS A PARTNERSHIP. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust Fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
Trust Fund, the partners of the partnership being the Certificateholders, and
the Notes being debt of the partnership. However, the proper characterization of
the arrangement involving the Trust Fund, the Certificates, the Notes, the Trust
Fund and the Servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
INDEXED SECURITIES, ETC. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series of
Securities includes a single class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
PARTNERSHIP TAXATION. If the Trust Fund is a partnership, in the
opinion of Tax Counsel, the Trust Fund will not be subject to federal income
tax. Rather, in the opinion of Tax Counsel, each Certificateholder will be
required to separately take into account such holder's allocated share of
income, gains, losses, deductions and credits of the Trust Fund. The Trust
Fund's income will consist primarily of interest and finance charges earned on
the Loans (including appropriate adjustments for market discount, OID and bond
premium) and any gain upon collection or disposition of Loans. The Trust Fund's
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees, and losses or deductions upon collection or
disposition of Loans.
In the opinion of Tax Counsel, the tax items of a partnership are
allocable to the partners in accordance with the Code, Treasury regulations and
the partnership agreement (here, the Trust Agreement and related documents). The
Trust Agreement will provide, in general, that the Certificateholders will be
allocated taxable income of the Trust Fund for each month equal to the sum of
(i) the interest that accrues on the Certificates in accordance with their terms
for such month, including interest accruing at the Pass-Through Rate for such
month and interest on amounts previously due on the Certificates but not yet
distributed; (ii) any Trust Fund income attributable to discount on the Loans
that corresponds to any excess of the principal amount of the Certificates over
their initial issue price (iii) prepayment premium payable to the
Certificateholders for such month; and (iv) any other amounts of income payable
to the Certificateholders for such month. Such allocation will be reduced by any
amortization by the Trust Fund of premium on Loans that corresponds to any
excess of the issue price of Certificates over their principal amount. All
remaining taxable income of the Trust Fund will be allocated to the Depositor.
Based on the economic arrangement of the parties, in the opinion of Tax Counsel,
this approach for allocating Trust Fund income should be permissible under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to
Certificateholders. Moreover, in the opinion of Tax Counsel, even under the
foregoing method of allocation, Certificateholders may be allocated income equal
to the entire Pass-Through Rate plus the other items described above even though
the Trust Fund might not have sufficient cash to make current cash distributions
of such amount. Thus, cash basis holders will in effect be required to report
income from the Certificates on the accrual basis and Certificateholders may
become liable for taxes on Trust Fund income even if they have not received cash
from the Trust Fund to pay such taxes. In addition, because tax allocations and
tax reporting will be done on a uniform basis for all
74
<PAGE>
Certificateholders but Certificateholders may be purchasing Certificates at
different times and at different prices, Certificateholders may be required to
report on their tax returns taxable income that is greater or less than the
amount reported to them by the Trust Fund.
In the opinion of Tax Counsel, all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
In the opinion of Tax Counsel, an individual taxpayer's share of
expenses of the Trust Fund (including fees to the Servicer but not interest
expense) would be miscellaneous itemized deductions. Such deductions might be
disallowed to the individual in whole or in part and might result in such holder
being taxed on an amount of income that exceeds the amount of cash actually
distributed to such holder over the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income
and allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Loan, the Trust Fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
DISCOUNT AND PREMIUM. It is believed that the Loans were not issued
with OID, and, therefore, the Trust should not have OID income. However, the
purchase price paid by the Trust Fund for the Loans may be greater or less than
the remaining principal balance of the Loans at the time of purchase. If so, in
the opinion of Tax Counsel, the Loan will have been acquired at a premium or
discount, as the case may be. (As indicated above, the Trust Fund will make this
calculation on an aggregate basis, but might be required to recompute it on a
Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium,
the Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
SECTION 708 TERMINATION. Pursuant to final Treasury regulations issued
May 9, 1997 under section 708 of the Code a sale or exchange of 50 percent or
more of the capital and profits in the issuer entity within a 12-month tax
period would cause a deemed contribution of assets of the issuer entity (the
"old partnership") to a new partnership (the "new partnership") in exchange for
interest in the new partnership. Such interests would be deemed distributed to
the partners of the old partnership in liquidation thereof, which would not
constitute a sale or exchange.
DISPOSITION OF CERTIFICATES. Generally, in the opinion of Tax Counsel,
capital gain or loss will be recognized on a sale of Certificates in an amount
equal to the difference between the amount realized and the seller's tax basis
in the Certificates sold. A Certificateholder's tax basis in a Certificate will
generally equal the holder's cost increased by the holder's share of Trust Fund
income (includible in income) and decreased by any distributions received with
respect to such Certificate. In addition, both the tax basis in the Certificates
and the amount realized on a sale of a Certificate would include the holder's
share of the Notes and other liabilities of the Trust Fund. A holder acquiring
Certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in such Certificates, and, upon sale or other disposition of
some of the Certificates, allocate a portion of such aggregate tax basis to the
Certificates sold (rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate).
Any gain on the sale of a Certificate attributable to the holder's
share of unrecognized accrued market discount on the Receivables would generally
be treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the Trust Fund will elect to include
market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash
75
<PAGE>
distributions with respect thereto, such excess will generally give rise to a
capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
SECTION 754 ELECTION. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust Fund will not make such
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Trust Fund income than would be appropriate based on their own
purchase price for Certificates.
