PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 13, 2000)
$491,675,000 (APPROXIMATE)
FIRST FRANKLIN MORTGAGE LOAN TRUST 2000-FF1
ASSET-BACKED CERTIFICATES, SERIES 2000-FF1
FINANCIAL ASSET SECURITIES CORPORATION
DEPOSITOR
OPTION ONE MORTGAGE CORPORATION
MASTER SERVICER
____________________
CONSIDER CAREFULLY Only the three classes of certificates identified below
THE RISK FACTORS are being offered by this prospectus supplement and the
BEGINNING ON PAGE accompanying prospectus.
S-8 IN THIS
PROSPECTUS THE OFFERED CERTIFICATES
SUPPLEMENT AND ON
PAGE 4 IN THE o Represent ownership interests in a trust consisting
PROSPECTUS. primarily of a pool of first lien adjustable-rate
The certificates residential mortgage loans.
represent
obligations of the o The Class A Certificates, the Class M-1 Certificates
trust only and do and the Class M-2 Certificates will accrue interest
not represent an at a rate equal to one-month LIBOR plus a fixed
interest in or margin, subject to certain limitations described in
obligation of this prospectus supplement.
Financial Asset
Securities CREDIT ENHANCEMENT
Corporation, Option
One Mortgage o Subordination as described in this prospectus
Corporation or any supplement under "Description of the
of their affiliates. Certificates--Credit Enhancement."
This prospectus
supplement may be o Overcollateralization as described in this
used to offer and prospectus supplement under "Description of the
sell the certificates Certificates--Overcollateralization Provisions."
only if accompanied
by the prospectus. o Excess Interest as described in this prospectus
____________________ supplement under "Description of the
Certificates--Overcollateralization Provisions."
o A Primary Mortgage Insurance Policy as described in
this prospectus supplement under "Description of the
Certificates--The PMI Policies."
<TABLE>
<CAPTION>
ORIGINAL
CERTIFICATE
PRINCIPAL PASS-THROUGH UNDERWRITING PROCEEDS TO THE
CLASS BALANCE RATE PRICE TO PUBLIC DISCOUNT DEPOSITOR(2)
----------------- ------------- ------------ --------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Class A.......... $462,026,000 Variable(1) 100.000% 0.225% 99.775%
Class M-1........ $22,236,000 Variable(1) 100.000% 0.600% 99.400%
Class M-2........ $7,413,000 Variable(1) 100.000% 0.760% 99.240%
--------------------
(1) Determined as provided herein.
(2) Before deducting expenses estimated to be $620,000.
</TABLE>
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE
SECURITIES OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Delivery of the Offered Certificates will be made in book-entry form through the
facilities of The Depository Trust Company, Clearstream Banking Luxembourg and
the Euroclear System on or about October 30, 2000.
[GRAPHIC OMITTED]
--------------------------------------------------------------------------------
October 13, 2000
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
----
SUMMARY OF TERMS............................................................S-3
RISK FACTORS................................................................S-8
THE MORTGAGE POOL..........................................................S-14
FIRST FRANKLIN FINANCIAL CORPORATION.......................................S-25
THE SELLER.................................................................S-29
THE POOLING AGREEMENT......................................................S-29
DESCRIPTION OF THE CERTIFICATES............................................S-36
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS..............................S-49
USE OF PROCEEDS............................................................S-56
FEDERAL INCOME TAX CONSEQUENCES............................................S-56
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS..................................S-59
LEGAL INVESTMENT CONSIDERATIONS............................................S-60
METHOD OF DISTRIBUTION.....................................................S-60
LEGAL MATTERS..............................................................S-61
RATINGS....................................................................S-61
INDEX OF DEFINED TERMS.....................................................S-62
ANNEX I.....................................................................I-1
S-2
<PAGE>
SUMMARY OF TERMS
o THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND DOES
NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER IN MAKING YOUR
INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF THE OFFERING OF THE
CERTIFICATES, READ CAREFULLY THIS ENTIRE DOCUMENT AND THE ACCOMPANYING
PROSPECTUS.
o THIS SUMMARY PROVIDES AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION TO AID YOUR UNDERSTANDING AND IS QUALIFIED
BY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW PRIORITIES AND
OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS. SOME OF THE INFORMATION CONSISTS OF FORWARD-LOOKING STATEMENTS
RELATING TO FUTURE ECONOMIC PERFORMANCE OR PROJECTIONS AND OTHER FINANCIAL
ITEMS. FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A VARIETY OF RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THE PROJECTED
RESULTS. THOSE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, GENERAL
ECONOMIC AND BUSINESS CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE
WITH GOVERNMENTAL REGULATIONS, AND VARIOUS OTHER MATTERS, ALL OF WHICH ARE
BEYOND OUR CONTROL. ACCORDINGLY, WHAT ACTUALLY HAPPENS MAY BE VERY
DIFFERENT FROM WHAT WE PREDICT IN OUR FORWARD-LOOKING STATEMENTS.
OFFERED CERTIFICATES
On the Closing Date, First Franklin Mortgage Loan Trust 2000-FF1 will issue six
classes of certificates, three of which are being offered by this prospectus
supplement and the accompanying prospectus. The assets of the trust that will
support the certificates will consist primarily of a pool of adjustable-rate
mortgage loans having the characteristics described in this prospectus
supplement. The Class A Certificates, the Class M-1 Certificates and the Class
M-2 Certificates are the only classes of offered certificates.
The Offered Certificates will be book-entry securities clearing through The
Depository Trust Company (in the United States) or Clearstream Banking
Luxembourg and the Euroclear System (in Europe) in minimum denominations of
$50,000.
OTHER CERTIFICATES
The trust will issue three additional classes of certificates. These
certificates will be designated as the Class C Certificates, the Class P
Certificates and the Class R Certificates and are not being offered to the
public by this prospectus supplement and the prospectus.
The Class C Certificates will have an initial certificate principal balance of
approximately $2,470,367, which is equal to the initial overcollateralization
required by the pooling agreement. The Class C Certificates initially evidence
an interest of approximately 0.50% in the trust. The Class C Certificates will
be delivered to the Seller or its designee as partial consideration for the
mortgage loans.
The Class P Certificates will have an original principal balance of $100 and
will not be entitled to distributions in respect of interest. The Class P
Certificates will be entitled to all prepayment charges received in respect of
the mortgage loans. The Class P Certificates will be delivered to the Seller or
its designee as partial consideration for the mortgage loans.
The Class R Certificates will not have an original principal balance and are the
class of certificates representing the residual interests in the trust. The
Class R Certificates will be delivered to the Seller or its designee as partial
consideration for the mortgage loans.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES-- GENERAL," "--BOOK-ENTRY
CERTIFICATES" AND "THE MORTGAGE POOL" IN THIS PROSPECTUS SUPPLEMENT.
CUT-OFF DATE
October 1, 2000.
CLOSING DATE
On or about October 30, 2000.
THE DEPOSITOR
Financial Asset Securities Corporation, a Delaware corporation and a wholly
owned subsidiary of Greenwich Capital Markets, Inc. WE REFER YOU TO "THE
DEPOSITOR" IN THE PROSPECTUS FOR ADDITIONAL INFORMATION.
MASTER SERVICER
Option One Mortgage Corporation, a California corporation. WE REFER YOU TO
"OPTION ONE MORTGAGE CORPORATION" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL
INFORMATION.
ORIGINATOR
First Franklin Financial Corporation, a Delaware corporation, originated or
acquired the mortgage loans. WE REFER YOU TO "FIRST FRANKLIN FINANCIAL
CORPORATION" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
S-3
<PAGE>
SELLER
Option One Owner Trust 2000-1, a Delaware business trust that previously
acquired the mortgage loans from Option One Mortgage Corporation. WE REFER YOU
TO "THE SELLER" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
TRUSTEE
Wells Fargo Bank Minnesota, N.A., a national banking association. WE REFER YOU
TO "THE POOLING AGREEMENT--THE TRUSTEE" IN THIS PROSPECTUS SUPPLEMENT FOR
ADDITIONAL INFORMATION.
PMI INSURER
PMI Mortgage Insurance Co., an Arizona corporation. WE REFER YOU TO "DESCRIPTION
OF THE CERTIFICATES--THE PMI POLICIES" IN THIS PROSPECTUS SUPPLEMENT FOR
ADDITIONAL INFORMATION.
LOSS MITIGATION ADVISOR
The Murrayhill Company, a Colorado corporation. WE REFER YOU TO "THE POOLING
AGREEMENT--THE LOSS MITIGATION ADVISOR" IN THIS PROSPECTUS SUPPLEMENT FOR
ADDITIONAL INFORMATION.
DESIGNATIONS
Each class of certificates will have different characteristics, some of which
are reflected in the following general designations.
o OFFERED CERTIFICATES
Class A Certificates and Mezzanine Certificates.
o MEZZANINE CERTIFICATES
Class M-1 Certificates and Class M-2 Certificates.
o SUBORDINATE CERTIFICATES
The Mezzanine Certificates and the Class C Certificates.
o RESIDUAL CERTIFICATEs
Class R Certificates.
o BOOK-ENTRY CERTIFICATES
Class A Certificates and Mezzanine Certificates.
MORTGAGE LOANS
On the Closing Date the trust will acquire a pool of first lien adjustable-rate
mortgage loans.
The mortgage pool will consist of approximately 4,024 mortgage loans included in
the mortgage pool as of the close of business on October 1, 2000 and described
in this prospectus supplement having an aggregate outstanding principal balance
as of the Cut-off Date of approximately $494,145,467 (the "Mortgage Loans").
The statistical information in this prospectus supplement reflects the
characteristics of the mortgage loans included in the mortgage pool as of the
Cut-off Date. After the date of this prospectus supplement and prior to the
Closing Date, some mortgage loans may be added to the mortgage pool and some
mortgage loans may be removed from the mortgage pool, as described under "The
Mortgage Pool" in this prospectus supplement. The Originator and Option One (as
defined herein) believe that the information set forth in this prospectus
supplement 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.
The mortgage loans have the following characteristics (with all figures being
approximate and all percentages and weighted averages being based on scheduled
principal balances as of the Cut-off Date):
Loans with Prepayment Charges: 95.87%
Range of Remaining Term 353 months to
to Stated Maturities: 358 months
Weighted Average Remaining
Term to Stated Maturity: 356 months
Range of Original Principal Balances: $20,500 to $600,000
Average Original Principal Balance: $123,063
Range of Outstanding Principal Balances: $20,427 to $598,414
Average Outstanding Principal Balance: $122,800
Current Range of Loan Rates: 7.500% to 14.625%
Current Weighted Average Loan Rate: 9.972%
Weighted Average Gross Margin: 5.253%
Weighted Average Maximum Loan Rate: 15.972%
Weighted Average Minimum Loan Rate: 9.972%
Weighted Average Initial
Rate Adjustment Cap: 2.997%
S-4
<PAGE>
Weighted Average Periodic
Rate Adjustment Cap: 1.000%
Weighted Average Time
Until Next Adjustment Date: 21 months
Geographic Concentration
in Excess of 5%
California 36.74%
Illinois 5.87%
Texas 5.08%
DISTRIBUTION DATES
The Trustee will make distributions on the certificates on the 25th day of each
calendar month beginning in November 2000 to the holder of record of the
certificates as of the business day preceding such date of distribution if held
in book-entry form or to the holder of record of the certificates as of the last
business day of the month immediately preceding the month in which the
distribution occurs if held in registered, certificated form. If the 25th day of
a month is not a business day, then the distribution will be made on the next
business day.
PAYMENTS ON THE CERTIFICATES
INTEREST PAYMENTS
The initial pass-through rate for the Class A Certificates will be calculated at
the per annum rate of One-Month LIBOR + 23 basis points, subject to the
limitations described in this prospectus supplement.
The initial pass-through rate for the Class M-1 Certificates will be calculated
at the per annum rate of One-Month LIBOR + 55 basis points, subject to the
limitations described in this prospectus supplement.
The initial pass-through rate for the Class M-2 Certificates will be calculated
at the per annum rate of One-Month LIBOR + 95 basis points, subject to the
limitations described in this prospectus supplement.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--PASS- THROUGH RATES" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
In addition, if the Master Servicer fails to exercise its option to terminate
the trust on the earliest permitted date as described below under "Optional
Termination," the pass- through rate on the Class A Certificates will then
increase to the per annum rate of One-Month LIBOR + 46 basis points, subject to
the limitations described in this prospectus supplement; the pass-through rate
on the Class M-1 Certificates will then increase to the per annum rate of One-
Month LIBOR + 82.5 basis points, subject to the limitations described in this
prospectus supplement and the pass- through rate on the Class M-2 Certificates
will then increase to the per annum rate of One-Month LIBOR + 142.5 basis
points, subject to the limitations described in this prospectus supplement.
Interest payable on the certificates accrues during an accrual period. The
accrual period for the Offered Certificates for any distribution date is the
period from the previous distribution date (or, in the case of the first accrual
period from the Closing Date) to the day prior to the current distribution date.
Interest will be calculated for the Offered Certificates on the basis of the
actual number of days in the accrual period, based on a 360-day year.
The Offered Certificates will accrue interest on their certificate principal
balance outstanding immediately prior to each distribution date.
The Class C Certificates will accrue interest as provided in the pooling
agreement. The Class P Certificates and the Residual Certificates will not
accrue interest.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT
FOR ADDITIONAL INFORMATION.
PRINCIPAL PAYMENTS
Principal will be distributed to holders of the Class A Certificates and each
class of Mezzanine Certificates on each distribution date in the amounts
described herein under "Description of the Certificates--Allocation of Available
Funds."
PAYMENT PRIORITIES
In general, on any distribution date, funds available for distribution from
payments and other amounts received on the mortgage loans will be distributed to
the Offered Certificates in the following order:
FIRST, to pay interest on the Class A Certificates;
SECOND, to pay interest on the Mezzanine Certificates, but only in the order of
priority, amounts and to the extent described herein; and
THIRD, to pay principal on the Offered Certificates, but only in the order of
priority, amounts and to the extent described herein.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT
FOR ADDITIONAL INFORMATION.
ADVANCES
The Master Servicer will make cash advances to cover delinquent payments of
principal and interest to the extent
S-5
<PAGE>
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.
WE REFER YOU TO "THE POOLING AGREEMENT--ADVANCES" IN THIS PROSPECTUS SUPPLEMENT
AND "DESCRIPTION OF THE SECURITIES--ADVANCES" IN THE PROSPECTUS FOR ADDITIONAL
INFORMATION.
OPTIONAL TERMINATION
The Master Servicer may purchase all of the mortgage loans and retire the
certificates when the current principal balance of the mortgage loans, in the
aggregate, is equal to or less than 10% of the principal balance of the mortgage
loans as of the Cut-off Date.
WE REFER YOU TO "THE POOLING AGREEMENT --TERMINATION" AND "DESCRIPTION OF THE
CERTIFICATES--PASS-THROUGH RATES" IN THIS PROSPECTUS SUPPLEMENT AND "THE
AGREEMENTS--TERMINATION; OPTIONAL TERMINATION" IN THE PROSPECTUS FOR ADDITIONAL
INFORMATION.
CREDIT ENHANCEMENT
1. SUBORDINATION
The rights of the holders of the Mezzanine Certificates and the Class C
Certificates to receive distributions will be subordinated, to the extent
described in this prospectus supplement, to the rights of the holders of the
Class A Certificates.
In addition, the rights of the holders of the Class M-2 Certificates to receive
distributions will be subordinated to the rights of the holders of the Class M-1
Certificates, and the rights of the holders of the Class C Certificates to
receive distributions will be subordinated to the rights of the holders of the
Mezzanine Certificates, in each case to the extent described in this prospectus
supplement.
Subordination is intended to enhance the likelihood of regular distributions on
the more senior certificates in respect of interest and principal and to afford
such certificates protection against realized losses on the mortgage loans.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--CREDIT ENHANCEMENT" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
2. EXCESS INTEREST
The mortgage loans bear interest each month that in the aggregate is expected to
exceed the amount needed to pay monthly interest on the Offered Certificates and
to pay certain fees and expenses of the trust. The excess interest from the
mortgage loans each month will be available to absorb realized losses on the
mortgage loans and to create or maintain overcollateralization at required
levels as described in the pooling agreement.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--ALLOCATION OF AVAILABLE FUNDS"
AND "--OVERCOLLATERALIZATION" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL
INFORMATION.
3. OVERCOLLATERALIZATION
The aggregate principal balance of the mortgage loans as of the Cut-off Date
will exceed the aggregate certificate principal balance of the Offered
Certificates and the Class P Certificates on the closing date by approximately
$2,470,367, which is equal to the initial certificate principal balance of the
Class C Certificates. Such amount represents approximately 0.50% of the
aggregate principal balance of the mortgage loans as of the Cut-off Date and is
the approximate amount of overcollateralization required to be provided under
the pooling agreement. We cannot assure you that sufficient interest will be
generated by the mortgage loans to maintain the required level of
overcollateralization.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--OVERCOLLATERALIZATION
PROVISIONS" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
4. ALLOCATION OF LOSSES
If, on any distribution date, there is not sufficient excess interest or
overcollateralization to absorb realized losses on the mortgage loans as
described under "Description of the Certificates--Overcollateralization
Provisions" in this prospectus supplement, then realized losses on the mortgage
loans will be allocated to the Mezzanine Certificates as described below. If
realized losses on the mortgage loans are allocated to the Mezzanine
Certificates, such losses will be allocated first, to the Class M-2 Certificates
and second, to the Class M-1 Certificates. The pooling agreement does not permit
the allocation of realized losses on the mortgage loans to the Class A
Certificates or the Class P Certificates; however investors in the Class A
Certificates should realize that under certain loss scenarios there will not be
enough principal and interest on the mortgage loans to pay the Class A
Certificates all interest and principal amounts to which such certificates are
then entitled.
Once realized losses are allocated to the Mezzanine Certificates, such realized
losses will not be reinstated thereafter. However, the amount of any realized
losses allocated to the Mezzanine Certificates may be paid to the holders of
these certificates according to the priorities set forth under "Description of
the Certificates --Overcollateralization Provisions" in this prospectus
supplement.
S-6
<PAGE>
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES --ALLOCATION OF LOSSES;
SUBORDINATION" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
5. PRIMARY MORTGAGE INSURANCE
Loan-level primary mortgage insurance policies have been acquired on behalf of
the trust from the PMI Insurer for approximately 97.87% (by aggregate principal
balance as of the Cut-off Date) of those mortgage loans in the mortgage pool
with original loan-to-value ratios in excess of 60% not otherwise covered by an
existing primary mortgage insurance policy. However, such policies will provide
only limited protection against losses on defaulted mortgage loans.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--THE PMI POLICIES" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
RATINGS
It is a condition of the issuance of the Offered Certificates that they be
assigned the following ratings by Fitch, Inc. ("Fitch") and Standard & Poor's, a
division of The McGraw-Hill Companies, Inc. ("S&P"):
Fitch: S&P:
----- ---
A AAA AAA
M-1 AA AA
M-2 A A
A security rating is not a recommendation to buy, sell or hold securities. These
ratings may be lowered or withdrawn at any time by any of the rating agencies.
WE REFER YOU TO "RATINGS" IN THIS PROSPECTUS SUPPLEMENT AND "RATING" IN THE
PROSPECTUS FOR ADDITIONAL INFORMATION.
TAX STATUS
One or more elections will be made to treat designated portions of the trust
(exclusive of the reserve fund, as described more fully herein) as real estate
mortgage investment conduits for federal income tax purposes.
WE REFER YOU TO "FEDERAL INCOME TAX CONSEQUENCES" IN THIS PROSPECTUS SUPPLEMENT
AND "CERTAIN MATERIAL FEDERAL INCOME TAX CONSIDERATIONS" IN THE PROSPECTUS FOR
ADDITIONAL INFORMATION.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
It is expected that the Class A Certificates may be purchased by a pension or
other employee benefit plan subject to the Employee Retirement Income Security
Act of 1974 or Section 4975 of the Internal Revenue Code of 1986, as amended
(the "Code") so long as certain conditions are met. A fiduciary of an employee
benefit plan must determine that the purchase of a certificate is consistent
with its fiduciary duties under applicable law and does not result in a
nonexempt prohibited transaction under applicable law.
The Mezzanine Certificates may not be acquired by or on behalf of a plan except
as described in this prospectus supplement. Each investor in a Mezzanine
Certificate purchased in book-entry form will be deemed to represent that it
complies with the restrictions described under "Considerations for Benefit Plan
Investors" in this prospectus supplement.
WE REFER YOU TO "CONSIDERATIONS FOR BENEFIT PLAN INVESTORS" IN THIS PROSPECTUS
SUPPLEMENT AND "ERISA CONSIDERATIONS IN THE PROSPECTUS FOR ADDITIONAL
INFORMATION.
LEGAL INVESTMENT
The Class A Certificates and the Class M-1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") for so long as they are rated not lower than
the second highest rating category by one or more nationally recognized
statistical rating organizations and, as such, will be legal investments for
certain entities to the extent provided in SMMEA and applicable state laws.
The Class M-2 Certificates will not constitute "mortgage related securities" for
purposes of SMMEA.
WE REFER YOU TO "LEGAL INVESTMENT CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT
AND "LEGAL INVESTMENT" IN THE PROSPECTUS FOR ADDITIONAL INFORMATION.
S-7
<PAGE>
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER, IDENTIFIES
CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN THE
CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER
"RISK FACTORS" IN THE PROSPECTUS.
UNPREDICTABILITY OF PREPAYMENTS AND EFFECT ON YIELDS
Mortgagors may prepay their mortgage loans in whole or in part at any time.
We cannot predict the rate at which mortgagors will repay their mortgage loans.
A prepayment of a mortgage loan generally will result in a prepayment on the
certificates.
o If you purchase your certificates at a discount and principal is repaid
slower than you anticipate, then your yield may be lower than you
anticipate.
o If you purchase your certificates at a premium and principal is repaid
faster than you anticipate, then your yield may be lower than you
anticipate.
o The rate of prepayments on the mortgage loans will be sensitive to
prevailing interest rates. Generally, if interest rates decline,
adjustable-rate mortgage loan prepayments may increase due to the
availability of fixed-rate mortgage loans or other adjustable-rate mortgage
loans at lower interest rates. Conversely, if prevailing interest rates
rise significantly, the prepayments on adjustable-rate mortgage loans may
decrease.
o Approximately 95.87% of the mortgage loans (by aggregate principal balance
of the mortgage loans as of the Cut-off Date) require the mortgagor to pay
a charge in certain instances if the mortgagor prepays the mortgage loan
during a stated period, which may be from one year to four years after the
mortgage loan was originated. A prepayment charge may or may not discourage
a mortgagor from prepaying the mortgage loan during the applicable period.
o The Originator or Option One Mortgage Corporation ("Option One") in its
capacity as a party to the Mortgage Loan Purchase Agreement (as defined
herein), may be required to purchase mortgage loans from the trust in the
event certain breaches of representations and warranties occur and have not
been cured. In addition, the Master Servicer has the option to purchase
mortgage loans that become 90 days or more delinquent, subject to certain
limitations and conditions described in this prospectus supplement.