ADMINISTRATIVE MATTERS. The Owner Trustee is required to keep or have
kept complete and accurate books of the Trust Fund. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and the
fiscal year of the Trust will be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Trust Fund and will report each Certificateholder's allocable share
of items of Trust Fund income and expense to holders and the IRS on Schedule
K-1. The Trust Fund will provide the Schedule K-l information to nominees that
fail to provide the Trust Fund with the information statement described below
and such nominees will be required to forward such information to the beneficial
owners of the Certificates. Generally, holders must file tax returns that are
consistent with the information return filed by the Trust Fund or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies .
Under section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under section 17A of the Securities Exchange Act of 1934, as amended,
is not required to furnish any such information statement to the Trust Fund. The
information referred to above for any calendar year must be furnished to the
Trust Fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the Trust Fund with the information
described above may be subject to penalties.
The Depositor will be designated as the tax matters partner in the
related Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
76
<PAGE>
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to foreign Certificateholders pursuant to section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust to change its withholding procedures. In determining a holder's
withholding status, the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the
holder's certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust Fund's income. Each foreign holder must
obtain a taxpayer identification number from the IRS and submit that number to
the Trust on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust Fund taking the
position that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust Fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
"portfolio interest." As a result, Certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
holder would only be entitled to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
BACKUP WITHHOLDING. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code. The New Regulations described herein make
certain modifications to the backup withholding and information reporting rules.
The New Regulations will generally be effective for payments made after December
31, 2000, subject to certain transition rules. Prospective investors are urged
to consult their own tax advisors regarding the New Regulations.
FASIT SECURITIES
GENERAL. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory vehicle
for the issuance of mortgage-backed and asset-backed securities. Although the
FASIT provisions of the Code became effective on September 1, 1997, no Treasury
regulations or other administrative guidance has been issued with respect to
those provisions. Accordingly, definitive guidance cannot be provided with
respect to many aspects of the tax treatment of FASIT Securityholders. Investors
also should note that the FASIT discussions contained herein constitutes only a
summary of the federal income tax consequences to holders of FASIT Securities.
With respect to each Series of FASIT Securities, the related Prospectus
Supplement will provide a detailed discussion regarding the federal income tax
consequences associated with the particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the related Series. The Prospectus Supplement for
each Series of Securities will indicate whether one or more FASIT elections will
be made for that Series and which Securities of such Series will be designated
as Regular Securities, and which, if any, will be designated as Ownership
Securities.
QUALIFICATION AS A FASIT. The Trust Fund underlying a Series (or one or
more designated pools of assets held in the Trust Fund) will qualify under the
Code as a FASIT in which the FASIT Regular Securities and the FASIT Ownership
Securities will constitute the "regular interests" and the "ownership
interests," respectively, if (i) a FASIT election is in effect, (ii) certain
tests concerning (A) the composition of the FASIT's assets and (B) the nature of
the
77
<PAGE>
Securityholders' interest in the FASIT are met on a continuing basis, and (iii)
the Trust Fund is not a regulated company as defined in section 851(a) of the
Code.
ASSET COMPOSITION. In order for a Trust Fund (on one or more designated
pools of assets held by a Trust Fund) to be eligible for FASIT status,
substantially all of the assets of the Trust Fund (or the designated pool) must
consist of "permitted assets" as of the close of the third month beginning after
the closing date and at all times thereafter (the "FASIT Qualification Test").
Permitted assets include (i) cash or cash equivalents, (ii) debt instruments
with fixed terms that would qualify as REMIC regular interests if issued by a
REMIC (generally, instruments that provide for interest at a fixed rate, a
qualifying variable rate, or a qualifying interest-only ("IO") type rate, (iii)
foreclosure property, (iv) certain hedging instruments (generally, interest and
currency rate swaps and credit enhancement contracts) that are reasonably
required to guarantee or hedge against the FASIT's risks associated with being
the obligor on FASIT interests, (v) contract rights to acquire qualifying debt
instruments or qualifying hedging instruments, (vi) FASIT regular interests, and
(vii) REMIC regular interests. Permitted assets do not include any debt
instruments issued by the holder of the FASIT's ownership interest or by any
person related to such holder.
INTERESTS IN A FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements. All
of the interests in a FASIT must belong to either of the following: (i) one or
more classes of regular interests or (ii) a single class of ownership interest
that is held by a fully taxable domestic corporation. In the case of Series that
include FASIT Ownership Securities, the ownership interest will be represented
by the FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater than
thirty years, (iii) it entitles its holder to a specified principal amount, (iv)
the issue price of the interest does not exceed 125% of its stated principal
amount, (v) the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%, and (vi) if it pays interest, such
interest is payable at either (a) a fixed rate with respect to the principal
amount of the regular interest or (b) a permissible variable rate with respect
to such principal amount. Permissible variable rates for FASIT regular interests
are the same as those for REMIC regular interest (i.e., certain qualified
floating rates and weighted average rates). See "-TAXATION OF DEBT
SECURITIES-VARIABLE RATE DEBT SECURITIES" above.
If a FASIT Security fails to meet one or more of the requirements set
out in clauses (iii), (iv) or (v) above, but otherwise meets the above
requirements, it may still qualify as a type of regular interest known as a
"HIGH-YIELD INTEREST." In addition, if a FASIT Security fails to meet the
requirements of clause (vi), but the interest payable on the Security consists
of a specified portion of the interest payments on permitted assets and that
portion does not vary over the life of the Security, the Security also will
qualify as a High-Yield Interest. A High-Yield Interest may be held only by
domestic corporations that are fully subject to corporate income tax ("ELIGIBLE
CORPORATIONS"), other FASITs and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition, holders of
High-Yield Interests are subject to limitations on offset of income derived from
such interest. See "-TREATMENT OF HIGH-YIELD INTERESTS" below.
CONSEQUENCES OF DISQUALIFICATION. If a Series of FASIT Securities fails
to comply with one or more of the Code's ongoing requirements for FASIT status
during any taxable year, the Code provides that its FASIT status may be lost for
that year and thereafter. If FASIT status is lost, the treatment of the former
FASIT and the interests therein for federal income tax purposes is uncertain.
The former FASIT might be treated as a grantor trust, as a separate association
taxed as a corporation, or as a partnership. The FASIT Regular Securities could
be treated as debt instruments for federal income tax purposes or as equity
interests. Although the Code authorizes the Treasury to issue regulations that
address situations where a failure to meet the requirements for FASIT status
occurs inadvertently and in good faith, such regulations have not yet been
issued. It is possible that disqualification relief might be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
FASIT's income for a period of time in which the requirements for FASIT status
are not satisfied.
TAX TREATMENT OF FASIT REGULAR SECURITIES. Payments received by holders
of FASIT Regular Securities generally should be accorded the same tax treatment
under the Code as payments received on other taxable corporate debt instruments
and on REMIC Regular Securities. As in the case of holders of REMIC Regular
Securities, holders of FASIT Regular Securities must report income from such
Securities under an accrual method of accounting, even if
78
<PAGE>
they otherwise would have used the case receipts and disbursements method.
Except in the case of FASIT Regular Securities issued with original issue
discount or acquired with market discount or premium, interest paid or accrued
on a FASIT Regular Security generally will be treated as ordinary income to the
Securityholder and a principal payment on such Security will be treated as a
return of capital to the extent that the Securityholder's basis is allocable to
that payment. FASIT Regular Securities issued with OID or acquired with market
discount or premium generally will treat interest and principal payments on such
Securities in the same manner described for REMIC Regular Securities. See
"-Taxation of Debt Securities", "-Market Discount", and "-Premium" above.
High-Yield Securities may be held only by fully taxable domestic corporations,
other FASITs, and certain securities dealers. Holders of High-Yield Securities
are subject to limitations on their ability to use current losses or net
operating loss carryforwards or carrybacks to offset any income derived from
those Securities.
If a FASIT Regular Security is sold or exchanged, the Securityholder
generally will recognize gain or loss upon the sale in the manner described
above for REMIC Regular Securities. See "-Sale or Exchange" above. In addition,
if a FASIT Regular Security becomes wholly or partially worthless as a result of
Default and Delinquencies of the underlying Assets, the holder of such Security
should be allowed to deduct the loss sustained (or alternatively be able to
report a lesser amount of income). See "-Taxation of Debt Instruments-EFFECTS OF
DEFAULT AND DELINQUENCIES" above.
FASIT Regular Securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c)(4)(A) of the Code, and interest on
such Securities will be considered Qualifying REIT Interest to the same extent
that REMIC Securities would be so considered. FASIT Regular Securities held by a
Thrift Institution taxed as a "domestic building and loan association" will
represent qualifying assets for purposes of the qualification requirements set
forth in section 7701(a)(19) of the Code to the same extent that REMIC
Securities would be so considered. See "Certain Material Federal Income Tax
Considerations-Taxation of Debt Securities-STATUS AS REAL PROPERTY LOANS." In
addition, FASIT Regular Securities held by a financial institution to which
section 585 of the Code applies will be treated as evidences of indebtedness for
purposes of section 582(c)(1) of the Code. FASIT Securities will not qualify as
"Government Securities" for either REIT or RIC qualification purposes.
TREATMENT OF HIGH-YIELD INTERESTS. High-Yield Interests are subject to
special rules regarding the eligibility of holders of such interests, and the
ability of such holders to offset income derived from their FASIT Security with
losses. High-Yield Interests may be held only by Eligible Corporations other
FASITs, and dealers in securities who acquire such interests as inventory. If a
securities dealer (other than an Eligible Corporation) initially acquires a
High-Yield Interest as inventory, but later begins to hold it for investment,
the dealer will be subject to an excise tax equal to the income from the
High-Yield Interest multiplied by the highest corporate income tax rate. In
addition, transfers of High-Yield Interests to disqualified holders will be
disregarded for federal income tax purposes, and the transferor still will be
treated as the holder of the High-Yield Interest.
The holder of a High-Yield Interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from the High-Yield Interest, for either regular Federal income tax
purposes or for alternative minimum tax purposes. In addition, the FASIT
provisions contain an anti-abuse rule that imposes corporate income tax on
income derived from a FASIT Regular Security that is held by a pass-through
entity (other than another FASIT) that issues debt or equity securities backed
by the FASIT Regular Security and that have the same features as High-Yield
Interests.
TAX TREATMENT OF FASIT OWNERSHIP SECURITIES. A FASIT Ownership Security
represents the residual equity interest in a FASIT. As such, the holder of a
FASIT Ownership Security determines its taxable income by taking into account
all assets, liabilities and items of income, gain, deduction, loss and credit of
a FASIT. In general, the character of the income to the holder of a FASIT
Ownership Interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
holder of a FASIT Ownership Interest is treated as ordinary income. In
determining that taxable income, the holder of a FASIT Ownership Security must
determine the amount of interest, original issue discount, market discount and
premium recognized with respect to the FASIT's assets and the FASIT Regular
Securities issued by the FASIT according to a constant yield methodology and
under an accrual method of accounting. In addition, holders of FASIT Ownership
Securities are subject to the same limitations on their ability to use losses to
offset income from their FASIT Security as are the holders of High-Yield
Interests. See "-TREATMENT OF HIGH-YIELD INTERESTS" above.