Moreover, under certain circumstances, the Master Servicer has the option
to sell mortgage loans 90 days or more delinquent to third parties at
prices less than their outstanding principal balances in accordance with
the servicing standard in the pooling agreement and as further described in
this prospectus supplement. These purchases will have the same effect on
the holders of the Offered Certificates as a prepayment of the mortgage
loans.
o The Master Servicer may purchase all of the mortgage loans when the
aggregate principal balance of the mortgage loans is equal to or less than
10% of the aggregate principal balance of the mortgage loans as of the
Cut-off Date.
o If the rate of default and the amount of losses on the mortgage loans is
higher than you expect, then your yield may be lower than you expect.
o As a result of the absorption of realized losses on the mortgage loans by
excess interest and overcollateralization as described herein and the
availability of the PMI Policies, liquidations of defaulted mortgage loans,
whether or not realized losses are incurred upon such liquidations, will
result in an earlier return of the principal of the Offered Certificates
and will influence the yield on the Offered Certificates in a manner
similar to the manner in which principal prepayments on the mortgage loans
will influence the yield on the Offered Certificates.
o The overcollateralization provisions are intended to result in an
accelerated rate of principal distributions to holders of the Offered
Certificates then entitled to principal distributions at any time that the
overcollateralization provided by the mortgage pool falls below the
required level.
SEE "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT FOR A DESCRIPTION OF FACTORS THAT MAY INFLUENCE THE RATE AND TIMING
OF PREPAYMENTS ON THE MORTGAGE LOANS.
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CONFLICTS OF INTEREST BETWEEN THE MASTER SERVICER AND THE TRUST
The Master Servicer will initially, directly or indirectly, own all or a
portion of the Class C Certificates, the Class P Certificates and the Residual
Certificates. The timing of mortgage loan foreclosures and sales of the related
mortgaged properties may affect the weighted average lives and yields of the
certificates.
Investors should consider that the timing of such foreclosures or sales may
not be in the best interests of all certificateholders and that no formal
policies or guidelines have been established to resolve or minimize such a
conflict of interest.
DELINQUENT MORTGAGE LOAN RISK
Approximately 0.92% of the mortgage loans (by aggregate principal balance
of the mortgage loans as of the Cut-off Date) were delinquent in their monthly
payments as of September 30, 2000. However, investors should realize that
approximately 5.30% of the mortgage loans (by aggregate principal balance of the
mortgage loans as of the Cut-off Date), have a first payment date occurring on
or after September 1, 2000 and therefore, such mortgage loans could not have
been delinquent with respect to any monthly payment due on or before September
30, 2000.
POTENTIAL INADEQUACY OF CREDIT ENHANCEMENT FOR THE OFFERED CERTIFICATES
The credit enhancement features described in the summary of this prospectus
supplement are intended to enhance the likelihood that holders of the Class A
Certificates, and to a limited extent, the holders of the Mezzanine
Certificates, will receive regular payments of interest and principal. However,
we cannot assure you that the applicable credit enhancement will adequately
cover any shortfalls in cash available to pay your certificates as a result of
delinquencies or defaults on the mortgage loans. If delinquencies or defaults
occur on the mortgage loans, neither the Master Servicer nor any other entity
will advance scheduled monthly payments of interest and principal on delinquent
or defaulted mortgage loans if such advances are not likely to be recovered.
If substantial losses occur as a result of defaults and delinquent payments
on the mortgage loans, you may suffer losses.
Furthermore, although loan-level primary mortgage insurance policies have
been acquired on behalf of the trust from the PMI Insurer with respect to
approximately 97.87% (by aggregate principal balance as of the Cut-off Date) of
those mortgage loans in the mortgage pool with original loan-to-value ratios
greater than 60%, such policies will provide only limited protection against
losses on defaulted mortgage loans.
INTEREST GENERATED BY THE MORTGAGE LOANS MAY BE INSUFFICIENT TO MAINTAIN
OVERCOLLATERALIZATION
The weighted average of the interest rates on the mortgage loans is
expected to be higher than the pass-through rates on the Offered Certificates.
The mortgage loans are expected to generate more interest than is needed to pay
interest owed on the Offered Certificates and to pay certain fees and expenses
of the trust. Any remaining interest generated by the mortgage loans will then
be used to absorb losses that occur on the mortgage loans. After these financial
obligations of the trust are covered, the available excess interest generated by
the mortgage loans will be used to maintain overcollateralization. We cannot
assure you, however, that enough excess interest will be generated to maintain
the required level of overcollateralization. The factors described below will
affect the amount of excess interest that the mortgage loans will generate:
o Every time a mortgage loan is prepaid in full, excess interest may be
reduced because the mortgage loan will no longer be outstanding and
generating interest or, in the case of a partial prepayment, will be
generating less interest.
o Every time a mortgage loan is liquidated or written off, excess interest
may be reduced because such mortgage loans will no longer be outstanding
and generating interest.
o If the rates of delinquencies, defaults or losses on the mortgage loans
turn out to be higher than expected, excess interest will be reduced by the
amount necessary to compensate for any shortfalls in cash available to make
required distributions on the Offered Certificates.
o The first adjustment of the rates for 0.15% of the mortgage loans (by
aggregate principal balance of the mortgage loans as of the Cut-off Date)
will not occur until one year after the date of origination, the first
adjustment of the rates for 90.77% of the mortgage loans (by aggregate
principal balance of the mortgage loans as of the Cut-off Date) will not
occur until two years after the date of origination and the first
adjustment of the rates for 8.99% of the mortgage loans
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(by aggregate principal balance of the mortgage loans as of the Cut-off
Date) will not occur until three years after the date of origination. As a
result, the pass-through rate on the Offered Certificates may increase
relative to interest rates on the mortgage loans, or may remain constant as
interest rates on the mortgage loans decline. In either case, this would
require that more of the interest generated by the mortgage loans be
applied to cover interest on the Offered Certificates.
EFFECT OF MORTGAGE LOAN RATES ON THE OFFERED CERTIFICATES
The Offered Certificates accrue interest at pass-through rates based on the
one-month LIBOR index plus specified margins, but are subject to a limit. The
limit on the pass-through rates on the Offered Certificates is based on the
weighted average of the interest rates on the mortgage loans in the mortgage
pool net of certain fees and expenses of the trust. These fees and expenses of
the trust will include servicing fees, trustee fees, premiums payable to the PMI
Insurer, fees of the Loss Mitigation Advisor and amounts retained by the trust
to pay contingent obligations of the trust to mortgagors under Dividend Mortgage
Loans as described under "The Mortgage Pool" in this prospectus supplement. The
mortgage rates on the mortgage loans are based on a six-month LIBOR index. All
of the mortgage loans have periodic and maximum limitations on adjustments to
their interest rates. As a result, the Offered Certificates may accrue less
interest than they would accrue if their pass-through rates were based solely on
the one-month LIBOR index plus the specified margins.
A variety of factors could limit the pass-through rates on the Offered
Certificates. Some of these factors are described below:
o The pass-through rates for the Offered Certificates adjust monthly while
the loan rates on the mortgage loans adjust less frequently. Consequently,
the cap on the Offered Certificates may limit increases in the pass-through
rates for extended periods in a rising interest rate environment.
o Six-month LIBOR may change at different times and in different amounts than
one-month LIBOR. As a result, it is possible that interest rates on certain
of the mortgage loans may decline while the interest rates on the Offered
Certificates is stable or rising. It is also possible that interest rates
on both the mortgage loans and the Offered Certificates may decline or
increase during the same period, but that the interest rates on these
certificates may decline more slowly or increase more rapidly.
o These factors may adversely affect the yields to maturity on the Offered
Certificates.
If the pass-through rates on the Offered Certificates are limited for any
distribution date, the resulting basis risk shortfalls may be recovered by the
holders of these certificates on a distribution date or future distribution
dates to the extent that on such distribution dates there are available funds
remaining after certain other distributions on the Offered Certificates and the
payment of certain fees and expenses of the trust.
RISKS ASSOCIATED WITH THE MEZZANINE CERTIFICATES
The weighted average lives of, and the yields to maturity on, the Class M-1
Certificates and the Class M-2 Certificates will be progressively more
sensitive, in increasing order of their numerical class designations, to the
rate and timing of mortgagor defaults and the severity of ensuing losses on the
mortgage loans. If the actual rate and severity of losses on the mortgage loans
is higher than those assumed by an investor in such certificates, the actual
yield to maturity of such certificates may be lower than the yield anticipated
by such holder based on such assumption. The timing of losses on the mortgage
loans will also affect an investor's actual yield to maturity, even if the rate
of defaults and severity of losses over the life of the mortgage pool are
consistent with an investor's expectations. In general, the earlier a loss
occurs, the greater the effect on an investor's yield to maturity. Realized
losses on the mortgage loans, to the extent they exceed the amount of
overcollateralization following distributions of principal on the related
distribution date, will reduce the certificate principal balance of the class of
Mezzanine Certificate then outstanding with the higher numerical class
designation. As a result of such reductions, less interest will accrue on such
class of Mezzanine Certificates than would otherwise be the case. Once a
realized loss is allocated to a Mezzanine Certificate, no principal or interest
will be distributable with respect to such written down amount. However, the
amount of any realized losses allocated to the Mezzanine Certificates may be
paid to the holders of the Mezzanine Certificates according to the priorities
set forth under "Description of the Certificates--Overcollateralization
Provisions" in this prospectus supplement.
Unless the certificate principal balance of the Class A Certificates has
been reduced to zero, the Mezzanine Certificates will not be entitled to any
principal distributions until at least November 2003 or a later date as provided
in this prospectus supplement or during any period in which delinquencies on the
mortgage loans exceed certain levels. As a result, the weighted average lives of
the Mezzanine Certificates will be longer than would otherwise be the case if
distributions of principal were
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allocated among all of the certificates at the same time. As a result of the
longer weighted average lives of the Mezzanine Certificates, the holders of such
certificates have a greater risk of suffering a loss on their investments.
Further, because such certificates might not receive any principal if certain
delinquency levels occur, it is possible for such certificates to receive no
principal distributions even if no losses have occurred on the mortgage pool.
The multiple class structure of the Mezzanine Certificates causes the yield
of such classes to be particularly sensitive to changes in the rates of
prepayment of the mortgage loans. Because distributions of principal will be
made to the holders of such certificates according to the priorities described
in this prospectus supplement, the yield to maturity on such classes of
certificates will be sensitive to the rates of prepayment on the mortgage loans
experienced both before and after the commencement of principal distributions on
such classes. The yield to maturity on such classes of certificates will also be
extremely sensitive to losses due to defaults on the mortgage loans (and the
timing thereof), to the extent such losses are not covered by excess interest,
the Class C Certificates or the class of Mezzanine Certificates with a higher
numerical class designation. Furthermore, as described in this prospectus
supplement, the timing of receipt of principal and interest by the Mezzanine
Certificates may be adversely affected by losses even if such classes of
certificates do not ultimately bear such loss.
PREPAYMENT INTEREST SHORTFALLS AND RELIEF ACT SHORTFALLS
When a mortgage loan is prepaid, the mortgagor 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 distribution date. The Master Servicer is
required to cover a portion of the shortfall in interest collections that are
attributable to prepayments, but only up to the amount of the Master Servicer's
servicing fee for the related calendar month. In addition, certain shortfalls in
interest collections arising from the application of the Soldiers' and Sailors'
Civil Relief Act of 1940 (the "Relief Act") will not be covered by the Master
Servicer.
On any distribution date, any shortfalls resulting from the application of
the Relief Act and any Prepayment Interest Shortfalls to the extent not covered
by Compensating Interest paid by the Master Servicer will be allocated, first,
to the interest distribution amount with respect to the Class C Certificates,
and thereafter, to the Monthly Interest Distributable Amounts with respect to
the Offered Certificates on a PRO RATA basis based on the respective amounts of
interest accrued on such certificates for such distribution date. THE HOLDERS OF
THE OFFERED CERTIFICATES WILL NOT BE ENTITLED TO REIMBURSEMENT FOR ANY SUCH
INTEREST SHORTFALLS. IF THESE SHORTFALLS ARE ALLOCATED TO THE OFFERED
CERTIFICATES THE AMOUNT OF INTEREST PAID TO THOSE CERTIFICATES WILL BE REDUCED,
ADVERSELY AFFECTING THE YIELD ON YOUR INVESTMENT.
REIMBURSEMENT OF ADVANCES BY THE MASTER SERVICER COULD DELAY DISTRIBUTIONS ON
THE CERTIFICATES
Under the pooling agreement, 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. The Master Servicer may make such advances from amounts held for
future distribution. In addition, the Master Servicer may withdraw from the
collection account funds that were not included in available funds for the
preceding distribution date to reimburse itself for advances previously made.
Any such amounts withdrawn by the Master Servicer in reimbursement of advances
previously made are generally required to be replaced by the Master Servicer on
or before the next distribution date, subject to subsequent withdrawal. To the
extent that the Master Servicer, or H&R Block, Inc. as guarantor of the Master
Servicer's obligations to make such replacements, is unable to replace any
amounts withdrawn in reimbursement of advances previously made, there could be a
delay in distributions on the Offered Certificates. Furthermore, the Master
Servicer's right to reimburse itself for advances previously made from funds
held for future distribution could lead to amounts required to be restored to
the collection account by the Master Servicer that are higher, and potentially
substantially higher, than one month's advance obligation.
DELAY IN RECEIPT OF LIQUIDATION PROCEEDS; LIQUIDATION PROCEEDS MAY BE LESS THAN
MORTGAGE LOAN BALANCE
Substantial delays could be encountered in connection with the liquidation
of delinquent mortgage loans. Further, reimbursement of advances made on a
mortgage loan, liquidation expenses such as legal fees, real estate taxes,
hazard insurance and maintenance and preservation expenses may reduce the
portion of liquidation proceeds payable to you. If a mortgaged property fails to
provide adequate security for the mortgage loan, you will incur a loss on your
investment if the credit enhancements are insufficient to cover the loss.
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HIGH LOAN-TO-VALUE RATIOS INCREASE RISK OF LOSS
Mortgage loans with higher loan-to-value ratios may present a greater risk
of loss than mortgage loans with loan-to-value ratios of 80% or below.
Approximately 13.57% of the mortgage loans (based on the aggregate principal
balance of the mortgage loans as of the Cut-off Date) had loan-to-value ratios
in excess of 80%, but no more than 92.70%, at origination. Additionally, the
Originator's determination of the value of a mortgaged property used in the
calculation of the loan-to-values ratios of the mortgage loans in the mortgage
pool may differ from the appraised value of such mortgaged properties. See
"First Franklin Financial Corporation--Underwriting Standards" herein.
GEOGRAPHIC CONCENTRATION
The following chart lists the states with the highest concentrations of
mortgage loans in excess of 5% for the mortgage pool, based on the aggregate
principal balance of the mortgage loans in the mortgage pool as of the Cut-off
Date.
California 36.74%
Illinois 5.87%
Texas 5.08%
Property in California may be particularly susceptible to certain types of
uninsurable hazards, such as earthquakes, floods, mudslides and other natural
disasters.
In addition, the conditions below will have a disproportionate impact on
the mortgage loans in general:
o Economic conditions in states listed above which may or may not affect real
property values may affect the ability of mortgagors to repay their loans
on time.
o Declines in the residential real estate markets in the states listed above
may reduce the values of properties located in those states, which would
result in an increase in the loan-to-value ratios.
o Any increase in the market value of properties located in the states listed
above would reduce the loan-to-value ratios and could, therefore, make
alternative sources of financing available to the mortgagors at lower
interest rates, which could result in an increased rate of prepayment of
the mortgage loans.
VIOLATION OF VARIOUS FEDERAL AND STATE LAWS MAY RESULT IN LOSSES ON THE MORTGAGE
LOANS
Applicable state laws generally regulate interest rates and other charges,
require certain disclosure, and require licensing of the Originator. In
addition, other state laws, public policy and general principles of equity
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 and Regulation Z promulgated thereunder,
which require certain disclosures to the mortgagors regarding the terms of
the mortgage loans;
o the Equal Credit 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
o 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 Master Servicer to collect all or part of the principal of or
interest on the mortgage loans and in addition could subject the trust to
damages and administrative enforcement. In particular, the Originator's failure
to comply with certain requirements of the Federal Truth-in-Lending Act, as
implemented by Regulation Z, could subject the trust (and other assignees of the
mortgage loans) to monetary penalties, and
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result in the obligors' rescinding the mortgage loans against either the trust
or subsequent holders of the mortgage loans. See "Certain Legal Aspects of the
Loans--Anti-Deficiency Legislation and Other Limitations on Lenders" in the
prospectus.
The Originator will represent that as of the closing date, each mortgage
loan originated by it is in compliance with applicable federal and state laws
and regulations. In the event of a breach of such representation, the Originator
will be obligated to cure such breach or repurchase or replace the affected
mortgage loan in the manner described under "The Pooling Agreement--Assignment
of the Mortgage Loans" in this prospectus supplement.
THE CERTIFICATES ARE OBLIGATIONS OF THE TRUST ONLY
The certificates will not represent an interest in or obligation of the
Depositor, the Master Servicer, the Originator, the Seller, the Trustee or any
of their respective affiliates. Neither the Offered Certificates nor the
underlying mortgage loans will be guaranteed or insured by any governmental
agency or instrumentality, or by the Depositor, the Master Servicer, the
Trustee, or any of their respective affiliates. Proceeds of the assets included
in the trust and proceeds from the reserve fund will be the sole source of
payments on the Offered Certificates, and there will be no recourse to the
Depositor, the Master Servicer, the Originator, the Seller, the Trustee or any
other entity in the event that such proceeds are insufficient or otherwise
unavailable to make all payments provided for under the Offered Certificates.
LACK OF LIQUIDITY
Greenwich Capital Markets, Inc. (the "Underwriter") intends to make a
secondary market in the classes of certificates actually purchased by it, but
has no obligation to do so. There is no assurance that such a secondary market
will develop or, if it develops, that it will continue. Consequently, you may
not be able to sell your certificates readily or at prices that will enable you
to realize your desired yield. The market values of the certificates are likely
to fluctuate; these fluctuations may be significant and could result in
significant losses to you.
The secondary markets for asset-backed securities have experienced periods
of illiquidity and can be expected to do so in the future. Illiquidity can have
a severely adverse effect on the prices of securities that are especially
sensitive to prepayment, credit, or interest rate risk, or that have been
structured to meet the investment requirements of limited categories of
investors.
NATURE OF THE MORTGAGE LOANS
Substantially all of the mortgage loans in the trust are loans that do not
meet the customary credit standards of Fannie Mae or Freddie Mac. As a result,
delinquencies and liquidation proceedings are more likely with these mortgage
loans than with mortgage loans that satisfy such credit standards. In the event
the mortgage loans in the mortgage pool do become delinquent or subject to
liquidation, you may face delays in receiving payment and losses if the credit
enhancements are insufficient to cover the delays and losses.
REDUCTION OR WITHDRAWAL OF RATINGS
Each rating agency rating the Offered Certificates may change or withdraw
its initial ratings at any time in the future if, in its judgment, circumstances
warrant a change. No person is obligated to maintain the ratings at their
initial levels. If a rating agency reduces or withdraws its rating on one or
more classes of the Offered Certificates, the liquidity and market value of the
affected certificates is likely to be reduced.
PROCEEDS OF THE SALE OF THE MORTGAGE LOANS
The Underwriter or an affiliate has been an investor in the mortgage loans
and will be entitled to a portion of the proceeds of the sale of the mortgage
loans by the Seller to the Depositor for inclusion by the Depositor in the
trust.
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THE MORTGAGE POOL
The information set forth in the following paragraphs has been provided by
the Originator and Option One. None of the Depositor, the Underwriter or the
Trustee or any of their respective affiliates have made or will make any
representation as to the accuracy or completeness of such information.
The statistical information presented in this prospectus supplement relates
to the mortgage loans only as of the Cut-off Date. 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 mortgage pool as of the Cut-off Date.
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 Originator and Option One believe
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
First Franklin Mortgage Loan Trust 2000-FF1 (the "Trust") will consist of a
pool (the "Mortgage Pool") of closed-end, first lien adjustable-rate mortgage
loans (the "Mortgage Loans"). The Mortgage Loans have original terms to maturity
of not greater than 30 years and an aggregate Principal Balance as of the
Cut-off Date of approximately $494,145,467. 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
received or advanced on or before such date (each, a "Cut-off Date Principal
Balance"). The "Principal Balance" of a Mortgage Loan, as of any date, is equal
to the principal balance of such Mortgage Loan at its origination, less the sum
of scheduled and unscheduled payments in respect of principal made on such
Mortgage Loan. References to percentages of the Mortgage Loans mean percentages
based on the aggregate of the Cut-off Date Principal Balances of the Mortgage
Loans, unless otherwise specified. The "Initial Pool Balance" is equal to the
aggregate Cut-off Date Principal Balances of the Mortgage Loans, plus or minus a
permitted variance of five percent. The "Pool Balance" is equal to the aggregate
Principal Balances of the Mortgage Loans as of any date of determination.
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 (as defined herein).
The Depositor will purchase the Mortgage Loans from the Seller pursuant to
the Mortgage Loan Purchase Agreement, dated as of October 13, 2000 (the
"Mortgage Loan Purchase Agreement"), among the Originator, the Seller, Option
One and the Depositor. Pursuant to the Pooling Agreement (as defined herein),
the Depositor will cause the Mortgage Loans and the Depositor's rights under the
Mortgage Loan Purchase Agreement to be assigned to the Trustee for the benefit
of the Certificateholders. See "The Pooling Agreement" herein and "The
Agreements" in the Prospectus.
Each of the Mortgage Loans in the Mortgage Pool was selected from the
Originator's portfolio of mortgage loans. 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 herein
under "First Franklin Financial Corporation--Underwriting Standards."
Under the Mortgage Loan Purchase Agreement, the Originator and Option One
will make certain representations and warranties to the Depositor relating to,
among other things, the due execution and enforceability of the Mortgage Loan
Purchase Agreement and certain characteristics of the Mortgage Loans and,
subject to certain limitations, will be obligated to repurchase or substitute a
similar mortgage loan for any Mortgage Loan as to which there exists deficient
documentation or an uncured breach of any such representation or warranty, if
such breach of any such representation or warranty materially and adversely
affects the Certificateholders' interests in such Mortgage Loan. The Seller is
selling the Mortgage Loans without recourse and will have no obligation with
respect to the Certificates in its capacity as Seller. The Originator will have
no obligation with respect to the Certificates in its capacity as Originator
other than the repurchase or substitution obligations described above. Option
One will have no obligation with respect to the Certificates in its capacity as
a party to the Mortgage Loan Purchase Agreement other than the repurchase or
substitution obligations described above.