79
<PAGE>
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where,
within six months before or after the disposition, the seller of such Security
acquires any other FASIT Ownership Security or, in the case of a FASIT holding
mortgage assets, any interest in a Taxable Mortgage Pool that is economically
comparable to a FASIT Ownership Security. In addition, if any security that is
sold or contributed to a FASIT by the holder of the related FASIT Ownership
Security was required to be marked-to-market under Code section 475 by such
holder, then section 475 will continue to apply to such securities, except that
the amount realized under the mark-to-market rules will be a greater of the
securities' value under present law or the securities' value after applying
special valuation rules contained in the FASIT provisions. Those special
valuation rules generally require that the value of debt instruments that are
not traded on an established securities market be determined by calculating the
present value of the reasonably expected payments under the instrument using a
discount rate of 120% of the applicable Federal rate, compounded semiannually.
The holder of a FASIT Ownership Security will be subject to a tax equal
to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include (i) the receipt of income derived
from assets that are not permitted assets, (ii) certain dispositions of
permitted assets, (iii) the receipt of any income derived from any loan
originated by a FASIT, and (iv) in certain cases, the receipt of income
representing a servicing fee or other compensation. Any Series for which a FASIT
election is made generally will be structured in order to avoid application of
the prohibited transaction tax.
BACKUP WITHHOLDING, REPORTING AND TAX ADMINISTRATION. Holders of FASIT
Securities will be subject to backup withholding to the same extent holders of
REMIC Securities would be subject. See "-Miscellaneous Tax Aspects-Backup
Withholding" above. For purposes of reporting and tax administration, holders of
record of FASIT Securities generally will be treated in the same manner as
holders of REMIC Securities.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Certain Material Federal Income Tax Considerations," potential investors should
consider the state and local income tax consequences of the acquisition,
ownership, and disposition of the Securities. State and local income tax law may
differ substantially from the corresponding federal law, and this discussion
does not purport to describe any aspect of the income tax laws of any state or
locality. Therefore, potential investors should consult their own tax advisors
with respect to the various state and local tax consequences of an investment in
the Securities.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the
Code, which apply only to Securities of a Series that are not divided into
subclasses. If Securities are divided into subclasses the related Prospectus
Supplement will contain information concerning considerations relating to ERISA
and the Code that are applicable to such Securities.
ERISA imposes requirements on employee benefit plans (and on certain
other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and separate
accounts in which such plans, accounts or arrangements are invested)
(collectively "Plans") subject to ERISA and on persons who are fiduciaries with
respect to such Plans. Generally, ERISA applies to investments made by Plans.
Among other things, ERISA requires that the assets of Plans be held in trust and
that the trustee, or other duly authorized fiduciary, have exclusive authority
and discretion to manage and control the assets of such Plans. ERISA also
imposes certain duties on persons who are fiduciaries of Plans. Under ERISA, any
person who exercises any authority or control respecting the management or
disposition of the assets of a Plan is considered to be a fiduciary of such Plan
(subject
80
<PAGE>
to certain exceptions not here relevant). Certain employee benefit plans, such
as governmental plans (as defined in ERISA Section 3(32)) and, if no election
has been made under Section 410(d) of the Code, church plans (as defined in
ERISA Section 3(33)), are not subject to ERISA requirements. Accordingly, assets
of such plans may be invested in Securities without regard to the ERISA
considerations described above and below, subject to the provisions of
applicable state law. Any such plan which is qualified and exempt from taxation
under Code Sections 401(a) and 501(a), however, is subject to the prohibited
transaction rules set forth in Code Section 503.
OnNovember 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations concerning the definition of what constitutes the
assets of a Plan. (Labor Reg. Section 2510.3-101) Under this regulation, the
underlying assets and properties of corporations, partnerships and certain other
entities in which a Plan makes an "equity" investment could be deemed for
purposes of ERISA to be assets of the investing Plan in certain circumstances.
However, the regulation provides that, generally, the assets of a corporation or
partnership in which a Plan invests will not be deemed for purposes of ERISA to
be assets of such Plan if the equity interest acquired by the investing Plan is
a publicly-offered security. A publicly-offered security, as defined in the
Labor Reg. Section 2510.3-101, is a security that is widely held, freely
transferable and registered under the Securities Exchange Act of 1934, as
amended.
In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA prohibits a broad range of
transactions involving Plan assets and persons ("PARTIES IN INTEREST") having
certain specified relationships to a Plan and imposes additional prohibitions
where Parties in Interest are fiduciaries with respect to such Plan. Because the
Loans may be deemed Plan assets of each Plan that purchases Securities, an
investment in the Securities by a Plan might be a prohibited transaction under
ERISA Sections 406 and 407 and subject to an excise tax under Code Section 4975
unless a statutory or administrative exemption applies.
In Prohibited Transaction Exemption 83-1 ("PTE 83-1"), which amended
Prohibited Transaction Exemption 81-7, the DOL exempted from ERISA's prohibited
transaction rules certain transactions relating to the operation of residential
mortgage pool investment trusts and the purchase, sale and holding of "mortgage
pool pass-through certificates" in the initial issuance of such certificates.