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All of the Mortgage Loans in the Mortgage Pool have scheduled monthly
payments due on the first day of the month (with respect to each Mortgage Loan,
a "Due Date").
MORTGAGE LOAN STATISTICS
The Mortgage Loans consist of approximately 4,024 adjustable-rate mortgage
loans with an aggregate Cut-off Date Principal Balance of approximately
$494,145,467.
Approximately 95.87% of the Mortgage Loans provide for payment by the
mortgagor of a prepayment charge in limited circumstances on certain
prepayments. Generally, each such Mortgage Loan provides for payment of a
prepayment charge on partial prepayments and prepayments in full made within a
stated number of months that is between 12 and 48 months from the date of
origination of such Mortgage Loan. The amount of the prepayment charge is
provided in the related mortgage note and is generally equal to 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 charges 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 Agreement, the Master Servicer may waive the payment of any otherwise
applicable prepayment charge. Investors should conduct their own analysis of the
effect, if any, that the prepayment charges, 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 charges, and decisions by the Master Servicer
with respect to the waiver thereof, may have on the prepayment performance of
the Mortgage Loans.
The following statistical information, unless otherwise specified, is based
upon the Initial Pool Balance.
The Mortgage Loans are secured by mortgages or deeds of trust or other
similar security instruments (each, a "Mortgage") creating first liens on one-
to four-family residential properties consisting of detached, attached or
semi-detached one- to four-family dwelling units and individual condominium
units (each, a "Mortgaged Property"). Approximately 13.57% of the Mortgage Loans
had loan-to-value ratios at origination in excess of 80%. Approximately 0.01% of
the Mortgage Loans had loan-to-value ratios at origination greater than 90% but
no Mortgage Loan had a loan-to-value ratio at origination more than 92.70%.
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 value of such
mortgaged property or the actual value of such mortgaged property at
origination.
Generally, the Mortgage Loans provide for semi-annual adjustment to the
loan rate (the "Loan Rate") thereon and for corresponding adjustments to the
monthly payment amount due thereon, in each case on each adjustment date
applicable thereto (each such date, an "Adjustment Date"); provided, that the
first adjustment for such Mortgage Loans will occur after an initial period of
one year in the case of 0.15% of the Mortgage Loans, two years in the case of
90.77% of the Mortgage Loans and three years in the case of 8.99% of the
Mortgage Loans (each such Mortgage Loan, a "Delayed First Adjustment Mortgage
Loan"). 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 (as defined below) and a fixed percentage
amount (the "Gross Margin"). The Loan Rate on any such Mortgage Loan will not
decrease on the first related Adjustment Date, 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 (the "Initial Periodic Rate Cap") and
will not increase or decrease by more than 1.000% on any Adjustment Date
thereafter (the "Periodic Rate Cap"). The Mortgage Loans have a weighted average
Initial Periodic Rate Cap of approximately 2.997% per annum and a weighted
average Periodic Rate Cap of approximately 1.000% per annum thereafter. Each
Loan Rate on each such Mortgage Loan will not exceed a specified maximum Loan
Rate over the life of such Mortgage Loan (the "Maximum Loan Rate") or be less
than a specified minimum Loan Rate over the life of such Mortgage Loan (the
"Minimum Loan Rate"). The Mortgage Loans that are Delayed First Adjustment
Mortgage Loans have a weighted average Initial Periodic Rate Cap of
approximately 2.998% per annum and a weighted average Periodic Rate Cap of
approximately 1.000% per annum thereafter. 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 and the related Gross Margin, rounded as
described herein. See "--The Index" herein. None of the Mortgage Loans will
permit the related mortgagor to convert the adjustable Loan Rate thereon to a
fixed Loan Rate.
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Each Mortgage Loan accrues interest at a Loan Rate of not less than 7.500%
per annum and not more than 14.625% per annum and as of the Cut-off Date, the
weighted average Loan Rate of the Mortgage Loans was approximately 9.972% per
annum. As of the Cut-off Date, the Mortgage Loans had Gross Margins ranging from
3.375% per annum to 9.125% per annum, Minimum Loan Rates ranging from 7.500% per
annum to 14.625% per annum and Maximum Loan Rates ranging from 13.500% per annum
to 20.625% per annum. As of the Cut-off Date, the weighted average Gross Margin
of the Mortgage Loans was approximately 5.253% per annum, the weighted average
Minimum Loan Rate of the Mortgage Loans was approximately 9.972% per annum and
the weighted average Maximum Loan Rate of the Mortgage Loans was approximately
15.972% per annum. The latest next Adjustment Date following the Cut-off Date on
any Mortgage Loan occurs in August 2003 and the weighted average time until the
next Adjustment Date for all of the Mortgage Loans is approximately 21 months.
Approximately 12.71% of the Mortgage Loans (the "Dividend Mortgage Loans")
contain a provision entitling the mortgagor thereunder to annual refunds, at the
end of each of the first four years of the life of the related Mortgage Loan, of
a portion of the interest paid by such mortgagor during the preceding twelve
months, if the mortgagor is not currently delinquent and has not defaulted or
prepaid. Accordingly, the Master Servicer will retain, each month on behalf of
the Trust, interest on each Dividend Mortgage Loan at the Dividend Rate then
applicable for such Mortgage Loan, and such retained interest will not be
available for distribution to Certificateholders. All of the Dividend Mortgage
Loans are Delayed First Adjustment Mortgage Loans with first Adjustment Dates
scheduled to occur after an initial period of two or three years following the
date of origination. The per annum "Dividend Rate" for each Dividend Mortgage
Loan is as follows:
DIVIDEND RATES OF THE DELAYED FIRST ADJUSTMENT MORTGAGE LOANS
THAT ARE DIVIDEND MORTGAGE LOANS
Two Year Delayed Three Year Delayed
First Adjustment First Adjustment
Mortgage Loans Mortgage Loans
-------------- --------------
Year 1................... 0.25% 0.25%
Year 2................... 0.25% 0.25%
Year 3................... 1.00% 0.25%
Year 4................... 0.25% 1.00%
Year 5 and thereafter.... 0.00% 0.00%
The weighted average remaining term to maturity of the Mortgage Loans was
approximately 356 months as of the Cut-off Date. None of the Mortgage Loans had
a first Due Date prior to April 2000 or after September 2000 or has a remaining
term to maturity of less than 353 months or greater than 358 months as of the
Cut-off Date. The latest maturity date of any Mortgage Loan is August 2030.
The average Principal Balance of the Mortgage Loans at origination was
approximately $123,063. The average Cut-off Date Principal Balance of the
Mortgage Loans was approximately $122,800.
No Mortgage Loan had a Cut-off Date Principal Balance of greater than
approximately $598,414 or less than approximately $20,427. The Mortgage Loans
are expected to have the following characteristics as of the Cut-off Date (the
sum in any column may not equal the total indicated due to rounding):
S-16
<PAGE>
CUT-OFF DATE PRINCIPAL BALANCES OF THE MORTGAGE LOANS (1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
PRINCIPAL BALANCE($) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
-------------------- -------------- ------------------ ------------------
20,427 - 50,000... 349 $ 14,491,018.38 2.93%
50,001 - 100,000... 1,579 117,959,507.40 23.87
100,001 - 150,000... 1,070 130,065,756.58 26.32
150,001 - 200,000... 499 86,676,191.11 17.54
200,001 - 250,000... 255 56,828,095.92 11.50
250,001 - 300,000... 142 38,930,673.18 7.88
300,001 - 350,000... 59 19,109,843.18 3.87
350,001 - 400,000... 34 12,854,618.83 2.60
400,001 - 450,000... 21 9,050,524.32 1.83
450,001 - 500,000... 7 3,344,559.92 0.68
500,001 - 550,000... 7 3,675,537.18 0.74
550,001 - 598,414... 2 1,159,141.29 0.23
----- ---------------- -------
Total.......... 4,024 $ 494,145,467.29 100.00%
===== ================ =======
---------------
(1) The average Cut-off Date Principal Balance of the Mortgage Loans was
approximately $122,800.
S-17
<PAGE>
CREDIT BUREAU RISK SCORES FOR THE MORTGAGE LOANS(1)(2)
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
CREDIT BUREAU RISK SCORE MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------------------ -------------- ------------------ ------------------
<S> <C> <C> <C>
500-500................. 1 $ 124,885.45 0.03%
501-550................. 193 16,580,583.49 3.36
551-600................. 659 68,367,251.92 13.84
601-650................. 1,595 186,776,183.83 37.80
651-700................. 1,076 149,907,627.57 30.34
701-750................. 414 59,701,335.61 12.08
751-800................. 83 12,173,952.88 2.46
801-810................. 3 513,646.54 0.10
----- --------------- ------
Total.................. 4,024 $494,145,467.29 100.00%
===== ==============
--------------------
</TABLE>
(1) The weighted average Credit Bureau Risk Score of the Mortgage Loans was
approximately 646.
(2) Determined for each Mortgage Loan as described under "First Franklin
Financial Corporation--Underwriting Standards" in this prospectus
supplement.
ORIGINAL TERMS TO MATURITY OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL TERM (MONTHS) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------- -------------- ------------------ -----------------
360................... 4,024 $494,145,467.29 100.00%
----- --------------- ------
Total............. 4,024 $494,145,467.29 100.00%
===== =============== =======
--------------------
(1) The weighted average Original Term to Maturity of the Mortgage Loans was
approximately 360 months.
REMAINING TERMS TO MATURITY OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
REMAINING TERM (MONTHS) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------------- ------------------ -----------------
353 - 354.............. 207 $ 24,604,329.07 4.98%
355 - 356.............. 2,563 316,284,179.83 64.01
357 - 358.............. 1,254 153,256,958.39 31.01
----- ---------------- -------
Total............... 4,024 $ 494,145,467.29 100.00%
===== ================ =======
--------------------
(1) The weighted average Remaining Term to Maturity of the Mortgage Loans was
approximately 356 months.
S-18
<PAGE>
PROPERTY TYPES OF THE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------------- ------------------ -----------------
Single Family.......... 3,065 $363,129,297.39 73.49%
PUD(1)................. 555 86,827,859.05 17.57
2-4 Units.............. 191 22,431,524.33 4.54
Condominium............ 169 18,256,272.94 3.69
Manufactured Housing... 44 3,500,513.58 0.71
----- --------------- -------
Total......... 4,024 $494,145,467.29 100.00%
===== =============== =======
--------------------
(1) PUD refers to a home or "unit" in a Planned Unit Development.
OCCUPANCY STATUS OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------------- ------------------ -----------------
Primary................ 3,937 $487,383,712.07 98.63%
Non-owner.............. 87 6,761,755.22 1.37
----- --------------- ------
Total......... 4,024 $494,145,467.29 100.00%
===== =============== ======
--------------------
(1) Occupancy as represented by the mortgagor at the time of origination.
S-19
<PAGE>
PURPOSE OF THE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
PURPOSE MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------------- ------------------ -----------------
Purchase............... 3,184 $399,673,575.86 80.88%
Cash Out Refinance..... 675 75,567,512.21 15.29
Rate/Term Refinance.... 165 18,904,379.22 3.83
----- --------------- ------
Total......... 4,024 $494,145,467.29 100.00%
===== =============== ======
ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
ORIGINAL LOAN-TO-VALUE NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
RATIO(%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------------- ------------------ -----------------
16.67 - 20.00.......... 1 $ 29,943.06 0.01%
20.01 - 25.00.......... 2 129,733.60 0.03
25.01 - 30.00.......... 3 464,319.49 0.09
30.01 - 35.00.......... 6 1,136,412.29 0.23
35.01 - 40.00.......... 4 215,606.58 0.04
40.01 - 45.00.......... 10 893,851.23 0.18
45.01 - 50.00.......... 23 1,653,492.29 0.33
50.01 - 55.00.......... 15 1,334,837.76 0.27
55.01 - 60.00.......... 40 3,838,763.22 0.78
60.01 - 65.00.......... 100 9,431,344.23 1.91
65.01 - 70.00.......... 150 15,683,033.87 3.17
70.01 - 75.00.......... 375 42,245,682.16 8.55
75.01 - 80.00.......... 2,772 350,056,818.80 70.84
80.01 - 85.00.......... 218 24,828,628.90 5.02
85.01 - 90.00.......... 304 42,139,595.62 8.53
90.01 - 92.70.......... 1 63,404.19 0.01
----- --------------- -------
Total........... 4,024 $494,145,467.29 100.00%
===== =============== =======
------------------
(1) The weighted average original loan-to-value ratio of the Mortgage Loans as
of the Cut-off Date was approximately 79.33%.
S-20
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------------- ------------------ -----------------
Alabama................ 49 $ 3,875,830.70 0.78%
Arizona................ 102 11,644,358.37 2.36
Arkansas............... 2 120,176.14 0.02
California............. 961 181,560,598.64 36.74
Colorado............... 99 14,268,960.79 2.89
Connecticut............ 57 6,530,087.59 1.32
Delaware............... 4 387,793.30 0.08
District of Columbia... 5 1,054,872.60 0.21
Florida................ 212 20,700,927.28 4.19
Georgia................ 107 11,039,911.83 2.23
Idaho.................. 7 598,833.14 0.12
Illinois............... 268 29,015,826.47 5.87
Indiana................ 67 5,246,231.75 1.06
Iowa................... 35 2,614,247.10 0.53
Kansas................. 19 1,261,793.34 0.26
Kentucky............... 49 3,780,836.33 0.77
Louisiana.............. 13 1,417,646.47 0.29
Maine.................. 9 633,836.32 0.13
Maryland............... 59 8,827,944.46 1.79
Massachusetts.......... 81 10,503,158.83 2.13
Michigan............... 235 21,713,605.51 4.39
Minnesota.............. 48 4,419,510.82 0.89
Mississippi............ 4 262,018.21 0.05
Missouri............... 36 2,876,734.75 0.58
Montana................ 4 643,027.39 0.13
Nebraska............... 34 2,754,445.01 0.56
Nevada................. 50 6,274,562.12 1.27
New Hampshire.......... 34 3,668,516.65 0.74
New Jersey............. 51 6,090,802.12 1.23
New Mexico............. 19 2,453,022.94 0.50
New York............... 7 1,525,568.63 0.31
North Carolina......... 89 7,461,722.64 1.51
North Dakota........... 1 70,607.59 0.01
Ohio................... 293 23,701,211.33 4.80
Oklahoma............... 17 1,177,176.42 0.24
Oregon................. 194 22,779,889.63 4.61
Pennsylvania........... 30 2,211,034.28 0.45
Rhode Island........... 12 1,237,175.67 0.25
South Carolina......... 46 3,798,112.08 0.77
South Dakota........... 16 1,161,971.59 0.24
Tennessee.............. 64 5,145,283.72 1.04
Texas.................. 249 25,100,113.51 5.08
Utah................... 84 10,342,690.31 2.09
Vermont................ 16 1,231,680.91 0.25
Virginia............... 31 4,210,924.46 0.85
Washington............. 116 13,596,021.89 2.75
Wisconsin.............. 38 3,079,468.92 0.62
Wyoming................ 1 74,696.74 0.02
----- ------------- -------
TOTAL................... 4,024 $ 494,145,467.29 100.00%
===== ================= ========
-------------------
(1) THE GREATEST ZIP CODE GEOGRAPHIC CONCENTRATION OF MORTGAGE LOANS, BY
CUT-OFF DATE PRINCIPAL BALANCE, WAS APPROXIMATELY 0.41% IN THE 92656 ZIP
CODE.
S-21
<PAGE>
DOCUMENTATION LEVEL OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
DOCUMENTATION LEVEL MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------- -------------- ----------------- -----------------
Full Documentation .......... 3,601 439,158,343.25 $ 88.87%
No Income Verification ...... 315 39,976,816.75 8.09
Limited Income Verification . 108 15,010,307.29 3.04
4,024 $ 494,145,467.29 100.00%
Total .............. ======= ================ ======
--------------------
(1) For a description of each Documentation Level, see "First Franklin
Financial Corporation--Underwriting Standards" herein.
<TABLE>
<CAPTION>
CURRENT LOAN RATES OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
CURRENT LOAN RATE (%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------------------ -------------- ------------------ -----------------
<S> <C> <C> <C>
7.500 - 8.000 ........ 3 $ 383,558.00 0.08%
8.001 - 9.000 ........ 382 55,747,379.66 11.28
9.001 - 10.000 ....... 1,886 254,160,984.33 51.43
10.001 - 11.000 ....... 1,193 132,172,392.05 26.75
11.001 - 12.000 ....... 413 40,383,897.10 8.17
12.001 - 13.000 ....... 108 8,563,819.51 1.73
13.001 - 14.000 ....... 30 2,153,445.80 0.44
14.001 - 14.625 ....... 9 579,990.84 0.12
----- -------------- ------
4,024 $ 494,145,467.29 100.00%
Total ........ ====== ================== ======
</TABLE>
------------------
(1) The weighted average Loan Rate of the Mortgage Loans as of the Cut-off Date
was approximately 9.972% per annum.
S-22
<PAGE>
MAXIMUM LOAN RATES OF THE MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
MAXIMUM LOAN RATE (%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------- -------------- ------------------ -----------------
<S> <C> <C> <C>
13.500 - 14.000 ....... 3 $ 383,558.00 0.08%
14.001 - 15.000 ....... 382 55,747,379.66 11.28
15.001 - 16.000 ....... 1,886 254,160,984.33 51.43
16.001 - 17.000 ....... 1,193 132,172,392.05 26.75
17.001 - 18.000 ....... 413 40,383,897.10 8.17
18.001 - 19.000 ....... 108 8,563,819.51 1.73
19.001 - 20.000 ....... 30 2,153,445.80 0.44
20.001 - 20.625 ....... 9 579,990.84 0.12
----- ------------------ ------
Total ........ 4,024 $ 494,145,467.29 100.00%
===== ================== =======
</TABLE>
------------------
(1) The weighted average Maximum Loan Rate of the Mortgage Loans as of the
Cut-off Date was approximately 15.972% per annum.
MINIMUM LOAN RATES OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
MINIMUM LOAN RATE (%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------- -------------- ----------------- -----------------
7.500 - 8.000....... 3 $ 383,558.00 0.08%
8.001 - 9.000....... 382 55,747,379.66 11.28
9.001 - 10.000....... 1,886 254,160,984.33 51.43
10.001 - 11.000....... 1,193 132,172,392.05 26.75
11.001 - 12.000....... 413 40,383,897.10 8.17
12.001 - 13.000....... 108 8,563,819.51 1.73
13.001 - 14.000....... 30 2,153,445.80 0.44
14.001 - 14.625....... 9 579,990.84 0.12
------ -------------- ------
Total.......... 4,024 $494,145,467.29 100.00%
====== =============== =======
--------------------
(1) The weighted average Minimum Loan Rate of the Mortgage Loans as of the
Cut-off Date was approximately 9.972% per annum.
S-23
<PAGE>
GROSS MARGINS OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
GROSS MARGIN (%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------------- ------------- ------------------ -----------------
3.375 - 4.000...... 177 $27,018,223.61 5.47%
4.001 - 5.000...... 1,647 228,808,923.51 46.30
5.001 - 6.000...... 1,231 141,606,998.81 28.66
6.001 - 7.000...... 698 72,241,139.05 14.62
7.001 - 8.000...... 217 20,145,388.97 4.08
8.001 - 9.000...... 53 4,285,824.84 0.87
9.001 - 9.125...... 1 38,968.50 0.01
----- -------------- ------
Total...... 4,024 $494,145,467.29 100.00%
===== =============== ======
------------------
(1) The weighted average Gross Margin of the Mortgage Loans as of the Cut-off
Date was approximately 5.253% per annum.
NEXT ADJUSTMENT DATES FOR THE MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
NEXT ADJUSTMENT DATE MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
-------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
11/01/00 ........... 2 $ 275,672.75 0.06%
12/01/00 ........... 1 181,603.35 0.04
04/01/01 ........... 2 190,687.12 0.04
06/01/01 ........... 1 240,351.72 0.05
07/01/01 ........... 2 314,148.92 0.06
03/01/02 ........... 2 97,538.33 0.02
04/01/02 ........... 187 22,155,010.42 4.48
05/01/02 ........... 1,190 141,843,910.50 28.70
06/01/02 ........... 1,138 139,037,080.19 28.14
07/01/02 ........... 973 120,074,868.12 24.30
08/01/02 ........... 207 25,318,501.90 5.12
03/01/03 ........... 1 54,862.64 0.01
04/01/03 ........... 15 2,106,230.56 0.43
05/01/03 ........... 134 21,921,343.34 4.44
06/01/03 ........... 97 12,784,217.98 2.59
07/01/03 ........... 62 6,673,925.96 1.35
08/01/03 ........... 10 875,513.49 0.18
----- ---------------- ------
Total ......... 4,024 $ 494,145,467.29 100.00%
===== ================ ======
</TABLE>
S-24
<PAGE>
INITIAL PERIODIC RATE CAPS OF THE MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
INITIAL PERIODIC RATE CAP NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
(%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------------------ -------------- ------------------ ------------------
<S> <C> <C> <C>
1.000 ................... 3 $ 457,276.10 0.09%
2.000 ................... 5 745,187.76 0.15
3.000 ................... 4,016 492,943,003.43 99.76
----- ------------------ ------
Total ........... 4,024 $ 494,145,467.29 100.00%
===== ================== ======
</TABLE>
------------------
(1) Relates solely to initial rate adjustments.
SUBSEQUENT PERIODIC RATE CAPS OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
PERIODIC RATE CAP (%) MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------------------ -------------- ----------------- -----------------
1.000................... 4,024 $ 494,145,467.29 100.00%
-------- ----------------- -------
Total......... 4,024 $ 494,145,467.29 100.00%
======== ================= ======
------------------
(1) Relates to all rate adjustments subsequent to initial rate adjustments.
THE INDEX
The index with respect to the Mortgage Loans is the average of
interbank offered rates for six-month U.S. dollar deposits in the London market
based on quotations of major banks, and most recently available as of a day
specified in the related note as published by the Western Edition of THE WALL
STREET JOURNAL ("Six Month LIBOR" or the "Index"). If the Index becomes
unpublished or is otherwise unavailable, the Master Servicer will select an
alternative index which is based upon comparable information.
FIRST FRANKLIN FINANCIAL CORPORATION
GENERAL
First Franklin Financial Corporation (the "Originator") is a Delaware
corporation headquartered in San Jose, California. The information set forth in
the following paragraphs has been provided by the Originator, and none of the
Depositor, the Master Servicer, the Seller, the Trustee, the Underwriter or any
other party makes any representation as to the accuracy or completeness of such
information.
The Originator is a direct, wholly-owned subsidiary of National City
Bank of Indiana ("NCBA"). NCBA is a wholly-owned subsidiary of National City
Corporation. At July 31, 2000, the Originator had approximately $668.5 million
in assets, approximately $358.8 million in liabilities and approximately $309.8
million in equity.
S-25
<PAGE>
The Originator is a HUD-approved mortgagee and an approved
seller/servicer by both Fannie Mae and Freddie Mac. It currently operates twenty
four wholesale branches and one retail branch in the United States including
offices in Atlanta, Georgia; Baltimore, Maryland; Bellevue, Washington; Boston,
Massachusetts; Chicago, Illinois; Cincinnati, Ohio; Denver, Colorado; Detroit,
Michigan; Ft. Lauderdale, Florida; Dallas, Houston, Texas; Las Vegas, Nevada;
Orlando, Florida; Portland, Oregon; Phoenix, Arizona; Salt Lake City, Utah and
Irvine, Laguna Hills, San Bernardino, San Diego, San Jose, Studio City, Walnut
Creek and Westlake Village, California. The Originator's primary source of
originations is through mortgage brokerage companies.
Founded in 1981, the Originator has grown from a small mortgage broker
to a full-service mortgage lender with a wide variety of products. During the
late 1980's and early 1990's, the Originator focused primarily on originating
and purchasing Agency mortgage loans. Agency origination volume peaked in 1993
at over $3.5 billion.
In 1994, the Originator embarked on a transformation to a full service
"A" through "D" credit lender. Since that time, Agency mortgage loan origination
volume has declined significantly as activities have been focused on originating
and acquiring non-Agency mortgage loans. For all of 1999, originations totaled
more than $79.8 million and $4.5 billion of retail and wholesale non-Agency
mortgage loans, respectively.
UNDERWRITING STANDARDS
All of the Mortgage Loans were originated or acquired by the
Originator, generally in accordance with the underwriting criteria described
herein. The information set forth in the following paragraphs has been provided
by the Originator, and none of the Depositor, the Master Servicer, the Seller,
the Trustee, the Underwriter or any other party makes any representation as to
the accuracy or completeness of such information.
The Originator's underwriting standards are primarily intended to
assess the ability and willingness of the borrower to repay the debt and to
evaluate the adequacy of the mortgaged property as collateral for the mortgage
loan. All of the Mortgage Loans were underwritten with a view toward the resale
thereof in the secondary mortgage market. The Originator considers, among other
things, a mortgagor's credit history, repayment ability and debt
service-to-income ratio ("Debt Ratio"), as well as the value, type and use of
the mortgaged property. The Mortgage Loans generally bear higher rates of
interest than mortgage loans that are originated in accordance with Fannie Mae
and Freddie Mac standards, and may experience rates of delinquencies and
foreclosures that are higher, and that may be substantially higher, than those
experienced by portfolios of mortgage loans underwritten in a more traditional
manner. Unless prohibited by state law or otherwise waived by the Originator
upon the payment by the related mortgagor of higher origination fees and a
higher Loan Rate, a majority of the Mortgage Loans provide for the payment by
the mortgagor of a prepayment charge on certain full or partial prepayments made
within one year, two years, three years or four years from the date of
origination of the related Mortgage Loan as described under "The Mortgage
Pool--Mortgage Loan Statistics" above. The amount of the prepayment charge is as
provided in the related Mortgage Note but is generally equal to six month's
interest on any amounts prepaid in excess of 20% of the original principal
balance of the related Mortgage Loan.
Substantially all of the mortgage loans originated by the Originator
are based on loan application packages submitted through mortgage brokerage
companies. These brokers must meet minimum standards set by the Originator based
on an analysis of the following information submitted with an application for
approval: resumes of the principals, company financial statements, applicable
state lending license (in good standing) and satisfactory credit report. Once
approved, mortgage brokerage companies are eligible to submit loan application
packages in compliance with the terms of a signed broker agreement.
The Originator has one underwriting program called the Direct Access
Program. Within the Direct Access Program, there are four documentation
programs, the Full Documentation Program, the Limited Income Verification
Program (the "LIV"), the No Income Verification Program (the "NIV") and the
Alternative Income Verification Program (the "AIV"). All of the Mortgage Loans
were originated in accordance with the Originator's Direct Access Program. While
each underwriting program is intended to assess the risk of default, the Direct
Access Program makes use of credit bureau risk scores (the "Credit Bureau Risk
Score"). The Credit Bureau Risk Score is a statistical ranking of likely future
credit performance developed by Fair, Isaac & Company ("Fair, Isaac") and the
three national credit repositories--Equifax, Trans Union and First American
(formerly Experian which was formerly TRW). The Credit Bureau Risk Scores
available from the three national credit repositories are calculated by the
assignment of weightings to the most predictive data collected by the credit
repositories and range from the 300's to the 900's. Although the Credit Bureau
Risk Scores are based solely on the information at the particular credit
repository, such Credit Bureau Risk Scores have been calibrated to indicate the
same level
S-26
<PAGE>
of credit risk regardless of which credit repository is used. The Credit Bureau
Risk Score is used as an aid to, not a substitute for, the underwriter's
judgment.
The Direct Access Program was developed to simplify the origination
process for the mortgage brokerage companies approved by the Originator. In
contrast to assignment of credit grades according to traditional Non-Agency
credit assessment methods, i.e., mortgage and other credit delinquencies, Direct
Access relies upon a borrower's Credit Bureau Risk Score initially to determine
a borrower's likely future credit performance. Mortgage brokerage companies are
able to access Credit Bureau Risk Scores at the initial phases of the loan
application process and use the score to determine a borrower's interest rate
based upon the Originator's Direct Access Program risk-based pricing matrix
(subject to final loan approval by the Originator).
Under the Direct Access Program, the Originator requires that the
Credit Bureau Risk Score of the primary borrower (the borrower with at least 60%
of total income) be used to determine program eligibility. Credit Bureau Risk
Scores must be obtained from at least two national credit repositories, with the
lower of the two scores being utilized in program eligibility determination. If
Credit Bureau Risk Scores are obtained from three credit repositories, the
middle of the three scores can be utilized. In all cases, a borrower's complete
credit history must be detailed in the credit report that produces a given
Credit Bureau Risk Score or the borrower is not eligible for the Direct Access
Program. Generally, the minimum Credit Bureau Risk Score allowed under the
Direct Access Program is 500.
The Credit Bureau Risk Score, along with loan-to-value ratio, is an
important tool in assessing the creditworthiness of a Direct Access borrower.
However, these two factors are not the only considerations in underwriting a
Direct Access loan. The Originator's underwriting staff fully reviews each
Direct Access loan to determine whether the Originator's guidelines for income,
assets, employment and collateral are met.
All of the Mortgage Loans were underwritten by the Originator's
underwriters having the appropriate signature authority. Each underwriter is
granted a level of authority commensurate with their proven judgment, maturity
and credit skills. On a case by case basis, the Originator may determine that,
based upon compensating factors, a prospective mortgagor not strictly qualifying
under the underwriting risk category guidelines described below warrants an
underwriting exception.
Compensating factors may include, but are not limited to, low loan-to-value
ratio, low Debt Ratio, substantial liquid assets, good credit history, stable
employment and time in residence at the applicant's current address. It is
expected that a substantial portion of the Mortgage Loans may represent such
underwriting exceptions.
The Originator's underwriters verify the income of each applicant under
various documentation programs as follows: under the Full Documentation Program,
applicants are generally required to submit verification of stable income for
the periods of six months to two years preceding the application dependent on
credit score range; under the LIV Program, the borrower is qualified based on
the income stated on the application and applicants are generally required to
submit verification of adequate cash flow to meet credit obligations for the 6
month period preceding the application; under the NIV Program, applicants are
qualified based on monthly income as stated on the mortgage application; and
under the AIV Program, salaried borrowers are qualified based on a verbal
verification of income stated on the mortgage application. For Direct Access
loans with a credit score greater than or equal to 600, bank statements (for 12
to 24 months) are acceptable as full documentation. For Direct Access loans with
credit scores greater than or equal to 640, six months bank statements are
acceptable as full documentation. In all cases, the income stated must be
reasonable and customary for the applicant's line of work. Although the income
is not verified under the LIV and NIV Programs, a preclosing audit generally
will confirm that the business exists. Verification may be made through phone
contact to the place of business, obtaining a valid business license or through
Dun and Bradstreet Information Services.
The applicant generally must have a sufficiently established credit
history to qualify for the appropriate Credit Bureau Risk Score range under the
Direct Access Program. This credit history is substantiated by a two repository
merged report prepared by an independent credit report agency. The report
typically summarizes the applicant's entire credit history, and generally
includes a seven year public record search for each address where the applicant
has lived during the two years prior to the issuance of the credit report and
contains information relating to such matters as credit history with local and
national merchants and lenders, installment debt payments and any record of
defaults, bankruptcy, repossession, suits or judgments. In some instances,
borrowers with a minimal credit history are eligible for financing under the
Direct Access Program.
The Originator originates loans secured by 1-4 unit residential
properties made to eligible borrowers with a vested fee simple (or in some cases
a leasehold) interest in the property. The Originator's guidelines are applied
in accordance with a procedure which complies with applicable federal and state
laws and regulations and generally require an appraisal of the
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mortgaged property which conforms to Freddie Mac and/or Fannie Mae standards;
and if appropriate, a review appraisal. Generally, appraisals are provided by
appraisers approved by the Originator. Review appraisals may only be provided by
appraisers approved by the Originator. In some cases, the Originator relies on a
statistical appraisal methodology provided by a third party.
Qualified independent appraisers must meet minimum standards of
licensing and provide errors and omissions insurance in most states to become
approved to do business with the Originator. Each Uniform Residential Appraisal
Report includes a market data analysis based on recent sales of comparable homes
in the area and, where deemed appropriate, replacement cost analysis based on
the current cost of constructing a similar home. The review appraisal may be a
desk, field review or an automated valuation report that confirms or supports
the original appraiser's value of the mortgaged premises.
The Originator requires title insurance on all mortgage loans secured
by liens on real property. The Originator also requires that fire and extended
coverage casualty insurance be maintained on the secured property in an amount
at least equal to the principal balance of the related residential loan or the
replacement cost of the property, whichever is less.
The Originator conducts a number of quality control procedures,
including a post-funding compliance audit as well as a full re-underwriting of a
random selection of loans to assure asset quality. Under the compliance audit,
all loans are reviewed to verify credit grading, documentation compliance and
data accuracy. Under the asset quality procedure, a random selection of each
month's originations is reviewed. The loan review confirms the existence and
accuracy of legal documents, credit documentation, appraisal analysis and
underwriting decision. A report detailing audit findings and level of error is
sent monthly to each branch for response. The audit findings and branch
responses are then reviewed by the Originator's senior management. Adverse
findings are tracked monthly and over a rolling six month period. This review
procedure allows the Originator to assess programs for potential guideline
changes, program enhancements, appraisal policies, areas of risk to be reduced
or eliminated and the need for additional staff training.
Under the mortgage loan programs, various risk categories are used to
grade the likelihood that the applicant will satisfy the repayment conditions of
the loan. These risk categories establish the maximum permitted loan-to-value
ratio and loan amount, given the occupancy status of the mortgaged property and
the applicant's credit history and Debt Ratio. In general, higher credit risk
mortgage loans are graded in categories which permit higher Debt Ratios and more
(or more recent) major derogatory credit items such as outstanding judgments or
prior bankruptcies; however these loan programs establish lower maximum
loan-to-value ratios and lower maximum loan amounts for loans graded in such
categories.
"Equity Refinance" transactions are defined as those instances where
the borrower receives the lesser of 1% of the new loan amount or $1,000
cash-in-hand. Funds used for debt consolidation are not included in this amount.
The Originator's guidelines under the Direct Access Program generally
have the following criteria for borrower eligibility for the specified Credit
Bureau Risk Score range.
"600 and higher": No liens or judgments affecting title may remain
open after the funding of the loan. Collections, charge-offs, or judgments not
affecting title with individual balances greater than $1,000 must be paid prior
to loan closing unless the time elapsed since the collection, charge-off, or
judgment is greater than two years. The maximum loan-to-value ratio of 90% is
permitted for owner occupied single family (1-2 units) property. The maximum
loan-to-value ratio generally is reduced by 5% on a mortgaged property
consisting of 3-4 units. Loan-to-value ratios for non-owner occupied properties
and second homes are limited to 80%. The Debt Ratio generally may not exceed 50%
for 600-639 credit scores, and 60% for (greater than) 640. Debt ratios greater
than 55% generally require a predetermined minimum monthly gross income.
"570-599": No liens or judgments affecting title may remain open after
the funding of the loan. Collections, charge-offs, or judgments not affecting
title with individual balances greater than $1,500 must be paid prior to loan
closing unless the time elapsed since the collection, charge-off, or judgment is
greater than two years. A maximum loan-to-value ratio of 85% is permitted for a
purchase, rate/term, debt consolidation or cash-out transaction. The maximum
loan-to-value ratio generally is reduced by 5% on a mortgaged property
consisting of 3-4 units. Properties with rural characteristics may be subject to
further loan-to-value ratio reduction. Loan-to-value ratios for non-owner
occupied properties and second homes are limited to 75%. Generally, the Debt
Ratio may not exceed 55%.
"540-569": No liens or judgments affecting title may remain open after
the funding of the loan. Collections, charge-offs, or judgments not affecting
title with individual balances greater than $2,500 must be paid prior to loan
closing unless the time elapsed since the collection, charge-off, or judgment is
greater than two years. A maximum loan-to-value ratio of 80% is permitted for a
purchase, rate/term, debt consolidation or cash-out transaction. Properties with
rural
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<PAGE>
characteristics may be subject to further loan-to-value ratio reduction.
Loan-to-value ratios for non-owner occupied properties and second homes are
limited to 70%. The Debt Ratio must be 60% or less. Debt ratios greater than 55%
generally require a predetermined minimum monthly gross income.
"500-539": No liens or judgment affecting title may remain open after
the funding of the loan. A maximum loan- to-value ratio of 75% is permitted for
purchase, rate/term, debt consolidation or cash out transaction for borrowers
whose credit score falls within 520-539; a maximum loan-to-value ratio of 70%
for 500-519. Non-owner occupied and second home not eligible. The Debt Ratio
must be 60% or less. Debt ratios greater than 55% generally require a
predetermined minimum monthly gross income.
For all of the above, collections, charge-offs, judgments and liens not
affecting title may remain open for loan-to- value ratios less than or equal to
75%. For Credit Bureau Risk Scores greater than or equal to 570, bank statements
are considered the same as full documentation for salaried and self-employed
borrowers. Twelve (12) months personal or business statements are required to
90% loan-to-value ratio.
The Originator will make representations and warranties with respect to
the Mortgage Loans as of the date the Mortgage Loans are sold by the Seller to
the Depositor. The Originator will be obligated to repurchase or substitute for
Mortgage Loans in respect of which a material breach of the representations and
warranties it has made has occurred (other than those breaches which have been
cured).
THE SELLER
The Seller of the Mortgage Loans is Option One Owner Trust 2000-1, a
Delaware business trust formed on or about April 7, 2000 pursuant to a Trust
Agreement dated as of April 1, 2000 between Option One Loan Warehouse
Corporation and Wilmington Trust Company as owner trustee. The Seller previously
acquired the Mortgage Loans from Option One and is beneficially owned by, but
not controlled by, Option One.
THE POOLING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement, dated as of October 1, 2000 (the "Pooling Agreement"), among the
Depositor, the Master Servicer and the Trustee. The Trust created under the
Pooling Agreement will consist of (i) all of the Depositor's right, title and
interest in the Mortgage Loans, the related mortgage notes, mortgages and other
related documents, (ii) all payments on or collections in respect of the
Mortgage Loans due after the Cut-off Date, together with any proceeds thereof,
(iii) any Mortgaged Properties acquired on behalf of Certificateholders by
foreclosure or by deed in lieu of foreclosure, and any revenues received
thereon, (iv) the rights of the Trustee under all insurance policies, including
the PMI Policies, required to be maintained pursuant to the Pooling Agreement,
(v) the Reserve Fund and (vi) the rights of the Depositor under the Mortgage
Loan Purchase Agreement among the Depositor, the Originator, Option One and the
Seller, including the rights of the Depositor under the guaranty by National
City Corporation of the Originator's obligations under the Mortgage Loan
Purchase Agreement.
ASSIGNMENT OF THE MORTGAGE LOANS
On the Closing Date, the Depositor will transfer to the Trust all of
its right, title and interest in and to each Mortgage Loan, the related mortgage
note, mortgage, assignment of mortgage in recordable form in blank or to the
Trustee and other related documents (collectively, the "Related Documents"),
including all scheduled payments with respect to each such Mortgage Loan due
after the Cut-off Date. The Trustee, concurrently with such transfer, will
deliver the Certificates to the Depositor. Each Mortgage Loan transferred to the
Trust will be identified on a schedule (the "Mortgage Loan Schedule") delivered
to the Trustee pursuant to the Pooling Agreement. Such schedule will include
information such as the Principal Balance of each Mortgage Loan as of the
Cut-off Date, its Loan Rate as well as other information.
The Pooling Agreement will require that, within the time period
specified therein, the Depositor will deliver or cause to be delivered to the
Trustee (or a custodian, as the Trustee's agent for such purpose) the mortgage
notes endorsed to the Trustee on behalf of the Certificateholders and the
Related Documents. In lieu of delivery of original mortgages or mortgage notes,
if such original is not available or lost, the Depositor may deliver or cause to
be delivered true and correct
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<PAGE>
copies thereof, or, with respect to a lost mortgage note, a lost note affidavit
executed by the Originator. The assignments of mortgage are required to be
recorded by or on behalf of the Depositor in the appropriate offices for real
property records.
On or prior to the Closing Date, the Trustee will review the Mortgage
Loans and the Related Documents pursuant to the Pooling Agreement and if any
Mortgage Loan or Related Document is found to be defective in any material
respect and such defect is not cured within 90 days following notification
thereof to the Originator by the Trustee, the Originator will be obligated to
either (i) substitute for such Mortgage Loan a Qualified Substitute Mortgage
Loan; however, such substitution is permitted only within two years of the
Closing Date and may not be made unless an opinion of counsel is provided to the
effect that such substitution will not disqualify any of the REMICs (as defined
in the Pooling Agreement) as a REMIC or result in a prohibited transaction tax
under the Code or (ii) purchase such Mortgage Loan at a price (the "Purchase
Price") equal to the outstanding Principal Balance of such Mortgage Loan as of
the date of purchase, plus all accrued and unpaid interest thereon, computed at
the Loan Rate through the end of the calendar month in which the purchase is
effected, plus the amount of any unreimbursed Advances and Servicing Advances
(each as defined herein) made by the Master Servicer. The Purchase Price will be
required to be remitted to the Master Servicer for deposit in the Collection
Account (as defined herein) on or prior to the next succeeding Determination
Date (as defined herein) after such obligation arises. The obligation of the
Originator to repurchase or substitute for a Deleted Mortgage Loan (as defined
herein) is the sole remedy regarding any defects in the Mortgage Loans and
Related Documents available to the Trustee or the Certificateholders.
In connection with the substitution of a Qualified Substitute Mortgage
Loan, the Originator will be required to deposit in the Collection Account on or
prior to the next succeeding Determination Date after such obligation arises an
amount (the "Substitution Adjustment") equal to the excess of the Principal
Balance of the related Deleted Mortgage Loan over the Principal Balance of such
Qualified Substitute Mortgage Loan.
A "Qualified Substitute Mortgage Loan" is a mortgage loan substituted
by the Originator or Option One for a Deleted Mortgage Loan which must, on the
date of such substitution, (i) have an outstanding Principal Balance (or in the
case of a substitution of more than one Mortgage Loan for a Deleted Mortgage
Loan, an aggregate Principal Balance), not in excess of, and not more than 5%
less than, the Principal Balance of the Deleted Mortgage Loan; (ii) have a Loan
Rate not less than the Loan Rate of the Deleted Mortgage Loan and not more than
1% in excess of the Loan Rate of such Deleted Mortgage Loan; (iii) have a
Maximum Loan Rate and Minimum Loan Rate not less than the respective rate for
the Deleted Mortgage Loan and have a Gross Margin equal to or greater than the
Deleted Mortgage Loan, have the same Adjustment Date frequency as the Deleted
Mortgage Loan and have a Dividend Rate, if applicable, equal to or less than
that of the Deleted Mortgage Loan; (iv) have the same Due Date as the Deleted
Mortgage Loan; (v) have a remaining term to maturity not more than one year
earlier and not later than the remaining term to maturity of the Deleted
Mortgage Loan; (vi) comply with each representation and warranty as to the
Mortgage Loans set forth in the Mortgage Loan Purchase Agreement (deemed to be
made as of the date of substitution); (vii) have been underwritten or
reunderwritten by the Originator in accordance with the same underwriting
criteria and guidelines as the Mortgage Loans being replaced; (viii) be of the
same or better credit quality as the Mortgage Loan being replaced and (ix)
satisfy certain other conditions specified in the Pooling Agreement.
The Originator and Option One will make certain representations and
warranties as to the accuracy in all material respects of certain information
furnished to the Trustee with respect to each Mortgage Loan (e.g., the Loan
Rate). In addition, the Originator will represent and warrant, on the Closing
Date, that, among other things: (i) at the time of transfer to the Seller, the
Originator transferred or assigned all of its right, title and interest in each
Mortgage Loan and the Related Documents, free of any lien and (ii) each Mortgage
Loan complied, at the time of origination, in all material respects with
applicable state and federal laws. Upon discovery of a breach of any such
representation and warranty which materially and adversely affects the interests
of the Certificateholders in the related Mortgage Loan and Related Documents,
the Originator or Option One, as applicable, will have a period of 90 days after
discovery or notice of the breach to effect a cure. If the breach cannot be
cured within the 90-day period, the Originator or Option One, as applicable,
will be obligated to (i) substitute for such Deleted Mortgage Loan a Qualified
Substitute Mortgage Loan or (ii) purchase such Deleted Mortgage Loan from the
Trust. The same procedure and limitations that are set forth above for the
substitution or purchase of Deleted Mortgage Loans as a result of deficient
documentation relating thereto will apply to the substitution or purchase of a
Deleted Mortgage Loan as a result of a breach of a representation or warranty in
the Mortgage Loan Purchase Agreement that materially and adversely affects the
interests of the Certificateholders.
Mortgage Loans required to be transferred to the Originator or Option
One as described in the preceding paragraphs are referred to as "Deleted
Mortgage Loans."