PTE 83-1 permits, subject to certain conditions, transactions which might
otherwise be prohibited between Plans and Parties in Interest with respect to
those Plans related to the origination, maintenance and termination of mortgage
pools consisting of mortgage loans secured by first or second mortgages or deeds
of trust on single-family residential property, and the acquisition and holding
of certain mortgage pool pass-through certificates representing an interest in
such mortgage pools by Plans. If the general conditions (discussed below) of PTE
83-1 are satisfied, investments by a Plan in Securities that represent interests
in a Pool consisting of Loans ("SINGLE FAMILY SECURITIES") will be exempt from
the prohibitions of ERISA Sections 406(a) and 407 (relating generally to
transactions with Parties in Interest who are not fiduciaries) if the Plan
purchases the Single Family Securities at no more than fair market value and
will be exempt from the prohibitions of ERISA Sections 406(b)(1) and (2)
(relating generally to transactions with fiduciaries) if, in addition, the
purchase is approved by an independent fiduciary, no sales commission is paid to
the pool sponsor, the Plan does not purchase more than 25% of all Single Family
Securities, and at least 50% of all Single Family Securities are purchased by
persons independent of the pool sponsor or pool trustee. PTE 83-1 does not
provide an exemption for transactions involving Subordinate Securities.
Accordingly, unless otherwise provided in the related Prospectus Supplement, no
transfer of a Subordinate Security or a Security which is not a Single Family
Security may be made to a Plan.
The discussion in this and the next succeeding paragraph applies only
to Single Family Securities. The Depositor believes that, for purposes of PTE
83-1, the term "mortgage pass-through certificate" would include: (i) Securities
issued in a Series consisting of only a single class of Securities; and (ii)
Securities issued in a Series in which there is only one class of Trust
Securities; provided that the Securities in the case of clause (i), or the
Securities in the case of clause (ii), evidence the beneficial ownership of both
a specified percentage of future interest payments (greater than 0%) and a
specified percentage (greater than 0%) of future principal payments on the
Loans. It is not clear whether a class of Securities that evidences the
beneficial ownership in a Trust Fund divided into Loan groups, beneficial
ownership of a specified percentage of interest payments only or principal
payments only, or a notional amount of either principal or interest payments, or
a class of Securities entitled to receive payments of interest and principal on
the Loans only after payments to other classes or after the occurrence of
certain specified events would be a "mortgage pass-through certificate" for
purposes of PTE 83-1.
81
<PAGE>
PTE 83-1 sets forth three general conditions which must be satisfied
for any transaction to be eligible for exemption: (i) the maintenance of a
system of insurance or other protection for the pooled mortgage loans and
property securing such loans, and for indemnifying Securityholders against
reductions in pass-through payments due to property damage or defaults in loan
payments in an amount not less than the greater of one percent of the aggregate
principal balance of all covered pooled mortgage loans or the principal balance
of the largest covered pooled mortgage loan; (ii) the existence of a pool
trustee who is not an affiliate of the pool sponsor; and (iii) a limitation on
the amount of the payment retained by the pool sponsor, together with other
funds inuring to its benefit, to not more than adequate consideration for
selling the mortgage loans plus reasonable compensation for services provided by
the pool sponsor to the Pool. The Depositor believes that the first general
condition referred to above will be satisfied with respect to the Securities in
a Series issued without a subordination feature, or the Securities only in a
Series issued with a subordination feature, provided that the subordination and
Reserve Account, subordination by shifting of interests, the pool insurance or
other form of credit enhancement described herein (such subordination, pool
insurance or other form of credit enhancement being the system of insurance or
other protection referred to above) with respect to a Series of Securities is
maintained in an amount not less than the greater of one percent of the
aggregate principal balance of the Loans or the principal balance of the largest
Loan. See "Description of the Securities" herein. In the absence of a ruling
that the system of insurance or other protection with respect to a Series of
Securities satisfies the first general condition referred to above, there can be
no assurance that these features will be so viewed by the DOL. The Trustee will
not be affiliated with the Depositor.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Single Family
Securities must make its own determination as to whether the first and third
general conditions, and the specific conditions described briefly in the
preceding paragraph, of PTE 83-1 have been satisfied, or as to the availability
of any other prohibited transaction exemptions. Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Securities is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
On September 6, 1990, the DOL issued to Greenwich Capital Markets, Inc.
an individual exemption (Prohibited Transaction Exemption 90-59; Exemption
Application No. D-8374, 55 Fed. Reg. 36724) (the "UNDERWRITER EXEMPTION") which
applies to certain sales and servicing of "certificates" that are obligations of
a "trust" with respect to which Greenwich Capital Markets, Inc. is the
underwriter, manager or co-manager of an underwriting syndicate. The Underwriter
Exemption provides relief which is generally similar to that provided by PTE
83-1, but is broader in several respects.
The Underwriter Exemption contains several requirements, some of which
differ from those in PTE 83-l. The Underwriter Exemption contains an expanded
definition of "certificate" which includes an interest which entitles the holder
to pass-through payments of principal, interest and/or other payments. The
Underwriter Exemption contains an expanded definition of "trust" which permits
the trust corpus to consist of secured consumer receivables. The definition of
"trust", however, does not include any investment pool unless, inter alia, (i)
the investment pool consists only of assets of the type which have been included
in other investment pools, (ii) certificates evidencing interests in such other
investment pools have been purchased by investors other than Plans for at least
one year prior to the Plan's acquisition of certificates pursuant to the
Underwriter Exemption, and (iii) certificates in such other investment pools
have been rated in one of the three highest generic rating categories of the
four credit rating agencies noted below. Generally, the Underwriter Exemption
holds that the acquisition of the certificates by a Plan must be on terms
(including the price for the certificates) that are at least as favorable to the
Plan as they would be in an arm's length transaction with an unrelated party.