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<PAGE>
Pursuant to the Pooling Agreement, the Master Servicer will service and
administer the Mortgage Loans as more fully set forth therein.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Master Servicer shall establish and maintain or cause to be
maintained a separate trust account (the "Collection Account") for the benefit
of the Certificateholders. The Collection Account will be an Eligible Account
(as defined in the Pooling Agreement). Upon receipt by the Master Servicer of
amounts in respect of the Mortgage Loans (excluding amounts representing the
Servicing Fee or other servicing compensation, reimbursement for Advances and
Servicing Advances) and insurance proceeds to be applied to the restoration or
repair of a Mortgaged Property or similar items, the Master Servicer will
deposit such amounts in the Collection Account. Amounts so deposited may be
invested in Permitted Investments (as described in the Pooling Agreement)
maturing no later than one Business Day prior to the date on which the amount on
deposit therein is required to be deposited in the Distribution Account. The
Trustee will establish an account (the "Distribution Account") into which will
be deposited amounts withdrawn from the Collection Account for distribution to
Certificateholders on a Distribution Date and payment of certain fees and
expenses of the Trust. The Distribution Account will be an Eligible Account.
Amounts on deposit therein may be invested in Permitted Investments maturing on
or before the Business Day prior to the related Distribution Date unless such
Permitted Investments are invested in investments managed or advised by the
Trustee or an affiliate thereof, in which case such Permitted Investments may
mature on the related Distribution Date.
THE MASTER SERVICER
The information set forth in the following paragraphs has been provided
by Option One. None of the Depositor, any affiliate of Option One, the Trustee,
the Originator, the Underwriter or any of their affiliates has made or will make
any representation as to the accuracy or completeness of such information.
Option One, a California corporation headquartered in Irvine,
California, will serve as the Master Servicer pursuant to the Pooling Agreement
for the Mortgage Loans.
Option One was incorporated in 1992, commenced receiving applications
for mortgage loans under its regular lending program in February 1993 and began
funding such mortgage loans indirectly in the same month. The principal business
of Option One is the origination, sale and servicing of non-conforming mortgage
loans.
Option One is a wholly-owned subsidiary of Block Financial, which is in
turn a wholly-owned subsidiary of H&R Block, Inc. ("H&R Block").
As of September 30, 2000, Option One 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, Wisconsin, 41 retail financial centers in 16 states
and one telemarketing center in each of California and Florida.
Option One operates as a stand-alone mortgage banking company and is a
Freddie Mac approved seller/servicer.
The following tables set forth, as of December 31, 1997, 1998 and 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 entire
servicing portfolio (which portfolio includes mortgage loans originated under
Option One'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.
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<PAGE>
<TABLE>
<CAPTION>
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN THOUSANDS)
Year Ended December 31, 1997 Year Ended December 31, 1998
-------------------------------------------- ----------------------------------------------
Percent
By No. Percent Percent Percent
By No. By Dollar of By Dollar By No. By Dollar By No. of By Dollar
of Loans Amount Loans Amount of Loans Amount 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>
Year Ended December 31, 1999 At June 30, 2000
------------------------------------------- ---------------------------------------------
Percent Percent Percent Percent
By No. By Dollar By No. of By Dollar By No. By Dollar By No. of By Dollar
of Loans Amount Loans Amount of 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%
------------------
* Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
</TABLE>
<TABLE>
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999 AT JUNE 30, 2000
-------------------- -------------------- --------------------- ----------------------
BY NO. BY DOLLAR BY NO. BY DOLLAR BY NO. BY DOLLAR BY NO. BY 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 55,708 $5,601,703 98,910 $9,924,101 132,431 $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.
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<PAGE>
<TABLE>
<CAPTION>
LOAN LOSS EXPERIENCE ON OPTION ONE'S SERVICING PORTFOLIO OF MORTGAGE LOANS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
JUNE 30,
------------------------------------------------------
1997 1998 1999 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
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 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, and the Mortgage Pool will therefore
consist 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. Furthermore, adverse economic conditions may affect
the timely payment by mortgagors 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.
ADVANCES
Subject to the following limitations, the Master Servicer will be
obligated to advance or cause to be advanced on or before each Distribution Date
its own funds, or funds in the Collection Account that are not included in the
Available Funds for such Distribution Date, in an amount equal to the aggregate
of all payments of principal and interest (net of 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 purpose of making
such Advances is to maintain a regular cash flow to the Certificateholders,
rather than to guarantee or insure against losses. The Master Servicer will not
be required, however, to make any Advances with respect to reductions in the
amount of the monthly payments on the Mortgage Loans due to bankruptcy
proceedings or the application of the Relief Act. Subject to the recoverability
standard above, the 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.
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<PAGE>
All Advances will be reimbursable to the Master Servicer from late
collections, insurance proceeds, condemnation proceeds and liquidation proceeds
from the Mortgage Loan as to which such unreimbursed Advance was made. The
Master Servicer may recover from amounts in the Collection Account the amount of
any Advance that remains unreimbursed to the Master Servicer from the related
liquidation proceeds after the final liquidation of the related Mortgage Loan,
and such reimbursement amount will not be available for remittance to the
Trustee for distribution on the Certificates. In addition, the Master Servicer
may, if so provided in the Pooling Agreement, withdraw from the Collection
Account funds that were not included in Available Funds for the preceding
Distribution Date to reimburse itself for Advances previously made. In the event
the Master Servicer fails in its obligation to make any required Advance, the
Trustee, in its capacity as successor Master Servicer, will be obligated to make
any such Advance, to the extent required in the Pooling Agreement.
In the course of performing its servicing obligations, the Master
Servicer will pay all reasonable and customary "out-of-pocket" costs and
expenses (including reasonable attorneys' fees and disbursements) incurred in
the performance of its servicing obligations, including, but not limited to, the
cost of (i) the preservation, restoration, inspection and protection of the
Mortgaged Properties, (ii) any enforcement or judicial proceedings, including
foreclosures, (iii) the management and liquidation of Mortgaged Properties
acquired in satisfaction of the related mortgage and (iv) certain insurance
premiums and certain ongoing expenses associated with the Mortgage Pool and
incurred by the Master Servicer in connection with its responsibilities under
the Pooling Agreement. Each such expenditure will constitute a "Servicing
Advance."
The Master Servicer's right to reimbursement for Servicing Advances is
limited to late collections on the related Mortgage Loan, including liquidation
proceeds, condemnation proceeds, released mortgaged property proceeds, insurance
proceeds and such other amounts as may be collected by the Master Servicer from
the related mortgagor or otherwise relating to the Mortgage Loan in respect of
which such unreimbursed amounts are owed, unless such amounts are deemed to be
nonrecoverable by the Master Servicer from the proceeds of the related Mortgage
Loan, in which event reimbursement will be made to the Master Servicer from
general funds in the Collection Account.
The Pooling Agreement provides that the Trustee, on behalf of the Trust
and with the consent of the Master Servicer, may enter into a facility with any
person which provides that such person (an "Advancing Person") may fund Advances
and/or Servicing Advances, although no such facility shall reduce or otherwise
affect the Master Servicer's obligation to fund such Advances and/or Servicing
Advances. Any Advances and/or Servicing Advances made by an Advancing Person
will be reimbursed to the Advancing Person in the same manner as reimbursements
would be made to the Master Servicer.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect
of its servicing activities (the "Servicing Fee") for the Certificates will be
at the "Servicing Fee Rate" of 0.50% per annum on the Principal Balance of each
Mortgage Loan. As additional servicing compensation, the Master Servicer is
entitled to retain all service-related fees, including assumption fees,
modification fees, extension fees, late payment charges and Prepayment Interest
Excess (as defined in the Pooling Agreement), non-sufficient fund fees and other
ancillary fees (but not prepayment charges, which will be distributed to the
holders of the Class P Certificates), to the extent collected from mortgagors,
together with any interest or other income earned on funds held in the
Collection Account and any Servicing Accounts. The Master Servicer is obligated
to deposit into the Collection Account the amount of any Prepayment Interest
Shortfall (payments made by the Master Servicer in satisfaction of such
obligation, "Compensating Interest") but only in an amount up to its Servicing
Fee for the related Distribution Date.
The "Determination Date" with respect to any Distribution Date will be
the 15th day of the calendar month in which such Distribution Date occurs or, if
such 15th day is not a Business Day, the Business Day immediately preceding such
15th day. With respect to any Determination Date and each Mortgage Loan as to
which a principal prepayment was applied during the portion of the related
Prepayment Period (as defined below) occurring in the month preceding the month
of such Determination Date, the "Prepayment Interest Shortfall" is an amount
equal to the interest at the applicable Loan Rate (net of the Servicing Fee) on
the amount of such principal prepayment for the number of days from the date on
which the principal prepayment is applied until the last day of such preceding
calendar month.
THE TRUSTEE
Wells Fargo Bank Minnesota, N.A., a national banking association
organized and existing under the laws of the United States, will be named
Trustee pursuant to the Pooling Agreement. The Trustee will provide a monthly
statement to Certificateholders containing information regarding the
Certificates. The Trustee may make such statement available each
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month, to any interested party, via the Trustee's website and its fax-on-demand
service. See "Description of the Certificates--Reports to Certificateholders."
The principal compensation to be paid to the Trustee in respect of its
obligations under the Pooling Agreement will be equal to certain investment
earnings on the amounts on deposit in the Distribution Account and a fee (the
"Trustee Fee") equal to accrued interest at the "Trustee Fee Rate" of 0.005% per
annum on the stated Principal Balance of the Mortgage Loans. The Pooling
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
Agreement) incurred by the Trustee arising out of or in connection with the
acceptance or administration of its obligations and duties under the Pooling
Agreement, other than any loss, liability or expense (i) that constitutes a
specific liability of the Trustee under the Pooling Agreement or (ii) incurred
by reason of willful misfeasance, bad faith or negligence in the performance of
the Trustee's duties under the Pooling Agreement or as a result of a breach, or
by reason of reckless disregard, of the Trustee's obligations and duties under
the Pooling Agreement. The Pooling Agreement will provide that the Trustee may
withdraw amounts owing to it under the Pooling Agreement prior to distributions
to Certificateholders.
LOSS MITIGATION ADVISOR
The Murrayhill Company, as loss mitigation advisor for the Trust (the
"Loss Mitigation Advisor"), will monitor the performance of, and make
recommendations to the Master Servicer and any subservicer regarding, certain
delinquent and defaulted Mortgage Loans and will report to the Trustee on the
performance of such Mortgage Loans, pursuant to a Loss Mitigation Advisory
Agreement, dated October 12, 2000, between the Loss Mitigation Advisor and the
Master Servicer. The Loss Mitigation Advisor will rely upon mortgage loan data
that is provided to it by the Master Servicer and any subservicer in performing
its advisory and monitoring functions. The Loss Mitigation Advisor will be
entitled to receive an "Advisor's Fee" until the termination of the Trust or
until its removal by a vote of at least 66 2/3% of the Certificateholders. Such
fee will be paid by the Trust and will be equal to a per annum percentage of the
Principal Balance of each PMI Mortgage Loan, as defined under "Description of
the Certificates--The PMI Policies."
VOTING RIGHTS
At all times 98% of all Voting Rights will be allocated among the
holders of the Offered Certificates and the Class C Certificates in proportion
to the then outstanding Certificate Principal Balances of their respective
Certificates. At all times 1% of all Voting Rights will be allocated to the
holders of the Class P Certificates and 1% of all Voting Rights will be
allocated to the holders of the Class R Certificates. The Voting Rights
allocated to any class of Certificates shall be allocated among all holders of
the Certificates of such class in proportion to the outstanding percentage
interests of such holders in such class.
AMENDMENT
The Pooling Agreement may be amended under the circumstances set forth
under "The Agreements--Amendment" in the Prospectus.
TERMINATION
The Master Servicer will have the right to purchase all of the Mortgage
Loans and REO Properties and thereby effect the early retirement of the
Certificates, on any Distribution Date on which the aggregate Principal Balance
of the Mortgage Loans and REO Properties in the Trust is equal to or less than
10% of the aggregate Principal Balance of the Mortgage Loans as of the Cut-off
Date. The first Distribution Date on which such option could be exercised is
referred to herein as the "Optional Termination Date." In the event that the
option is exercised, the repurchase will be made at a price (the "Termination
Price") generally equal to the greater of par or the fair market value of the
Mortgage Loans and REO Properties, in each case plus accrued interest for each
Mortgage Loan at the related Loan Rate to but not including the first day of the
month in which such repurchase price is paid plus the amount of any unreimbursed
Advances and Servicing Advances made by the Master Servicer plus the unpaid Net
WAC Rate Carryover Amounts, if any. In the event the Master Servicer exercises
this option, the portion of the purchase price allocable to the Offered
Certificates will be, to the extent of available funds:
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(i) 100% of the then outstanding Certificate Principal Balance of the
Offered Certificates, plus
(ii) interest for the final Accrual Period on the then outstanding
Certificate Principal Balance of the Offered Certificates at the
then applicable Pass-Through Rate for the class, plus
(iii) any previously accrued but unpaid interest thereon to which the
holders of the Offered Certificates are entitled, together with
the amount of any Net WAC Rate Carryover Amounts (payable to and
from the Reserve Fund), plus
(iv) in the case of the Mezzanine Certificates, any previously unpaid
Allocated Realized Loss Amount.
MASTER SERVICER ALTERNATIVES TO FORECLOSURE
The Master Servicer may foreclose on any delinquent Mortgage Loan or,
subject to certain limitations set forth in the Pooling Agreement, work out an
agreement with the mortgagor, which may involve waiving or modifying any term of
the mortgage loan. The Master Servicer may also sell any Mortgage Loan that is
at least 90 days delinquent. If the Master Servicer sells any such Mortgage Loan
for less than its outstanding Principal Balance in accordance with the servicing
standard set forth in the Pooling Agreement plus (without duplication) all prior
Advances and Servicing Advances thereon, or extends the payment period or
accepts a lesser amount than stated in the mortgage note in satisfaction of the
mortgage note, your yield may be reduced.
OPTIONAL PURCHASE OF DEFAULTED LOANS
As to any Mortgage Loan which is delinquent in payment by 90 days or
more, the Master Servicer may, at its option, purchase such Mortgage Loan from
the Trust at the Purchase Price for such Mortgage Loan; provided, however, that
the Master Servicer must first purchase the Mortgage Loan that, as of the time
of such purchase, has been delinquent for the greatest period before purchasing
Mortgage Loans that have been delinquent lesser periods.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling Agreement. Set
forth below are summaries of the specific terms and provisions pursuant to which
the Offered Certificates will be issued. The following summaries do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, the provisions of the Pooling Agreement.
When particular provisions or terms used in the Pooling Agreement are referred
to, the actual provisions (including definitions of terms) are incorporated by
reference.
The Trust will issue (i) the Class A Certificates, (ii) the Class M-1
Certificates and the Class M-2 Certificates (together, the "Mezzanine
Certificates"), (iii) the Class C Certificates (together with the Mezzanine
Certificates, the "Subordinate Certificates"), (iv) the Class P Certificates and
(v) the Class R Certificates (the "Residual Certificates"). The Class A
Certificates, the Mezzanine Certificates, the Class C Certificates, the Class P
Certificates and the Residual Certificates are collectively referred to herein
as the "Certificates." Only the Class A Certificates and the Mezzanine
Certificates are offered hereby (together, the "Offered Certificates").
The Offered Certificates will have the Original Certificate Principal
Balances specified on the cover hereof, subject to a permitted variance of plus
or minus five percent. The Class C Certificates will have an Original
Certificate Principal Balance equal to the excess of the aggregate Principal
Balance of the Mortgage Loans as of the Cut-off Date over the Original
Certificate Principal Balances of the Offered Certificates and the Class P
Certificates. The Class P Certificates will have an Original Certificate
Principal Balance of $100 and will not bear interest. The Class P Certificates
will be entitled to all prepayment charges received in respect of the Mortgage
Loans and such amounts will not be available for distribution to the holders of
the Offered Certificates. The Class R Certificates will not have Original
Certificate Principal Balances and will not bear interest.
The Offered Certificates will be issued in book-entry form as described
below. The Offered Certificates will be issued in minimum dollar denominations
of $50,000 and integral multiples of $1.00 in excess thereof. The assumed final
maturity date (the "Assumed Final Distribution Date") for the Certificates is
the Distribution Date in September 2030.
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Distributions on the Offered Certificates will be made by the Trustee
on the 25th day of each month, or if such day is not a Business Day, on the
first Business Day thereafter, commencing in November 2000 (each, a
"Distribution Date"), to the persons in whose names such Certificates are
registered at the close of business on the Record Date. The "Record Date" for
any Certificate issued in book-entry form is the business day immediately
preceding such Distribution Date and the "Record Date" for any physical
Certificate or any book-entry Certificate that becomes a Definitive Certificate
(as defined herein), will be the last business day of the month immediately
preceding the month in which the related Distribution Date occurs.
BOOK-ENTRY CERTIFICATES
The Offered Certificates will be book-entry Certificates (for so long
as they are registered in the name of the applicable depository or its nominee,
the "Book-Entry Certificates"). Persons acquiring beneficial ownership interests
in the Book-Entry Certificates ("Certificate Owners") will hold such
Certificates through The Depository Trust Company ("DTC") in the United States,
or Clearstream Banking Luxembourg, formerly known as Cedelbank SA
("Clearstream"), or the Euroclear System ("Euroclear") (in Europe) if they are
participants of such systems, or indirectly through organizations which are
participants in such systems. The Book-Entry Certificates will be issued in one
or more certificates which equal the aggregate Certificate Principal Balance of
such Certificates and will initially be registered in the name of Cede & Co.,
the nominee of DTC. Clearstream and Euroclear will hold omnibus positions on
behalf of their participants through customers' securities accounts in
Clearstream's and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank will act as
depositary for Clearstream and The Chase Manhattan Bank will act as depositary
for Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries"). Investors may hold such beneficial
interests in the Book-Entry Certificates in minimum denominations of $50,000.
Except as described below, no Certificate Owner on acquiring a Book-Entry
Certificate will be entitled to receive a physical certificate representing such
Certificate (a "Definitive Certificate"). Unless and until Definitive
Certificates are issued, it is anticipated that the only "Certificateholder" of
the Offered Certificates will be Cede & Co., as nominee of DTC. Certificate
Owners will not be Certificateholders as that term is used in the Pooling
Agreement. Certificate Owners are only permitted to exercise their rights
indirectly through DTC and participants of DTC ("DTC Participants").
The Certificate Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Certificate Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Certificate Owner's Financial Intermediary is not a DTC Participant and on
the records of Clearstream or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While the Book-Entry Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among DTC Participants on whose behalf it acts with
respect to the Book-Entry Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Book- Entry Certificates.
DTC Participants and indirect participants with whom Certificate Owners have
accounts with respect to Book-Entry Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates representing their respective interests in the
Book-Entry Certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their interest.
Certificate Owners will not receive or be entitled to receive
certificates representing their respective interests in the Book-Entry
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Certificate Owners who are not DTC
Participants may transfer ownership of Book-Entry Certificates only through DTC
Participants and indirect participants by instructing such DTC Participants and
indirect participants to transfer Book-Entry Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Book-Entry
Certificates, which account is maintained with their respective DTC
Participants. Under the Rules and in accordance with DTC's normal procedures,
transfers of ownership of Book-Entry Certificates will be executed through DTC
and the accounts of the respective DTC Participants will be debited and
credited. Similarly, the DTC Participants and indirect participants will make
debits or credits, as the case may be, on their records on behalf of the selling
and purchasing Certificate Owners.
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Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a DTC Participant
will be made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Such credits or any transactions
in such securities settled during such processing will be reported to the
relevant Euroclear Participants or Clearstream Participants (each as defined
below) on such business day. Cash received in Clearstream or Euroclear as a
result of sales of securities by or through a Clearstream Participant or
Euroclear Participant to a DTC Participant will be received with value on the
DTC settlement date but will be available in the relevant Clearstream or
Euroclear cash account only as of the business day following settlement in DTC.
For information with respect to tax documentation procedures relating to the
Certificates, see "Certain Material Federal Income Tax
Considerations--Miscellaneous Tax Aspects--Backup Withholding" and "--Tax
Treatment of Foreign Investors" in the Prospectus and "Global Clearance,
Settlement and Tax Documentation Procedures--Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I hereto.
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between Clearstream 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 Clearstream
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. Clearstream Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
DTC which is a New York-chartered limited purpose trust company,
performs services for its DTC Participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC Participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the Rules, as in effect from time to time.
Clearstream, 67 Bd Grande-Duchesse Charlotte, L-1331 Luxembourg, was
incorporated in 1970 as a limited company under Luxembourg law. Clearstream is
owned by banks, securities dealers and financial institutions, and currently has
about 100 shareholders, including U.S. financial institutions or their
subsidiaries. No single entity may own more than five percent of Clearstream's
stock.
Clearstream is registered as a bank in Luxembourg, and as such is
subject to regulation by the Institute Monetaire Luxembourgeois, "IML," the
Luxembourg Monetary Authority, which supervises Luxembourg banks.
Clearstream holds securities for its customers ("Clearstream
Participants") and facilitates the clearance and settlement of securities
transactions by electronic book-entry transfers between their accounts.
Clearstream provides various services, including safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream also deals with domestic securities markets
in several countries through established depository and custodial relationships.
Clearstream has established an electronic bridge with the Euroclear Operator (as
defined below) in Brussels to facilitate settlement of trades between systems.
Clearstream currently accepts over 70,000 securities issues on its books.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 3,000 customers located in over 60 countries, including all major
European countries, Canada, and the United States. Indirect access to
Clearstream is available to other institutions which clear through or maintain a
custodial relationship with an account holder of Clearstream.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 29 currencies, including United
States dollars. Euroclear includes various other
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services, including securities lending and borrowing and interfaces with
domestic markets in several countries generally similar to the arrangements for
cross-market transfers with DTC described above. Euroclear is operated by the
Brussels, Belgium office of Morgan Guaranty Trust Company of New York (the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to Cede & Co. DTC will be responsible for
crediting the amount of such payments to the accounts of the applicable DTC
Participants in accordance with DTC's normal procedures. Each DTC Participant
will be responsible for disbursing such payments to the Certificate Owners of
the Book-Entry Certificates that it represents and to each Financial
Intermediary for which it acts as agent. Each such Financial Intermediary will
be responsible for disbursing funds to the Certificate Owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, Certificate Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede & Co. Distributions with
respect to Certificates held through Clearstream or Euroclear will be credited
to the cash accounts of Clearstream Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Certain Material Federal Income Tax Considerations--Miscellaneous Tax
Aspects--Backup Withholding" and "--Tax Treatment of Foreign Investors" in the
Prospectus. Because DTC can only act on behalf of Financial Intermediaries, the
ability of a Certificate Owner to pledge Book-Entry Certificates to persons or
entities that do not participate in the Depository system, or otherwise take
actions in respect of such Book-Entry Certificates, may be limited due to the
lack of physical certificates for such Book-Entry Certificates. In addition,
issuance of the Book-Entry Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary market since certain potential
investors may be unwilling to purchase Certificates for which they cannot obtain
physical certificates.