The Underwriter Exemption requires that the rights and interests evidenced by
the certificates not be "subordinated" to the rights and interests evidenced by
other certificates of the same trust. The Underwriter Exemption requires that
certificates acquired by a Plan have received a rating at the time of their
acquisition that is in one of the three highest generic rating categories of
Standard & Poor's, a division of the McGraw-Hill Companies, Inc., Moody's
Investors Service, Inc., Duff & Phelps 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"
82
<PAGE>
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 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
83
<PAGE>
minimum level specified in the pooling and servicing
agreement or an event of default occurs.
(7) Amounts transferred to any pre-funding account
and/or capitalized interest account used in
connection with the pre-funding may be invested only
in investments which are permitted by the Exemption
Rating Agencies rating the certificates and must:
(i) be direct obligations of, or
obligations fully guaranteed as to timely payment of
principal and interest by, the United States or any
agency or instrumentality thereof (provided that such
obligations are backed by the full faith and credit
of the United States); or
(ii) have been rated (or the obligor
has been rated) in one or the three highest generic
rating categories by an Exemption Rating Agency ("DOL
Permitted Investments").
(8) The related prospectus or prospectus supplement
must describe:
(i) any pre-funding account
and/or capitalized interest account used in
connection with a pre-funding account;
(ii) the duration of the
Pre-Funding Period;
(iii) the percentage and/or
dollar amount of the Pre-Funding Limit for the trust;
and
(iv) that the amounts remaining in
the pre-funding account at the end of the Pre-Funding
Period will be remitted to certificateholders as
repayments of principal.
(9) The related pooling and servicing
agreement must describe the DOL Permitted Investments
for the pre-funding account and/or capitalized
interest account and, if not disclosed in the related
prospectus or prospectus supplement, the terms and
conditions for eligibility of Additional Obligations.
On August 23, 2000, the DOL proposed certain amendments to the
Underwriter Exemption which, if published in final form as proposed, would
permit the subordinated Securities to be purchased and held by or on behalf of,
or with Plan Assets of, a Plan if those Securities are rated "BBB-" or better at
the time of purchase. See Department of Labor Exemption Application No. D-
10809, 65 Fed. Reg. 51454 (August 23, 2000). Theses amendments will not apply
until they are finalized by the DOL and published in final form in the Federal
Register, but the proposed effective date is August 23, 2000. Accordingly,
prospective investors should consult counsel regarding the effect of these
proposed amendments.
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,
84
<PAGE>
however, that in no event will the enactment of any such legislation affect the
validity of any contractual commitment to purchase, hold or invest in
securities, or require the sale or other disposition of securities, so long as
such contractual commitment was made or such securities were acquired prior to
the enactment of such legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal in
Securities without limitations as to the percentage of their assets represented
thereby, federal credit unions may invest in mortgage related securities, and
national banks may purchase certificates for their own account without regard to
the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal authority may prescribe. In this connection, federal credit unions
should review the National Credit Union Administration ("NCUA") Letter to Credit
Unions No. 96, as modified by Letter to Credit Unions No. 108, which includes
guidelines to assist federal credit unions in making investment decisions for
mortgage related securities and the NCUA's regulation "Investment and Deposit
Activities" (12 C.F.R. Part 703), which sets forth certain restrictions on
investment by federal credit unions in mortgage related securities.
All depository institutions considering an investment in the Securities
(whether or not the class of Securities under consideration for purchase
constitutes a "mortgage related security") should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities (to the extent adopted by their respective regulators)
(the "POLICY STATEMENT") setting forth, in relevant part, certain securities
trading and sales practices deemed unsuitable for an institution's investment
portfolio, and guidelines for (and restrictions on) investing in mortgage
derivative products, including "mortgage related securities", which are
"high-risk mortgage securities" as defined in the Policy Statement. According to
the Policy Statement such "high-risk mortgage securities" include securities
such as Securities not entitled to distributions allocated to principal or
interest, or Subordinated Securities. Under the Policy Statement, it is the
responsibility of each depository institution to determine, prior to purchase
(and at stated intervals thereafter), whether a particular mortgage derivative
product is a "high-risk mortgage security", and whether the purchase (or
retention) of such a product would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions which may restrict or prohibit investment in
securities which are not "interest bearing" or "income paying".
There may be other restrictions on the ability of certain investors,
including depositors institutions, either to purchase Securities or to purchase
Securities representing more than a specified percentage of the investor's
assets. Investors should consult their own legal advisors in determining whether
and to what extent the Securities constitute legal investments for such
investors.
METHOD OF DISTRIBUTION
The Securities offered hereby and by the Prospectus Supplement will be
offered in Series. The distribution of the Securities may be effected from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices to be determined at the time of
sale or at the time of commitment therefor. If so specified in the related
Prospectus Supplement, the Securities will be distributed in a firm commitment
underwriting, subject to the terms and conditions of the underwriting agreement,
by Greenwich Capital Markets, Inc. ("GCM") acting as underwriter with other
underwriters, if any, named therein. In such event, the related Prospectus
Supplement may also specify that the underwriters will not be obligated to pay
for any Securities agreed to be purchased by purchasers pursuant to purchase
agreements acceptable to the Depositor. In connection with the sale of the
Securities, underwriters may receive compensation from the Depositor or from
purchasers of the Securities in the form of discounts, concessions or
commissions. The related Prospectus Supplement will describe any such
compensation paid by the Depositor.