Monthly and annual reports on the Trust will be provided to Cede & Co.,
as nominee of DTC, and may be made available by Cede & Co. to Certificate Owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Certificate Owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Pooling Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. Clearstream or the Euroclear Operator, as the case may be, will
take any other action permitted to be taken by a Certificateholder under the
Pooling Agreement on behalf of a Clearstream 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 DTC
Participants, with respect to some Book-Entry Certificates which conflict with
actions taken with respect to other Book-Entry Certificates.
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Definitive Certificates will be issued to Certificate Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC or its nominee,
only if (a) DTC or the Depositor advises the Trustee in writing that DTC is no
longer willing, qualified or able to discharge properly its responsibilities as
nominee and depository with respect to the Book-Entry Certificates and the
Depositor or the Trustee is unable to locate a qualified successor, (b) the
Depositor, at its sole option, with the consent of the Trustee, elects to
terminate a book-entry system through DTC or (c) after the occurrence of a
Master Servicer Event of Termination (as defined in the Pooling Agreement),
Certificate Owners having percentage interests aggregating not less than 51% of
the Book-Entry Certificates advise the Trustee and DTC through the Financial
Intermediaries and the DTC Participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of Certificate Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Certificate
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Pooling Agreement.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Certificates among DTC
Participants of DTC, Clearstream 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 Depositor, the Master Servicer or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
ALLOCATION OF AVAILABLE FUNDS
Distributions to holders of each class of Offered Certificates will be
made on each Distribution Date from Available Funds. With respect to any
Distribution Date, "Available Funds" will be equal to the sum of the following
amounts with respect to the Mortgage Loans, net of amounts reimbursable
therefrom to the Master Servicer or the Trustee: (i) the aggregate amount of
monthly payments on the Mortgage Loans due on the related Due Date (net of the
portion of such monthly payments equal to interest on Dividend Mortgage Loans at
the applicable Dividend Rate) and received by the Trustee by the Business Day
preceding such Distribution Date, after deduction of the Trustee Fee for such
Distribution Date, the Servicing Fee for such Distribution Date, any accrued and
unpaid Servicing Fees and Trustee Fees in respect of any prior Distribution
Dates, the PMI Insurer Fee (as defined herein) and the Advisor's Fee for such
Distribution Date, (ii) certain unscheduled payments in respect of the Mortgage
Loans, including prepayments, Insurance Proceeds, Net Liquidation Proceeds and
proceeds from repurchases of and substitutions for such Mortgage Loans occurring
during the related Prepayment Period, excluding prepayment charges and (iii)
payments from the Master Servicer in connection with Advances and Prepayment
Interest Shortfalls for such Distribution Date. The holders of the Class P
Certificates will be entitled to all prepayment charges received on the Mortgage
Loans and such amounts will not be available for distribution to the holders of
the Offered Certificates.
INTEREST DISTRIBUTIONS ON THE OFFERED CERTIFICATES
On each Distribution Date the Trustee shall withdraw from the
Distribution Account that portion of Available Funds for such Distribution Date
consisting of the Interest Remittance Amount for such Distribution Date, and
make the following disbursements and transfers in the order of priority
described below, in each case to the extent of the Interest Remittance Amount
remaining for such Distribution Date.
(i) to the holders of the Class A Certificates, the Monthly Interest
Distributable Amount for such class for such Distribution Date;
(ii) to the holders of the Class A Certificates, the Unpaid Interest
Shortfall Amount, if any, for such class for such Distribution Date;
(iii) to the holders of the Class M-1 Certificates, the Monthly
Interest Distributable Amount allocable to such Certificates; and
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(iv) to the holders of the Class M-2 Certificates, the Monthly Interest
Distributable Amount allocable to such Certificates.
On any Distribution Date, any shortfalls resulting from the application
of the Relief Act and any Prepayment Interest Shortfalls to the extent not
covered by Compensating Interest paid by the Master Servicer will be allocated,
first, to the interest distribution amount with respect to the Class C
Certificates, and thereafter, to the Monthly Interest Distributable Amounts with
respect to the Offered Certificates on a PRO RATA basis based on the respective
amounts of interest accrued on such Certificates for such Distribution Date. THE
HOLDERS OF THE OFFERED CERTIFICATES WILL NOT BE ENTITLED TO REIMBURSEMENT FOR
ANY SUCH INTEREST SHORTFALLS.
PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES
On each Distribution Date (a) prior to the Stepdown Date or (b) on
which a Trigger Event is in effect, the holders of each class of Offered
Certificates shall be entitled to receive distributions in respect of principal
to the extent of the Principal Distribution Amount in the following amounts and
order of priority:
(i) first, to the holders of the Class A Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(ii) second, to the holders of the Class M-1 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero; and
(iii) third, to the holders of the Class M-2 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero.
On each Distribution Date (a) on or after the Stepdown Date and (b) on
which a Trigger Event is not in effect, the holders of each class of Offered
Certificates shall be entitled to receive distributions in respect of principal
to the extent of the Principal Distribution Amount in the following amounts and
order of priority:
(i) first, to the holders of the Class A Certificates, the Class A
Principal Distribution Amount until the Certificate Principal Balance thereof
has been reduced to zero;
(ii) second, to the holders of the Class M-1 Certificates, the Class
M-1 Principal Distribution Amount until the Certificate Principal Balance
thereof has been reduced to zero; and
(iii) third, to the holders of the Class M-2 Certificates, the Class
M-2 Principal Distribution Amount until the Certificate Principal Balance
thereof has been reduced to zero.
The allocation of distributions in respect of principal to the Class A
Certificates on each Distribution Date (a) prior to the Stepdown Date or (b) on
which a Trigger Event has occurred, will have the effect of accelerating the
amortization of the Class A Certificates while, in the absence of Realized
Losses, increasing the respective percentage interest in the principal balance
of the Mortgage Loans evidenced by the Subordinate Certificates. Increasing the
respective percentage interest in the Trust of the Subordinate Certificates
relative to that of the Class A Certificates is intended to preserve the
availability of the subordination provided by the Subordinate Certificates.
CREDIT ENHANCEMENT
The Credit Enhancement provided for the benefit of the holders of the
Class A Certificates consists of subordination, as described below, excess
interest and overcollateralization, as described under "--Overcollateralization
Provisions" herein and the PMI Policies as described under "--The PMI Policies"
herein.
The rights of the holders of the Subordinate Certificates to receive
distributions will be subordinated, to the extent described herein, to the
rights of the holders of the Class A Certificates. This subordination is
intended to enhance the likelihood of regular receipt by the holders of the
Class A Certificates of the full amount of their scheduled monthly payments of
interest and principal and to afford such holders protection against Realized
Losses.
The protection afforded to the holders of the Class A Certificates by
means of the subordination of the Subordinate Certificates will be accomplished
by (i) the preferential right of the holders of the Class A Certificates to
receive on any
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Distribution Date, prior to distribution on the Subordinate Certificates,
distributions in respect of interest and principal, subject to funds available
for such distributions and (ii) if necessary, the right of the holders of the
Class A Certificates to receive future distributions of amounts that would
otherwise be payable to the holders of the Subordinate Certificates.
In addition, the rights of the holders of the Class M-1 Certificates to
receive distributions will be senior to the rights of holders of the Class M-2
Certificates, and the rights of the holders of the Mezzanine Certificates to
receive distributions will be senior to the rights of the holders of the Class C
Certificates, in each case to the extent described herein. This subordination is
intended to enhance the likelihood of regular receipt by the holders of more
senior Certificates of distributions in respect of interest and principal and to
afford such holders protection against Realized Losses.
OVERCOLLATERALIZATION PROVISIONS
The weighted average net Loan Rate for the Mortgage Loans is generally
expected to be higher than the weighted average of the Pass-Through Rates on the
Offered Certificates. As a result, interest collections on the Mortgage Loans
are expected to be generated in excess of the amount of interest payable to the
holders of the Offered Certificates and the fees and expenses payable by the
Trust. The Pooling Agreement requires that, on each Distribution Date, the Net
Monthly Excess Cashflow, if any, be applied on such Distribution Date as an
accelerated payment of principal on the class or classes of Offered Certificates
then entitled to receive distributions in respect of principal, but only to the
limited extent hereafter described.
With respect to any Distribution Date, any Net Monthly Excess Cashflow
shall be paid as follows:
(i) to the holders of the class or classes of Certificates then
entitled to receive distributions in respect of principal, in an amount equal to
any Extra Principal Distribution Amount, payable to such holders as part of the
Principal Distribution Amount as described under "--Allocation of Available
Funds--Principal Distributions on the Offered Certificates" above;
(ii) to the holders of the Class M-1 Certificates, in an amount equal
to the Unpaid Interest Shortfall Amount allocable to such Certificates;
(iii) to the holders of the Class M-1 Certificates, in an amount equal
to the Allocated Realized Loss Amount allocable to the Class M-1 Certificates;
(iv) to the holders of the Class M-2 Certificates, in an amount equal
to the Unpaid Interest Shortfall Amount allocable to such Certificates;
(v) to the holders of the Class M-2 Certificates, in an amount equal to
the Allocated Realized Loss Amount allocable to the Class M-2 Certificates;
(vi) to make payments to the Reserve Fund, to the extent required to
pay the holders of the Offered Certificates any Net WAC Rate Carryover Amounts
for such classes;
(vii) to the PMI Insurer as provided in the Pooling Agreement;
(viii) to the holders of the Class C Certificates as provided in the
Pooling Agreement;
(ix) if such Distribution Date follows the Prepayment Period during
which occurs the latest date on which a prepayment charge may be required to be
paid in respect of any Mortgage Loan, to the holders of the Class P
Certificates, in reduction of the Certificate Principal Balance thereof, until
the Certificate Principal Balance thereof is reduced to zero; and
(x) any remaining amounts to the holders of the Residual Certificates
as provided in the Pooling Agreement.
On each Distribution Date, after making the distributions of the
Available Funds as described above, the Trustee will withdraw from the Reserve
Fund the amount deposited therein pursuant to subclause (vi) above and will
distribute these amounts to the holders of the Offered Certificates in the order
and priority set forth under "--Pass-Through Rates" herein.
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On each Distribution Date, the Trustee will withdraw from the
Distribution Account all amounts representing prepayment charges in respect of
the Mortgage Loans received during the related Prepayment Period and will
distribute these amounts to the holders of the Class P Certificates.
ALLOCATION OF LOSSES; SUBORDINATION
Any Realized Losses on the Mortgage Loans will be allocated on any
Distribution Date, first, to Net Monthly Excess Cashflow, second, to the Class C
Certificates, third, to the Class M-2 Certificates and fourth, to the Class M-1
Certificates.
The Pooling Agreement does not permit the allocation of Realized Losses
to the Class A Certificates or the Class P Certificates. Investors in the Class
A Certificates should note that although Realized Losses cannot be allocated to
the Class A Certificates, under certain loss scenarios there will not be enough
principal and interest on the Mortgage Loans to pay the Class A Certificates all
interest and principal amounts to which they are then entitled.
Once Realized Losses have been allocated to the Mezzanine Certificates,
such amounts with respect to such Certificates will no longer accrue interest
nor will such amounts be reinstated thereafter. However, Allocated Realized Loss
Amounts may be paid to the holders of the Mezzanine Certificates from Net
Monthly Excess Cashflow, according to the priorities set forth under
"--Overcollateralization Provisions" above.
Any allocation of a Realized Loss to a Certificate will be made by
reducing the Certificate Principal Balance thereof by the amount so allocated as
of the Distribution Date in the month following the calendar month in which such
Realized Loss was incurred. Notwithstanding anything to the contrary described
herein, in no event will the Certificate Principal Balance of any Certificate be
reduced more than once in respect of any particular amount both (i) allocable to
such Certificate in respect of Realized Losses and (ii) payable as principal to
the holder of such Certificate from Net Monthly Excess Cashflow.
THE PMI POLICIES
Approximately 98.04% of the Mortgage Loans (by aggregate Principal
Balance of the Mortgage Loans as of the Cut-off Date) have original
loan-to-value ratios in excess of 60.00%. Loan-level primary mortgage insurance
policies (each, a "PMI Policy" and together, the "PMI Policies") have been
acquired on behalf of the Trust with respect to approximately 97.87% of such
Mortgage Loans (by aggregate Principal Balance as of the Cut-off Date) through
PMI Mortgage Insurance Co. (the "PMI Insurer").
The PMI Insurer, an Arizona corporation with its administrative offices
in San Francisco, California, is a monoline guaranty insurance company founded
in 1972. The PMI Insurer is licensed in 50 states and the District of Columbia
to offer both primary and pool insurance and is approved as a private mortgage
insurer by Freddie Mac and Fannie Mae. The following description is applicable
to the PMI Policies provided by the PMI Insurer:
The PMI Policies do not cover any Mortgage Loan in default at the
applicable "effective date" of the PMI Policies (i.e., the Cut-off Date) or any
Mortgage Loan otherwise insured under the terms of a traditional mortgage
guaranty insurance policy. Each Mortgage Loan covered by a PMI Policy (each, a
"PMI Mortgage Loan" and together, the "PMI Mortgage Loans") is covered by the
PMI Policy for losses up to the policy limits; provided, however, that the PMI
Policy will not cover special hazard, bankruptcy, fraud losses and certain other
types of losses as described in the PMI Policy. Claims on insured Mortgage Loans
will reduce uninsured exposure to an amount equal to 60% of the lesser of the
appraised value or purchase price, as the case may be, of the related Mortgaged
Property, in each case, at the time of the applicable effective date of the PMI
Policy. The PMI Policies are cancelable only with the consent of the Trustee in
accordance with the PMI Policies' terms. The PMI Policies may be terminated for
failure to pay premiums or if the PMI Insurer is no longer qualified under state
law to write the insurance provided by the PMI Policies.
The premiums payable to the PMI Insurer for coverage of each insured
Mortgage Loan will be paid by the Trust. Such premiums are calculated as a per
annum percentage (depending with respect to each PMI Mortgage Loan, upon the
original loan-to-value ratio of the insured Mortgage Loan) of the Principal
Balance of the PMI Mortgage Loan (the "PMI Insurer Fee").
The premium rates under the Policies were established taking into
account the loss mitigation and servicing advisory services to be provided by
the Loss Mitigation Advisor (as defined herein) throughout the entire effective
life of the Policies.
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See "The Pooling Agreement--Loss Mitigation Advisor." Should the Loss Mitigation
Advisor cease to provide such services, the annual premium rate on each insured
Mortgage Loan would increase by the Advisor's Fee Rate (as defined herein).
The PMI Policies will provide only limited protection against losses on
defaulted Mortgage Loans.
DEFINITIONS
The "Accrual Period" for the Offered Certificates for a given
Distribution Date will be the actual number of days (based on a 360-day year)
included in the period commencing on the immediately preceding Distribution Date
(or, in the case of the first such Accrual Period, commencing on the Closing
Date) and ending on the day immediately preceding such Distribution Date.
An "Allocated Realized Loss Amount" with respect to any class of the
Mezzanine Certificates and any Distribution Date is an amount equal to the sum
of any Realized Loss allocated to that class of Certificates on the Distribution
Date and any Allocated Realized Loss Amount for that class remaining unpaid from
the previous Distribution Date.
The "Basic Principal Distribution Amount" means with respect to any
Distribution Date the excess of (i) the Principal Remittance Amount for such
Distribution Date over (ii) the Overcollateralization Release Amount, if any,
for such Distribution Date.
The "Certificate Principal Balance" of any Class A Certificate,
Mezzanine Certificate or Class P Certificate immediately prior to any
Distribution Date will be equal to the Certificate Principal Balance thereof on
the Closing Date (the "Original Certificate Principal Balance") reduced by the
sum of all amounts actually distributed in respect of principal of such Class
and, in the case of a Mezzanine Certificate, Realized Losses allocated thereto
on all prior Distribution Dates. The "Certificate Principal Balance" of the
Class C Certificates as of any date of determination is equal to the excess, if
any, of (a) the then aggregate Principal Balance of the Mortgage Loans over (b)
the then aggregate Certificate Principal Balances of the Class A Certificates,
the Mezzanine Certificates and the Class P Certificates.
The "Class A Principal Distribution Amount" is an amount equal to the
excess of (x) the Certificate Principal Balance of the Class A Certificates
immediately prior to such Distribution Date over (y) the lesser of (A) the
product of (i) 87.00% and (ii) the aggregate principal balance of the Mortgage
Loans as of the last day of the related Due Period (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 (B) the aggregate principal balance of the
Mortgage Loans as of the last day of the related Due Period (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) minus $2,470,367.
The "Class M-1 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (i) the Certificate Principal Balance of the Class A
Certificates (after taking into account the payment of the Class A Principal
Distribution Amount on such Distribution Date) and (ii) the Certificate
Principal Balance of the Class M-1 Certificates immediately prior to such
Distribution Date over (y) the lesser of (A) the product of (i) 96.00% and (ii)
the aggregate principal balance of the Mortgage Loans as of the last day of the
related Due Period (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 (B) the aggregate principal balance of the Mortgage Loans as of the
last day of the related Due Period (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) minus $2,470,367.
The "Class M-2 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (i) the Certificate Principal Balance of the Class A
Certificates (after taking into account the payment of the Class A Principal
Distribution Amount on such Distribution Date), (ii) the Certificate Principal
Balance of the Class M-1 Certificates (after taking into account the payment of
the Class M-1 Principal Distribution Amount on such Distribution Date) and (iii)
the Certificate Principal Balance of the Class M-2 Certificates immediately
prior to such Distribution Date over (y) the lesser of (A) the product of (i)
99.00% and (ii) the aggregate principal balance of the Mortgage Loans as of the
last day of the related Due Period (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 (B) the aggregate principal balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled
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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) minus $2,470,367.
The "Credit Enhancement Percentage" for any Distribution Date is the
percentage obtained by dividing (x) the aggregate Certificate Principal Balance
of the Subordinate Certificates by (y) the aggregate principal balance of the
Mortgage Loans, calculated prior to taking into account distributions of
principal on the Mortgage Loans and distribution of the Principal Distribution
Amount to the holders of the Certificates then entitled to distributions of
principal on such Distribution Date.
A Mortgage Loan is "Delinquent" if any monthly payment due on a Due
Date is not made by the close of business on the next scheduled Due Date for
such Mortgage Loan. A Mortgage Loan is "30 days Delinquent" if such monthly
payment has not been received by the close of business on the corresponding day
of the month immediately succeeding the month in which such monthly payment was
due or, if there was no such corresponding day (E.G., as when a 30-day month
follows a 31-day month in which a payment was due on the 31st day of such
month), then on the last day of such immediately succeeding month; and similarly
for "60 days Delinquent" and "90 days Delinquent," etc.
A "Due Period" with respect to any Distribution Date is the period
commencing on the second day of the month preceding the month in which such
Distribution Date occurs and ending on the first day of the month in which such
Distribution Date occurs.
The "Extra Principal Distribution Amount" for any Distribution Date, is
the lesser of (x) the Net Monthly Excess Cashflow for such Distribution Date for
such Distribution Date and (y) the Overcollateralization Deficiency Amount for
such Distribution Date.
"Insurance Proceeds" means the proceeds of any title policy, hazard
policy or other insurance policy covering a Mortgage Loan, including any related
PMI Policy, to the extent such proceeds are not to be applied to the restoration
of the related Mortgaged Property or released to the mortgagor in accordance
with the procedures that the Master Servicer would follow in servicing mortgage
loans held for its own account, subject to the terms and conditions of the
related mortgage note and Mortgage.
The "Interest Remittance Amount" for any Distribution Date is that
portion of the Available Funds for such Distribution Date allocable to interest.
The "Monthly Interest Distributable Amount" for any Distribution Date
and each Class of Offered Certificates equals the amount of interest accrued
during the related Accrual Period at the related Pass-Through Rate on the
Certificate Principal Balance of such Class immediately prior to such
Distribution Date, in each case, reduced by any Prepayment Interest Shortfalls
allocated to such Class and shortfalls resulting from the application of the
Relief Act (allocated to each Certificate based on its respective entitlements
to interest irrespective of any Prepayment Interest Shortfalls or shortfalls
resulting from the application of the Relief Act for such Distribution Date).
"Net Monthly Excess Cashflow" for any Distribution Date is equal to the
sum of (a) any Overcollateralization Release Amount and (b) the excess of (x)
the Available Funds for such Distribution Date over (y) the sum for such
Distribution Date of (A) the Monthly Interest Distributable Amounts for the
Offered Certificates, (B) the Unpaid Interest Shortfall Amounts for the Class A
Certificates and (C) the Principal Remittance Amount.
An "Overcollateralization Deficiency Amount" with respect to any
Distribution Date equals the amount, if any, by which the Overcollateralization
Target Amount exceeds the Overcollateralized Amount on such Distribution Date
(after giving effect to distributions in respect of the Basic Principal
Distribution Amount on such Distribution Date).
"Overcollateralization Release Amount" means, with respect to any
Distribution Date, the lesser of (x) the Principal Remittance Amount for such
Distribution Date and (y) the excess, if any, of (i) the Overcollateralized
Amount for such Distribution Date (assuming that 100% of the Principal
Remittance Amount is applied as a principal payment on such Distribution Date)
over (ii) the Overcollateralization Target Amount for such Distribution Date.
The "Overcollateralization Target Amount" means with respect to any
Distribution Date, $2,470,367.
The "Overcollateralized Amount" for any Distribution Date is the
amount, if any, by which (i) the Pool Balance on the related Determination Date
exceeds (ii) the sum of the aggregate Certificate Principal Balance of the Class
A Certificates,
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the Mezzanine Certificates and the Class P Certificates as of such Distribution
Date (after giving effect to distributions to be made on such Distribution
Date).
The "Principal Distribution Amount" for any Distribution Date is the
Basic Principal Distribution Amount plus the Extra Principal Distribution
Amount.
The "Prepayment Period" for any Distribution Date is the period
commencing on the day after the Determination Date in the month preceding the
month in which such Distribution Date falls (or, in the case of the first
Distribution Date, from the Cut-off Date) and ending on the Determination Date
of the calendar month in which such Distribution Date falls.