Alternatively, the related Prospectus Supplement may specify that the
Securities will be distributed by GCM acting as agent or in some cases as
principal with respect to Securities that it has previously purchased or agreed
to purchase. If GCM acts as agent in the sale of Securities, GCM will receive a
selling commission with respect to each Series of Securities, depending on
market conditions, expressed as a percentage of the aggregate principal balance
of
85
<PAGE>
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 or Thacher
Proffitt & Wood, New York, New York 10048.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Securities and no Trust Fund will engage in any business activities or have any
assets or obligations prior to the issuance of the related Series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
AVAILABLE INFORMATION
The Depositor has filed with the SEC a Registration Statement under the
Securities Act of 1933, as amended, with respect to the Securities. This
Prospectus, which forms a part of the Registration Statement, and the Prospectus
Supplement relating to each Series of Securities contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the Registration Statement pursuant
to the Rules and Regulations of the SEC. For further information, reference is
made to such Registration Statement and the exhibits thereto. Such Registration
Statement and exhibits can be inspected and copied at prescribed rates at the
public reference facilities maintained by the SEC at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional
Offices located as follows: Midwest Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional Office, 7 World
Trade Center, Suite 1300, New York, New York 10048. In addition, the SEC
maintains a Web site at http://www.sec.gov containing reports, proxy and
information statements and other information regarding registrants, including
the Depositor, that file electronically with the Commission.
RATING
It is a condition to the issuance of the Securities of each Series
offered hereby and by the Prospectus Supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies (each, a "RATING AGENCY") specified in the
related Prospectus Supplement.
86
<PAGE>
Any such rating would be based on, among other things, the adequacy of
the value of the Trust Fund Assets and any credit enhancement with respect to
such class and will reflect such Rating Agency's assessment solely of the
likelihood that holders of a class of Securities of such class will receive
payments to which such Securityholders are entitled under the related Agreement.
Such rating will not constitute an assessment of the likelihood that principal
prepayments on the related Loans will be made, the degree to which the rate of
such prepayments might differ from that originally anticipated or the likelihood
of early optional termination of the Series of Securities. Such rating should
not be deemed a recommendation to purchase, hold or sell Securities, inasmuch as
it does not address market price or suitability for a particular investor. Such
rating will not address the possibility that prepayment at higher or lower rates
than anticipated by an investor may cause such investor to experience a lower
than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios.
There is also no assurance that any such rating will remain in effect
for any given period of time or that it may not be lowered or withdrawn entirely
by the Rating Agency in the future if in its judgment circumstances in the
future so warrant. In addition to being lowered or withdrawn due to any erosion
in the adequacy of the value of the Trust Fund Assets or any credit enhancement
with respect to a Series, such rating might also be lowered or withdrawn among
other reasons, because of an adverse change in the financial or other condition
of a credit enhancement provider or a change in the rating of such credit
enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a Series of Securities will be determined on the basis of
criteria established by each Rating Agency rating classes of such Series. Such
criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. Such analysis is often the basis upon which
each Rating Agency determines the amount of credit enhancement required with
respect to each such class. There can be no assurance that the historical data
supporting any such actuarial analysis will accurately reflect future experience
nor any assurance that the data derived from a large pool of mortgage loans
accurately predicts the delinquency, foreclosure or loss experience of any
particular pool of Loans. No assurance can be given that values of any
Properties have remained or will remain at their levels on the respective dates
of origination of the related Loans. If the residential real estate markets
should experience an overall decline in property values such that the
outstanding principal balances of the Loans in a particular Trust Fund and any
secondary financing on the related Properties become equal to or greater than
the value of the Properties, the rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry. In additional, adverse economic conditions (which may or may not
affect real property values) may affect the timely payment by mortgagors of
scheduled payments of principal and interest on the Loans and, accordingly, the
rates of delinquencies, foreclosures and losses with respect to any Trust Fund.
To the extent that such losses are not covered by credit enhancement, such
losses will be borne, at least in part, by the holders of one or more classes of
the Securities of the related Series.
87
<PAGE>
INDEX OF DEFINED TERMS
Accrual Securities........................................................22
Additional Obligations....................................................83
Agreement ........................................................11
APR ........................................................14
Asset Conservation Act....................................................49
Available Funds ........................................................21
Average Interest Rate.....................................................83
Bankruptcy Bond ........................................................30
BIF ........................................................37
Book-Entry Securities.....................................................25
Cash Flow Bond Method.....................................................69
Cede ........................................................25
CEDEL ........................................................25
CEDEL Participants........................................................26
CERCLA ........................................................49
Certificates ........................................................11
Code ........................................................59
Collateral Value ........................................................14
Combined Loan-to-Value Ratio..............................................14
Contingent Regulations....................................................61
Cooperative ........................................................27
Cut-off Date ........................................................11
Debt Securities ........................................................60
Definitive Security.......................................................25
Detailed Description......................................................12
Determination Date........................................................21
DOL ........................................................81
DOL Permitted Investments.................................................84
DTC .........................................................9
Eligible Corporations.....................................................78
Euroclear ........................................................25
Euroclear Participants....................................................27
European Depositaries.....................................................25
FASCO ........................................................16
FASIT Qualification Test..................................................78
FDIC ........................................................37
Financial Intermediary....................................................25
Garn-St. Germain Act......................................................51
GCM ........................................................85
High-Yield Interest.......................................................78
Home Equity Loans ........................................................12
Home Improvement Contracts................................................12
Home Improvements ........................................................12
HUD ........................................................31
Indenture ........................................................19
Installment Contract......................................................54
Insurance Proceeds........................................................38
Insured Expenses ........................................................38
Interest Weighted Securities..............................................62
IO ........................................................78
IRS ........................................................61
Liquidation Expenses......................................................38
88
<PAGE>
Liquidation Proceeds......................................................38
Loan Rate ........................................................13
Mark-to-Market Regulations................................................68
Mortgage ........................................................36
NCUA ........................................................85
New Regulations ........................................................71
Nonresidents ........................................................71
Notes ........................................................11
Obligations ........................................................83
OID ........................................................60
OID Regulations ........................................................60
PABS Agreement ........................................................14
PABS Issuer ........................................................15
PABS Servicer ........................................................15
PABS Trustee ........................................................15
Participants ........................................................25
Parties in Interest.......................................................81
Pass-Through Rate ........................................................11
Pass-Through Securities...................................................68
Pay-Through Security......................................................61
Permitted Investments.....................................................37
Plans ........................................................80
Policy Statement ........................................................85
Pool ........................................................11
Pool Insurance Policy.....................................................30
Pool Insurer ........................................................30
Pooling and Servicing Agreement...........................................19
Pre-Funded Amount ........................................................38
Pre-Funding Account.......................................................38
Pre-Funding Limit ........................................................83
Pre-Funding Period........................................................83
Premium ........................................................57
Prepayment Assumption.....................................................61
Primary Insurer ........................................................42
Principal Prepayments.....................................................22
Properties ........................................................12
Property Improvement Loans................................................56
PTE 83-1 ........................................................81
Purchase Price ........................................................18
Rating Agency ........................................................86
Ratio Strip Securities....................................................69
RCRA ........................................................50
Record Date ........................................................20
Refinance Loan ........................................................14
Regular Interest Securities...............................................59
Relevant Depositary.......................................................25
Relief Act ........................................................54
REMIC ........................................................20
Reserve Account ........................................................21
Residual Interest Security................................................65
Retained Interest ........................................................19
Rules ........................................................26
SAIF ........................................................37
SEC ........................................................16
Security Account ........................................................37
89
<PAGE>
Security Owners ........................................................25
Security Register ........................................................20
Sellers ........................................................11
Senior Securities ........................................................28
Servicing Agreement.......................................................11
Servicing Fee ........................................................68
Short-Term Note ........................................................72
Single Family Properties..................................................12
Single Family Securities..................................................81
Small Mixed-Use Properties................................................13
SMMEA ........................................................84
Special Hazard Insurance Policy...........................................29
Special Hazard Insurer....................................................29
Stripped Securities.......................................................68
Sub-Servicers ........................................................11
Sub-Servicing Account.....................................................37
Sub-Servicing Agreement...................................................39
Support Agreement ........................................................23
Support Servicer ........................................................23
Tax Counsel ........................................................59
Terms and Conditions......................................................27
TIN ........................................................71
Title I Loans ........................................................56
Title I Program ........................................................56
Title V ........................................................52
Trust Agreement ........................................................11
Trust Fund ........................................................11
Trust Fund Assets ........................................................11
Trustee ........................................................19
U.S. Person ........................................................59
Underwriter Exemption.....................................................82
VA Guaranty Policy........................................................32
90
<PAGE>
================================================================================
$491,675,000 (APPROXIMATE)
FIRST FRANKLIN MORTGAGE LOAN TRUST 2000-FF1
FINANCIAL ASSET SECURITIES CORPORATION
Depositor
OPTION ONE MORTGAGE CORPORATION
Master Servicer
ASSET-BACKED CERTIFICATES, SERIES 2000-FF1
--------------------
PROSPECTUS SUPPLEMENT
--------------------
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the Asset-Backed Certificates, Series 2000-FF1 in any state
where the offer is not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Asset-Backed Certificates, Series 2000-FF1 and with respect
to their unsold allotments or subscriptions. In addition, all dealers selling
the Asset-Backed Certificates, Series 2000-FF1 will be required to deliver a
prospectus supplement and prospectus for ninety days following the date of this
prospectus supplement.
[GRAPHIC OMITTED]
--------------------------------------------------------------------------------
October 13, 2000
================================================================================
<PAGE>
<PAGE>
================================================================================
$237,001,000 (APPROXIMATE)
OPTION ONE MORTGAGE LOAN TRUST 2000-5
ASSET-BACKED CERTIFICATES, SERIES 2000-5
FINANCIAL ASSET SECURITIES CORPORATION
DEPOSITOR
[LOGO]
OPTION ONE MORTGAGE CORPORATION
MASTER SERVICER
---------------------------------
PROSPECTUS SUPPLEMENT
---------------------------------
UBS WARBURG LLC
GREENWICH CAPITAL MARKETS, INC.
PAINEWEBBER INCORPORATED
October 27, 2000
We suggest that you 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 securities offered hereby in any state where the
offer is not permitted.
Dealers will be required to deliver a prospectus supplement and prospectus
when acting as underwriters of the securities offered hereby and with
respect to their unsold allotments or subscriptions. In addition, all
dealers selling the securities, whether or not participating in this
offering, may be required to deliver a prospectus supplement and prospectus
until January 26, 2001.
================================================================================