The "Principal Remittance Amount" means with respect to any
Distribution Date, the sum of (i) all scheduled payments of principal collected
or advanced on the Mortgage Loans by the Master Servicer that were due during
the related Due Period, (ii) the principal portion of all partial and full
principal prepayments of the Mortgage Loans applied by the Master Servicer
during such Prepayment Period, (iii) the principal portion of all related Net
Liquidation Proceeds and Insurance Proceeds received during such Prepayment
Period, (iv) that portion of the Purchase Price, representing principal of any
repurchased Mortgage Loan, deposited to the Collection Account during such
Prepayment Period, (v) the principal portion of any related Substitution
Adjustments deposited in the Collection Account during such Prepayment Period
and (vi) on the Distribution Date on which the Trust is to be terminated in
accordance with the Pooling Agreement, that portion of the Termination Price, in
respect of principal.
"Realized Loss" means, with respect to any defaulted Mortgage Loan that
is finally liquidated (a "Liquidated Mortgage Loan"), the amount of loss
realized equal to the portion of the Principal Balance remaining unpaid after
application of all liquidation proceeds net of amounts reimbursable to the
Master Servicer for related Advances, Servicing Advances and Servicing Fees
(such amount, the "Net Liquidation Proceeds") in respect of such Mortgage Loan.
The "Stepdown Date" means the earlier to occur of (i) the Distribution
Date on which the Certificate Principal Balance of the Class A Certificates has
been reduced to zero and (ii) the later to occur of (x) the Distribution Date
occurring in November 2003 and (y) the first Distribution Date on which the
Credit Enhancement Percentage (calculated for this purpose only after taking
into account distributions of principal on the Mortgage Loans and distribution
of the Principal Distribution Amount to the holders of the Certificates then
entitled to distributions of principal on such Distribution Date) is greater
than or equal to 13.00%. The Overcollateralization Target Amount will NOT be
permitted to "step down" on the Stepdown Date or on any other date.
A "Trigger Event" is in effect with respect to any Distribution Date if
the percentage obtained by dividing (x) the principal amount of Mortgage Loans
Delinquent 60 days or more by (y) the aggregate principal balance of the
Mortgage Loans, in each case, as of the last day of the previous calendar month,
exceeds 100% of the Credit Enhancement Percentage.
The "Unpaid Interest Shortfall Amount" means (i) for each class of
Offered Certificates and the first Distribution Date, zero, and (ii) with
respect to each class of Offered Certificates and any Distribution Date after
the first Distribution Date, the amount, if any, by which (a) the sum of (1) the
Monthly Interest Distributable Amount for such class for the immediately
preceding Distribution Date and (2) the outstanding Unpaid Interest Shortfall
Amount, if any, for such class for such preceding Distribution Date exceeds (b)
the aggregate amount distributed on such class in respect of interest pursuant
to clause (a) of this definition on such preceding Distribution Date, plus
interest on the amount of interest due but not paid on the Certificates of such
class on such preceding Distribution Date, to the extent permitted by law, at
the Pass-Through Rate for such class for the related Accrual Period.
PASS-THROUGH RATES
The "Pass-Through Rate" on any Distribution Date with respect to the
Offered Certificates will equal the lesser of (a) the related Formula Rate and
(b) the Net WAC Rate for such Distribution Date. With respect to the Offered
Certificates, interest in respect of any Distribution Date will accrue during
the related Accrual Period on the basis of a 360-day year and the actual number
of days elapsed.
The "Net WAC Rate" for any Distribution Date shall be 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 Adjusted Net Mortgage Rates
of the Mortgage Loans.
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The "Adjusted Net Mortgage Rate" for any Mortgage Loan for any
Distribution Date shall be a per annum rate equal to the applicable Loan Rate
for such Mortgage Loan as of the first day of the month preceding the month in
which such Distribution Date occurs minus the sum of (i) the Trustee Fee Rate,
(ii) the Servicing Fee Rate, (iii) the PMI Insurer Fee Rate, if applicable, (iv)
the Advisor's Fee Rate, if applicable and (v) the Dividend Rate, if applicable.
The "PMI Insurer Fee Rate" and the "Advisor's Fee Rate" are the per
annum rates at which the PMI Insurer Fees and Advisor's Fees, respectively, are
calculated and are as set forth in the Pooling Agreement.
If on any Distribution Date, the Pass-Through Rate for the Class A
Certificates or any class of the Mezzanine Certificates is the Net WAC Rate,
then the "Net WAC Rate Carryover Amount" for such class for such Distribution
Date is an amount equal to the sum of (i) the excess of (x) the amount of
interest such class of Certificates would have been entitled to receive on such
Distribution Date had such Pass-Through Rate been the related Formula Rate, over
(y) the amount of interest such class of Certificates accrued for such
Distribution Date at the Net WAC Rate and (ii) the unpaid portion of any related
Net WAC Rate Carryover Amount from the prior Distribution Date together with
interest accrued on such unpaid portion for the most recently ended Accrual
Period at the Formula Rate applicable for such class for such Accrual Period.
Any Net WAC Rate Carryover Amount on the Offered Certificates will be paid on
such Distribution Date or future Distribution Dates from and to the extent of
funds available therefor in accordance with the priorities described above.
The "Formula Rate" for the Class A Certificates and any class of the
Mezzanine Certificates is the lesser of (a) the sum of the interbank offered
rate for one-month United States dollar deposits in the London market (the
"Certificate Index") as of the related LIBOR Determination Date (as defined
herein) plus a related margin (the "Certificate Margin") or (b) the Maximum Cap.
The Certificate Margin with respect to the Class A Certificates on each
Distribution Date on or prior to the Optional Termination Date will equal 0.23%
and on each Distribution Date after the Optional Termination Date will equal
0.46%. The Certificate Margin with respect to the Class M-1 Certificates on each
Distribution Date on or prior to the Optional Termination Date will equal 0.55%
and on each Distribution Date after the Optional Termination Date will equal
0.825%. The Certificate Margin with respect to the Class M-2 Certificates on
each Distribution Date on or prior to the Optional Termination Date will equal
0.95% and on each Distribution Date after the Optional Termination Date will
equal 1.425%.
The "Maximum Cap" for any Distribution Date is a per annum rate
(subject to adjustment based on the actual number of days elapsed in the related
Accrual Period) equal to weighted average of the Adjusted Net Maximum Mortgage
Rates of the Mortgage Loans.
The "Adjusted Net Maximum Mortgage Rate" for any Mortgage Loan for any
Distribution Date shall be a per annum rate equal to the applicable Maximum Loan
Rate for such Mortgage Loan as of the first day of the month preceding the month
in which such Distribution Date occurs minus the sum of (i) the Trustee Fee
Rate, (ii) the Servicing Fee Rate, (iii) the PMI Insurer Fee Rate, if
applicable, (iv) the Advisor's Fee Rate, if applicable and (v) the Dividend
Rate, if applicable.
On the Closing Date, the Trustee will establish a Reserve Fund account
(the "Reserve Fund") from which payments in respect of Net WAC Rate Carryover
Amounts on the Offered Certificates will be made. The Reserve Fund will be an
asset of the Trust but not of any REMIC. On each Distribution Date, to the
extent required following the distribution of Available Funds as described under
"--Allocation of Available Funds" above, the Trustee will withdraw from amounts
in the Reserve Fund to pay the Offered Certificates any Net WAC Rate Carryover
Amounts in the following order of priority, in each case to the extent of
amounts remaining in the Reserve Fund:
(i) to the Class A Certificates;
(ii) to the Class M-1 Certificates; and
(iii) to the Class M-2 Certificates.
RESTRICTIONS ON TRANSFER OF THE MEZZANINE CERTIFICATES
Because the Mezzanine Certificates are subordinate to the Class A
Certificates, any Plan (as defined herein) purchasing such Mezzanine
Certificates will be deemed to have represented that certain conditions have
been satisfied in connection with such purchase. See "Considerations for Benefit
Plan Investors" herein.
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CALCULATION OF ONE-MONTH LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Accrual Period for the Offered Certificates (each such
date, a "LIBOR Determination Date"), the Trustee will determine the Certificate
Index for such Accrual Period for the Offered Certificates on the basis of the
London interbank offered rate for one-month United States dollar deposits, as
such rates appear on the Telerate Page 3750, as of 11:00 a.m. (London time) on
such LIBOR Determination Date. If such rate does not appear on Telerate Page
3750, the rate for that day will be determined on the basis of the offered rates
of the Reference Banks (as defined herein) for one-month United States dollar
deposits, as of 11:00 a.m.
(London time) on such LIBOR Determination Date. The Trustee will request the
principal London office of each of the Reference Banks to provide a quotation of
its rate. If on such LIBOR Determination Date two or more Reference Banks
provide such offered quotations, the Certificate Index for the related Accrual
Period will be the arithmetic mean of such offered quotations (rounded upwards
if necessary to the nearest whole multiple of 0.0625%). If on such LIBOR
Determination Date fewer than two Reference Banks provide such offered
quotations, the Certificate Index for the related Accrual Period shall be the
higher of (x) the Certificate Index as determined on the previous LIBOR
Determination Date and (y) the Reserve Interest Rate (as defined herein).
As used in this section, "LIBOR Business Day" means a day on which
banks are open for dealing in foreign currency and exchange in London and New
York City; "Telerate Page 3750" means the display page currently so designated
on the Dow Jones Telerate Capital Markets Report (or such other page as may
replace that page on that service for the purpose of displaying comparable rates
or prices); "Reference Banks" means leading banks selected by the Trustee and
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market (i) with an established place of business in London, (ii) which have been
designated as such by the Trustee and (iii) not controlling, controlled by or
under common control with, the Master Servicer or any successor Master Servicer
or the Originator; and "Reserve Interest Rate" shall be the rate per annum that
the Trustee determines to be either (i) the arithmetic mean (rounded upwards if
necessary to the nearest whole multiple of 0.0625%) of the one-month United
States dollar lending rates which New York City banks selected by the Trustee
are quoting on the relevant LIBOR Determination Date to the principal London
offices of leading banks in the London interbank market or (ii) in the event
that the Trustee can determine no such arithmetic mean, the lowest one-month
United States dollar lending rate which New York City banks selected by the
Trustee are quoting on such LIBOR Determination Date to leading European banks.
The establishment of the Certificate Index on each LIBOR Determination
Date by the Trustee and the Trustee's calculation of the rate of interest
applicable to the Offered Certificates for the related Accrual Period will (in
the absence of manifest error) be final and binding.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will provide or make available
to each holder of a Certificate and the rating agencies a statement (based on
information received from the Master Servicer) setting forth, among other
things, the information set forth in the Prospectus under "Description of the
Securities--Reports to Securityholders." The Trustee will make the statement
(and, at its option, any additional files containing the same information in an
alternative format) available each month via the Trustee's internet website and
its fax-on-demand service. The Trustee's fax-on-demand service may be accessed
by calling (301) 815-6610. The Trustee's internet website shall initially be
located at "www.ctslink.com". Assistance in using the website or the
fax-on-demand service can be obtained by calling the Trustee's customer service
desk at (301) 815-6600. Parties that are unable to use the above distribution
options are entitled to have a paper copy mailed to them via first class mail by
calling the customer service desk and indicating such. The Trustee shall have
the right to change the way statements are distributed in order to make such
distribution more convenient and/or more accessible to the above parties and the
Trustee shall provide timely and adequate notification to all above parties
regarding any such changes.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each holder of a
Certificate of record during the previous calendar year a statement containing
information necessary to enable holders of the Certificates to prepare their tax
returns. Such statements will not have been examined and reported upon by an
independent public accountant.
S-48
<PAGE>
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity of the Offered Certificates will be sensitive to
defaults on the Mortgage Loans. If a purchaser of an Offered Certificate
calculates its anticipated yield based on an assumed rate of default and amount
of losses that is lower than the default rate and amount of losses actually
incurred, its actual yield to maturity will be lower than that so calculated. In
general, the earlier a loss occurs, the greater is the effect on an investor's
yield to maturity. There can be no assurance as to the delinquency, foreclosure
or loss experience with respect to the Mortgage Loans. Because the Mortgage
Loans were underwritten in accordance with standards less stringent than those
generally acceptable to Fannie Mae and Freddie Mac with regard to a borrower's
credit standing and repayment ability, the risk of delinquencies with respect
to, and losses on, the Mortgage Loans will be greater than that of mortgage
loans underwritten in accordance with Fannie Mae and Freddie Mac standards.
The rate of principal payments, the aggregate amount of distributions
and the yields to maturity of the Offered Certificates will be affected by the
rate and timing of payments of principal on the Mortgage Loans. The rate of
principal payments on the Mortgage Loans will in turn be affected by the
amortization schedules of the Mortgage Loans and by the rate of principal
prepayments (including for this purpose prepayments resulting from refinancing,
liquidations of the Mortgage Loans due to defaults, casualties or condemnations
and repurchases by the Originator or Master Servicer). Because certain of the
Mortgage Loans contain prepayment charges, the rate of principal payments may be
less than the rate of principal payments for mortgage loans that did not have
prepayment charges. 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. See "The Mortgage
Pool" herein.
Prepayments, liquidations and purchases of the Mortgage Loans
(including any optional purchase) will result in distributions on the Offered
Certificates of principal amounts which would otherwise be distributed over the
remaining terms of the Mortgage Loans. Since the rate of payment of principal on
the Mortgage Loans will depend on future events and a variety of other factors,
no assurance can be given as to such rate or the rate of principal prepayments.
The extent to which the yield to maturity of a class of Offered Certificates may
vary from the anticipated yield will depend upon the degree to which such class
of Certificates is purchased at a discount or premium. Further, an investor
should consider the risk that, in the case of any Offered Certificate purchased
at a discount, a slower than anticipated rate of principal payments (including
prepayments) on the Mortgage Loans could result in an actual yield to such
investor that is lower than the anticipated yield and, in the case of any
Offered Certificate purchased at a premium, a faster than anticipated rate of
principal payments on the Mortgage Loans could result in an actual yield to such
investor that is lower than the anticipated yield.
The rate of principal payments (including prepayments) on pools of
mortgage loans may vary significantly over time and may be influenced by a
variety of economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. In general, if prevailing
interest rates were to fall significantly below the Loan Rates on the Mortgage
Loans, such Mortgage Loans could be subject to higher prepayment rates than if
prevailing interest rates were to remain at or above the Loan Rates on such
Mortgage Loans. Conversely, if prevailing interest rates were to rise
significantly, the rate of prepayments on such Mortgage Loans would generally be
expected to decrease. The Mortgage Loans may be subject to a greater rate of
principal prepayments in a low interest rate environment. For example, if
prevailing interest rates were to fall, mortgagors may be inclined to refinance
their Mortgage Loans with a fixed-rate loan to "lock in" a lower interest rate
or to refinance their Mortgage Loans with other more competitive adjustable-rate
mortgage loans. The existence of the applicable Periodic Rate Cap and Maximum
Rate with respect to the Mortgage Loans also may affect the likelihood of
prepayments resulting from refinancings. No assurances can be given as to the
rate of prepayments on the Mortgage Loans in stable or changing interest rate
environments. In addition, substantially all of the Mortgage Loans will not have
their initial Adjustment Date for one, two or three years after the origination
thereof. The prepayment experience of the Delayed First Adjustment Mortgage
Loans may differ from that of the other Mortgage Loans. The Delayed First
Adjustment Mortgage Loans may be subject to greater rates of prepayments as they
approach their initial Adjustment Dates even if market interest rates are only
slightly higher or lower than the Loan Rates on the Delayed First Adjustment
Mortgage Loans as mortgagors seek to avoid changes in their monthly payments.
Approximately 95.87% of the Mortgage Loans provide for payment by the
mortgagor of a prepayment charge in limited circumstances on certain
prepayments. The holders of the Class P Certificates will be entitled to all
prepayment charges 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 Agreement, the Master Servicer may
waive the payment of any otherwise applicable prepayment charge. Investors
should conduct their own analysis of the effect, if any, that the prepayment
charges, and decisions by the Master Servicer with respect to the waiver
thereof, may have on the
S-49
<PAGE>
prepayment performance of the Mortgage Loans. The Depositor makes no
representations as to the effect that the prepayment charges, and decisions by
the Master Servicer with respect to the waiver thereof, may have on the
prepayment performance of the Mortgage Loans.
To the extent the Net WAC Rate is paid on the Offered Certificates, a
shortfall in interest equal to the Net WAC Rate Carryover Amount will occur.
Such shortfall will only be payable from the Net Monthly Excess Cashflow, and
only to the extent that the Overcollateralization Target Amount has been
reached.
The required payment by the Trust of the PMI Insurer Fee and the
Advisor's Fee, as well as the retention by the Trust of interest on each
Dividend Mortgage Loan at the applicable Dividend Rate, will result in the Net
WAC Rate being lower than would be the case if the Trust did not have such
obligations. In addition, the Net WAC Rate will be lower for Accrual Periods
that are longer than 30 days, and the Pass-Through Rates on the Offered
Certificates are more likely to be capped at the Net WAC Rate than they would if
all Accrual Periods were 30 days long. For a discussion of other factors that
could cause the Pass-Through Rate on the Offered Certificates to be capped at
the Net WAC Rate, see "Risk Factors--Effect of Mortgage Loan Rates on the
Offered Certificates" in this prospectus supplement.
ADDITIONAL INFORMATION
The Depositor has filed certain yield tables and other computational
materials with respect to the Offered Certificates with the Securities and
Exchange Commission (the "Commission") in a report on Form 8-K and may file
certain additional yield tables and other computational materials with respect
to the Offered Certificates with the Commission in a report on Form 8-K. Such
tables and materials were prepared by the Underwriter at the request of certain
prospective investors, based on assumptions provided by, and satisfying the
special requirements of, such prospective investors. Such tables and assumptions
may be based on assumptions that differ from the Structuring Assumptions (as
defined herein). Accordingly, such tables and other materials may not be
relevant to or appropriate for investors other than those specifically
requesting them.
WEIGHTED AVERAGE LIVES
The timing of changes in the rate of principal prepayments on the
Mortgage Loans may significantly affect an investor's actual yield to maturity,
even if the average rate of principal prepayments is consistent with such
investor's expectation. In general, the earlier a principal prepayment on the
Mortgage Loans occurs, the greater the effect of such principal prepayment on an
investor's yield to maturity. The effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the Offered
Certificates may not be offset by a subsequent like decrease (or increase) in
the rate of principal prepayments.
The weighted average life of an Offered Certificate is the average
amount of time that will elapse from the Closing Date, until each dollar of
principal is repaid to the investors in such Certificate. Because it is expected
that there will be prepayments and defaults on the Mortgage Loans, the actual
weighted average lives of these Certificates are expected to vary substantially
from the weighted average remaining terms to stated maturity of the Mortgage
Loans as set forth herein under "The Mortgage Pool."
The Assumed Final Distribution Date for the Offered Certificates is as
set forth herein under "Description of the Certificates--General." The final
Distribution Date with respect to the Offered Certificates could occur
significantly earlier than the related Assumed Final Distribution Date because
(i) prepayments are likely to occur, (ii) excess cashflow, if any, will be
applied as principal of the Offered Certificates as described herein and (iii)
the Master Servicer may cause a termination of the Trust as provided herein.
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 of 100% of the Prepayment
Vector. The "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 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 an 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.
S-50
<PAGE>
Each of the Prepayment Scenarios in the table below assumes the
respective percentages of the Prepayment Vector described thereunder.
The table entitled "Percent of Original Certificate Principal Balance
Outstanding" was prepared on the basis of the assumptions in the following
paragraph and the table set forth below. There are certain differences between
the loan characteristics included in such assumptions and the characteristics of
the actual Mortgage Loans. Any such discrepancy may have an effect upon the
percentages of Original Certificate Principal Balances outstanding and weighted
average lives of the Offered Certificates set forth in that table. In addition,
since the actual Mortgage Loans in the Trust will have characteristics that
differ from those assumed in preparing the tables set forth below, the
distributions of principal of the Offered Certificates may be made earlier or
later than indicated in the table.
The percentages and weighted average lives in the table entitled
"Percent of Original Certificate Principal Balance Outstanding" were determined
assuming that (the "Structuring Assumptions"): (i) the Mortgage Loans have the
characteristics set forth in the table below, (ii) the closing date for the
Offered Certificates occurs on October 30, 2000 and the Offered Certificates
were sold to investors on such date, (iii) distributions on the Certificates are
made on the 25th day of each month regardless of the day on which the
Distribution Date actually occurs, commencing in November 2000, in accordance
with the allocation of Available Funds set forth above under "Description of the
Certificates--Allocation of Available Funds," (iv) the prepayment rates are the
percentages of the Prepayment Vector set forth in the "Percent of Original
Certificate Principal Balance Outstanding" tables below, (v) prepayments include
thirty days' interest thereon, (vi) neither the Originator nor Option One is
required to substitute or repurchase any or all of the Mortgage Loans pursuant
to the Mortgage Loan Purchase Agreement and no optional termination is
exercised, except with respect to the entries identified by the row captioned
"Weighted Average Life (years) to Optional Termination" in the tables below,
(vii) the Overcollateralization Target Amount is $2,470,367, (viii) scheduled
payments for all Mortgage Loans are received on the first day of each month
commencing in November 2000, the principal portion of such payments is computed
prior to giving effect to prepayments received in the previous month and there
are no losses or delinquencies with respect to such Mortgage Loans, (ix) all
related Mortgage Loans prepay at the same rate and all such payments are treated
as prepayments in full of individual Mortgage Loans, with no shortfalls in
collection of interest, (x) such prepayments are received on the last day of
each month commencing in the month of the Closing Date, (xi) the Certificate
Index is at all times equal to 6.62000%, (xii) the Pass-Through Rates for the
Offered Certificates are as set forth herein, (xiii) the Loan Rate for each
Mortgage Loan is adjusted on its next Adjustment Date (and on subsequent
Adjustment Dates, if necessary) to equal the sum of (a) the assumed level of the
Index and (b) the respective Gross Margin (such sum being subject to the
applicable Periodic Rate Caps, Minimum Loan Rates and Maximum Loan Rates), (xiv)
Six-Month LIBOR is equal to 6.75938% and (xv) the Trustee Fee Rate is equal to
0.005% per annum, the Servicing Fee Rate for each Mortgage Loan is equal to
0.50% per annum and the PMI Insurer Fee Rate and the Advisor's Fee Rate with
respect to the PMI Mortgage Loans are as set forth in the Pooling Agreement.
Nothing contained in the foregoing assumptions should be construed as a
representation that the Mortgage Loans will not experience delinquencies or
losses.
S-51
<PAGE>
<TABLE>
<CAPTION>
ASSUMED MORTGAGE LOAN CHARACTERISTICS(1)
Months to Initial Original Remaining
Next Gross Maximum Periodic Periodic Term to Term to
Principal Loan Rate Adjustment Margin Loan Rate Minimum Loan Rate Cap Rate Cap Maturity Maturity
Balance ($) (%) Date (%) (%) Rate (%) (%) (%) (months) (months)
--------------- --------- ---------- ------- --------- ------------ -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 57,568,158.87 9.36249% 19 4.62516% 15.36249% 9.36249% 3.00000 1.00000 360 355
$ 2,235,230.21 9.68761% 31 4.76488% 15.68761% 9.68761% 3.00000 1.00000 360 355
$ 18,782,656.30 10.84353% 20 5.73487% 16.84353% 10.84353% 3.00000 1.00000 360 356
$ 123,833.66 11.81454% 32 6.92744% 17.81454% 11.81454% 3.00000 1.00000 360 356
$ 665,377.81 9.62203% 8 5.75203% 15.62203% 9.62203% 2.00000 1.00000 360 356
$354,710,373.07 10.02313% 20 5.36126% 16.02313% 10.02313% 3.00000 1.00000 360 356
$ 39,567,390.30 9.86839% 32 4.84204% 15.86839% 9.86839% 3.00000 1.00000 360 356
$ 457,276.10 9.25198% 1 5.57240% 15.25198% 9.25198% 1.00000 1.00000 360 355
$ 2,979,669.40 8.80219% 19 4.22809% 14.80219% 8.80219% 3.00000 1.00000 360 355
$ 1,498,871.93 11.16791% 20 5.98106% 17.16791% 11.16791% 3.00000 1.00000 360 356
$ 79,809.95 10.62500% 6 6.75000% 16.62500% 10.62500% 2.00000 1.00000 360 354
$ 12,987,179.89 10.55218% 20 5.86170% 16.55218% 10.55218% 3.00000 1.00000 360 356
$ 2,489,639.80 9.96813% 32 4.91854% 15.96813% 9.96813% 3.00000 1.00000 360 356(1)
</TABLE>
-----------------------
The first, second and ninth hypothetical Mortgage Loans above are Dividend
Mortgage Loans.
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of the Offered Certificates, and set forth the
percentages of the Original Certificate Principal Balance of such Certificate
that would be outstanding after each of the dates shown, at various percentages
of the Prepayment Vector.
S-52
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
CLASS A
PERCENTAGES OF THE PREPAYMENT VECTOR
--------------------------------------------------------------------------------
Distribution Date 0% 50% 75% 100% 125% 150% 175% 200%
--------------------- -------- -------- -------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100% 100% 100% 100%
October 2001......... 99 90 85 80 75 70 65 60
October 2002......... 99 73 61 51 41 31 23 15
October 2003......... 98 59 43 30 20 11 5 0
October 2004......... 98 47 32 21 13 7 4 0
October 2005......... 97 38 23 14 7 3 1 0
October 2006......... 96 32 17 9 4 1 0 0
October 2007......... 95 26 13 6 2 0 0 0
October 2008......... 95 21 9 4 1 0 0 0
October 2009......... 93 17 7 2 0 0 0 0
October 2010......... 92 14 5 1 0 0 0 0
October 2011......... 91 11 4 1 0 0 0 0
October 2012......... 89 9 2 0 0 0 0 0
October 2013......... 88 8 2 0 0 0 0 0
October 2014......... 86 6 1 0 0 0 0 0
October 2015......... 84 5 1 0 0 0 0 0
October 2016......... 81 4 0 0 0 0 0 0
October 2017......... 79 3 0 0 0 0 0 0
October 2018......... 76 2 0 0 0 0 0 0
October 2019......... 72 2 0 0 0 0 0 0
October 2020......... 68 1 0 0 0 0 0 0
October 2021......... 64 1 0 0 0 0 0 0
October 2022......... 59 1 0 0 0 0 0 0
October 2023......... 53 0 0 0 0 0 0 0
October 2024......... 47 0 0 0 0 0 0 0
October 2025......... 41 0 0 0 0 0 0 0
October 2026......... 34 0 0 0 0 0 0 0
October 2027......... 26 0 0 0 0 0 0 0
October 2028......... 17 0 0 0 0 0 0 0
October 2029......... 7 0 0 0 0 0 0 0
October 2030......... 0 0 0 0 0 0 0 0
Weighted Average Life
(years) to maturity
(1).................. 21.77 5.22 3.58 2.70 2.15 1.78 1.49 1.26
Weighted Average Life
(years) to Optional
Termination(1)(2)....
21.73 4.85 3.32 2.52 2.01 1.67 1.42 1.25
</TABLE>
-------------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount on
each Distribution Date on such class of Certificates by the number of years
from the date of issuance of the Certificates to the related Distribution
Date, (ii) summing the results, and (iii) dividing the sum by the aggregate
amount of the assumed net reductions in principal amount on such class of
Certificates.
(2) Calculated pursuant to footnote (1) but assumes the Master Servicer
exercises its option to purchase the Mortgage Loans on the earliest
possible Distribution Date on which it is permitted to exercise such
option.
S-53
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
CLASS M-1
PERCENTAGES OF THE PREPAYMENT VECTOR
----------------------------------------------------------------------------------------------------
Distribution Date 0% 50% 75% 100% 125% 150% 175% 200%
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100% 100% 100% 100%
October 2001............ 100 100 100 100 100 100 100 100
October 2002............ 100 100 100 100 100 100 100 100
October 2003............ 100 100 100 100 100 100 100 92
October 2004............ 100 100 69 45 28 12 1 30
October 2005............ 100 83 50 29 11 0 0 1
October 2006............ 100 68 37 16 1 0 0 0
October 2007............ 100 55 27 6 0 0 0 0
October 2008............ 100 44 17 0 0 0 0 0
October 2009............ 100 37 10 0 0 0 0 0
October 2010............ 100 30 4 0 0 0 0 0
October 2011............ 100 24 0 0 0 0 0 0
October 2012............ 100 18 0 0 0 0 0 0
October 2013............ 100 12 0 0 0 0 0 0
October 2014............ 100 8 0 0 0 0 0 0
October 2015............ 100 4 0 0 0 0 0 0
October 2016............ 100 1 0 0 0 0 0 0
October 2017............ 100 0 0 0 0 0 0 0
October 2018............ 100 0 0 0 0 0 0 0
October 2019............ 100 0 0 0 0 0 0 0
October 2020............ 100 0 0 0 0 0 0 0
October 2021............ 100 0 0 0 0 0 0 0
October 2022............ 100 0 0 0 0 0 0 0
October 2023............ 100 0 0 0 0 0 0 0
October 2024............ 100 0 0 0 0 0 0 0
October 2025............ 88 0 0 0 0 0 0 0
October 2026............ 73 0 0 0 0 0 0 0
October 2027............ 56 0 0 0 0 0 0 0
October 2028............ 37 0 0 0 0 0 0 0
October 2029............ 11 0 0 0 0 0 0 0
October 2030............ 0 0 0 0 0 0 0 0
Weighted Average Life
(years) to maturity(1).. 27.16 8.37 5.63 4.35 3.75 3.50 3.50 3.79
Weighted Average Life
(years) to Optional
Termination(1)(2)....... 27.11 8.03 5.40 4.19 3.62 3.40 3.07 2.65
-------------------------
* Rounded to the nearest whole percentage.
</TABLE>
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount on
each Distribution Date on such class of Certificates by the number of years
from the date of issuance of the Certificates to the related Distribution
Date, (ii) summing the results, and (iii) dividing the sum by the aggregate
amount of the assumed net reductions in principal amount on such class of
Certificates.
(2) Calculated pursuant to footnote (1) but assumes the Master Servicer
exercises its option to purchase the Mortgage Loans on the earliest
possible Distribution Date on which it is permitted to exercise such
option.
S-54
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
CLASS M-2
PERCENTAGES OF THE PREPAYMENT VECTOR
------------------------------------------------------------------------------
Distribution Date 0% 50% 75% 100% 125% 150% 175% 200%
------------------------ ------ ------ ------ ------ ------ ------ ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100% 100% 100% 100%
October 2001............ 100 100 100 100 100 100 100 100
October 2002............ 100 100 100 100 100 100 100 100
October 2003............ 100 100 100 100 100 100 100 100
October 2004............ 100 100 59 27 4 0 0 0
October 2005............ 100 77 34 5 0 0 0 0
October 2006............ 100 57 16 0 0 0 0 0
October 2007............ 100 41 3 0 0 0 0 0
October 2008............ 100 27 0 0 0 0 0 0
October 2009............ 100 16 0 0 0 0 0 0
October 2010............ 100 7 0 0 0 0 0 0
October 2011............ 100 0 0 0 0 0 0 0
October 2012............ 100 0 0 0 0 0 0 0
October 2013............ 100 0 0 0 0 0 0 0
October 2014............ 100 0 0 0 0 0 0 0
October 2015............ 100 0 0 0 0 0 0 0
October 2016............ 100 0 0 0 0 0 0 0
October 2017............ 100 0 0 0 0 0 0 0
October 2018............ 100 0 0 0 0 0 0 0
October 2019............ 100 0 0 0 0 0 0 0
October 2020............ 100 0 0 0 0 0 0 0
October 2021............ 100 0 0 0 0 0 0 0
October 2022............ 100 0 0 0 0 0 0 0
October 2023............ 100 0 0 0 0 0 0 0
October 2024............ 100 0 0 0 0 0 0 0
October 2025............ 83 0 0 0 0 0 0 0
October 2026............ 64 0 0 0 0 0 0 0
October 2027............ 41 0 0 0 0 0 0 0
October 2028............ 16 0 0 0 0 0 0 0
October 2029............ 0 0 0 0 0 0 0 0
October 2030............ 0 0 0 0 0 0 0 0
Weighted Average Life
(years) to maturity(1).. 26.55 6.76 4.57 3.63 3.23 3.11 3.11 3.14
Weighted Average Life
(years) to Optional
Termination(1)(2)....... 26.55 6.76 4.57 3.63 3.23 3.11 3.07 2.65
</TABLE>
-------------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount on
each Distribution Date on such class of Certificates by the number of years
from the date of issuance of the Certificates to the related Distribution
Date, (ii) summing the results, and (iii) dividing the sum by the aggregate
amount of the assumed net reductions in principal amount on such class of
Certificates.
(2) Calculated pursuant to footnote (1) but assumes the Master Servicer
exercises its option to purchase the Mortgage Loans on the earliest
possible Distribution Date on which it is permitted to exercise such
option.
S-55
<PAGE>
YIELD SENSITIVITY OF THE MEZZANINE CERTIFICATES
If the Certificate Principal Balances of the Class C Certificates and
the Class M-2 Certificates have been reduced to zero, the yield to maturity on
the Class M-1 Certificates will become extremely sensitive to losses on the
Mortgage Loans (and the timing thereof) that are covered by subordination,
because the entire amount of any Realized Losses (to the extent not covered by
Net Monthly Excess Cashflow) will be allocated to the Class M-1 Certificates. If
the Certificate Principal Balance of the Class C Certificates has been reduced
to zero, the yield to maturity on the Class M-2 Certificates will become
extremely sensitive to losses on the Mortgage Loans (and the timing thereof)
that are covered by subordination, because the entire amount of any Realized
Losses (to the extent not covered by Net Monthly Excess Cashflow) will be
allocated to the Class M-2 Certificates. The initial undivided interests in the
Trust evidenced by the Class M-1 Certificates, the Class M-2 Certificates and
the Class C Certificates are approximately 4.50%, approximately 1.50% and
approximately 0.50%, respectively. Investors in the Mezzanine Certificates
should fully consider the risk that Realized Losses on the Mortgage Loans could
result in the failure of such investors to fully recover their investments. In
addition, once Realized Losses have been allocated to the Mezzanine
Certificates, such amounts with respect to such Certificates will no longer
accrue interest and will not be reinstated thereafter. However, Allocated
Realized Loss Amounts may be paid to the holders of the Mezzanine Certificates
from Net Monthly Excess Cashflow in the priorities set forth under "Description
of the Certificates--Overcollateralization Provisions" in this prospectus
supplement.
Unless the Certificate Principal Balance of the Class A Certificates
has been reduced to zero, the Mezzanine Certificates will not be entitled to any
principal distributions until the Stepdown Date or during any period in which a
Trigger Event is in effect. As a result, the weighted average lives of the
Mezzanine Certificates will be longer than would otherwise be the case if
distributions of principal were allocated on a pro rata basis among the Class A
Certificates and Mezzanine Certificates. As a result of the longer weighted
average lives of the Mezzanine Certificates, the holders of such Certificates
have a greater risk of suffering a loss on their investments. Further, because a
Trigger Event is based on delinquencies and not losses, it is possible for the
Mezzanine Certificates to receive no principal distributions (unless the
Certificate Principal Balance of the Class A Certificates has been reduced to
zero) on and after the Stepdown Date even if no losses have occurred on the
Mortgage Pool. For additional considerations relating to the yield on the
Mezzanine Certificates, see "Yield and Prepayment Considerations" in the
Prospectus.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates to the purchase of the Mortgage Loans transferred to the Trust. The
Underwriter or an affiliate has been an investor in the Mortgage Loans and will
be entitled to a portion of the proceeds of the sale of the Mortgage Loans by
the Seller to the Depositor for inclusion by the Depositor in the Trust.
FEDERAL INCOME TAX CONSEQUENCES
Multiple elections will be made to treat designated portions of the
Trust (exclusive of the Reserve Fund) as a real estate mortgage investment
conduit (a "REMIC") for federal income tax purposes. Upon the issuance of the
Offered Certificates, Thacher Proffitt & Wood, counsel to the Depositor, will
deliver its opinion generally to the effect that, assuming compliance with all
provisions of the Pooling Agreement, for federal income tax purposes, each REMIC
elected by the Trust will qualify as a REMIC under Sections 860A through 860G of
the Internal Revenue Code of 1986 (the "Code").
For federal income tax purposes, (i) the Residual Certificates will
consist of components, each of which will represent the sole class of "residual
interests" in each REMIC elected by the Trust and (ii) the Class A Certificates
and the Mezzanine Certificates (exclusive of any right of the holder of such
Certificates to receive payments from the Reserve Fund in respect of the Net WAC
Rate Carryover Amount), the Class C Certificates and the Class P Certificates
will represent the "regular interests" in, and which generally will be treated
as debt instruments of, a REMIC. See "Certain Material Federal Income Tax
Considerations--General" in the Prospectus.
Each holder of a Class A Certificate or a Mezzanine Certificate is
deemed to own an undivided beneficial ownership interest in two assets, a REMIC
regular interest and the right to receive payments from the Reserve Fund in
respect of the Net WAC Rate Carryover Amount. The Reserve Fund is not an asset
of any REMIC. The treatment of amounts received by a Class A Certificateholder
or a Mezzanine Certificateholder under such Certificateholder's right to receive
the Net WAC Rate Carryover Amount will depend on the portion, if any, of such
Certificateholder's purchase price
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<PAGE>
allocable thereto. Under the REMIC Regulations, each holder of a Class A
Certificate or a Mezzanine Certificate must allocate its purchase price for the
Class A Certificate or Mezzanine Certificate between its undivided interest in
the regular interest of the related REMIC and its undivided interest in the
right to receive payments from the Reserve Fund in respect of the Net WAC Rate
Carryover Amount in accordance with the relative fair market values of each
property right. The Trustee intends to treat payments made to the holders of the
Class A Certificates and the Mezzanine Certificates with respect to the Net WAC
Rate Carryover Amount as includible in income based on the regulations relating
to notional principal contracts (the "Notional Principal Contract Regulations").
The OID Regulations provide that the Trust's allocation of the issue price is
binding on all holders unless the holder explicitly discloses on its tax return
that its allocation is different from the Trust's allocation. For tax reporting
purposes, the Trustee intends to treat the right to receive payments from the
Reserve Fund in respect of Net WAC Rate Carryover Amounts as having a DE MINIMIS
value. Under the REMIC Regulations, the Trustee is required to account for the
REMIC regular interest and the right to receive payments from the Reserve Fund
in respect of the Net WAC Rate Carryover Amount as discrete property rights.
Holders of the Class A Certificates and the Mezzanine Certificates are advised
to consult their own tax advisors regarding the allocation of issue price,
timing, character and source of income and deductions resulting from the
ownership of such Certificates. Treasury regulations have been promulgated under
Section 1275 of the Code generally providing for the integration of a
"qualifying debt instrument" with a hedge if the combined cash flows of the
components are substantially equivalent to the cash flows on a variable rate
debt instrument. However, such regulations specifically disallow integration of
debt instruments subject to Section 1272(a)(6) of the Code. Therefore, holders
of the Class A Certificates and the Mezzanine Certificates will be unable to use
the integration method provided for under such regulations with respect to those
Certificates. If the Trustee's treatment of payments of the Net WAC Rate
Carryover Amount is respected, ownership of the right to the Net WAC Rate
Carryover Amount will entitle the owner to amortize the separate price paid for
the right to the Net WAC Rate Carryover Amount under the Notional Principal
Contract Regulations.
Upon the sale of a Class A Certificate or Mezzanine Certificate the
amount of the sale allocated to the selling Certificateholder's right to receive
payments from the Reserve Fund in respect of the Net WAC Rate Carryover Amount
would be considered a "termination payment" under the Notional Principal
Contract Regulations allocable to the related Class A Certificate or Mezzanine
Certificate, as the case may be. A Class A Certificateholder or Mezzanine
Certificateholder will have gain or loss from such a termination of the right to
receive payments from the Reserve Fund in respect of the Net WAC Rate Carryover
Amount equal to (i) any termination payment it received or is deemed to have
received minus (ii) the unamortized portion of any amount paid (or deemed paid)
by the Certificateholder upon entering into or acquiring its interest in the
right to receive payments from the Reserve Fund in respect of the Net WAC Rate
Carryover Amount.
Gain or loss realized upon the termination of the right to receive
payments from the Reserve Fund in respect of the Net WAC Cap Carryover Amount
will generally be treated as capital gain or loss. Moreover, in the case of a
bank or thrift institution, Code Section 582(c) would likely not apply to treat
such gain or loss as ordinary.
For federal income tax reporting purposes, the Offered Certificates
will not be treated as having been issued with original issue discount. The
prepayment assumption that will be used in determining the rate of accrual of
original issue discount, premium and market discount, if any, for federal income
tax purposes will be based on the assumption that subsequent to the date of any
determination the Mortgage Loans will prepay at the Prepayment Assumption. No
representation is made that the Mortgage Loans will prepay at such rate or at
any other rate. See "Certain Material Federal Income Tax
Considerations--Taxation of Debt Securities" in the Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the
"OID Regulations") under Sections 1271 to 1275 of the Code generally addressing
the treatment of debt instruments issued with original issue discount.
Purchasers of the Offered Certificates should be aware that the OID Regulations
do not adequately address certain issues relevant to, or are not applicable to,
prepayable securities such as the Offered Certificates. In addition, there is
considerable uncertainty concerning the application of the OID Regulations to
REMIC Regular Certificates that provide for payments based on an adjustable rate
such as the Class A Certificates and the Mezzanine Certificates. Because of the
uncertainty concerning the application of Section 1272(a)(6) of the Code to such
Certificates and because the rules of the OID Regulations relating to debt
instruments having an adjustable rate of interest are limited in their
application in ways that could preclude their application to such Certificates
even in the absence of Section 1272(a)(6) of the Code, the IRS could assert that
the Offered Certificates should be treated as issued with original issue
discount or should be governed by the rules applicable to debt instruments
having contingent payments or by some other method not yet set forth in
regulations. Prospective purchasers of the Offered Certificates are advised to
consult their tax advisors concerning the tax treatment of such Certificates.
S-57
<PAGE>
It appears that a reasonable method of reporting original issue
discount with respect to the Offered Certificates, if such Certificates are
required to be treated as issued with original issue discount, generally would
be to report all income with respect to such Certificates as original issue
discount for each period, computing such original issue discount (i) by assuming
that the value of the applicable index will remain constant for purposes of
determining the original yield to maturity of, and projecting future
distributions on such Certificates, thereby treating such Certificates as fixed
rate instruments to which the original issue discount computation rules
described in the Prospectus can be applied, and (ii) by accounting for any
positive or negative variation in the actual value of the applicable index in
any period from its assumed value as a current adjustment to original issue
discount with respect to such period. See "Certain Federal Income Tax
Considerations--Taxation of Debt Securities " in the Prospectus.
Certain of the Certificates may be treated for federal income tax
purposes as having been issued at a premium. Whether any holder of a Certificate
will be treated as holding such Certificate with amortizable bond premium will
depend on such Certificateholder's purchase price and the distributions
remaining to be made on such Certificate at the time of its acquisition by such
Certificateholder. Holders of such Certificates should consult their own tax
advisors regarding the possibility of making an election to amortize such
premium. See "Certain Material Federal Income Tax Considerations--Taxation of
Debt Securities" in the Prospectus.
With respect to the Offered Certificates, this paragraph is relevant
to such Certificates exclusive of the rights of the holders of such Certificates
to receive certain payments in respect of the Net WAC Rate Carryover Amount. The
Offered Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(4)(A)
of the Code, generally in the same proportion that the assets in the Trust would
be so treated. In addition, interest on the Offered Certificates will be treated
as "interest on obligations secured by mortgages on real property" under Section
856(c)(3)(B) of the Code, generally to the extent that the Offered Certificates
are treated as "real estate assets" under Section 856(c)(4)(A) of the Code. The
Offered Certificates will also be treated as "qualified mortgages" under Section
860G(a)(3) of the Code. See "Certain Material Federal Income Tax
Considerations--Taxation of Debt Securities--Status as Real Property Loans" in
the Prospectus.
The holders of the Offered Certificates will be required to include in
income interest on such Certificates in accordance with the accrual method of
accounting. As noted above, each holder of an Offered Certificate will be
required to allocate a portion of the purchase price paid for the Certificates
to the right to receive payments from the Reserve Fund in respect of the Net WAC
Rate Carryover Amount. The value of the right to receive any such Net WAC Rate
Carryover Amount is a question of fact which could be subject to differing
interpretations. Because the Net WAC Rate Carryover Amount is treated as a
separate right of the Offered Certificates not payable by any REMIC elected by
the Trust, such right will not be treated as a qualifying asset for any
Certificateholder that is a mutual savings bank, domestic building and loan
association, real estate investment trust, or real estate mortgage investment
conduit and any amounts received from the Reserve Fund will not be qualifying
real estate income for real estate investment trusts.
It is not anticipated that any REMIC elected by the Trust will engage
in any transactions that would subject it to the prohibited transactions tax as
defined in Section 860F(a)(2) of the Code, the contributions tax as defined in
Section 860G(d) of the Code or the tax on net income from foreclosure property
as defined in Section 860G(c) of the Code. However, in the event that any such
tax is imposed on any REMIC elected by the Trust, such tax will be borne (i) by
the Trustee, if the Trustee has breached its obligations with respect to REMIC
compliance under the Pooling Agreement, (ii) by the Master Servicer, if the
Master Servicer has breached its obligations with respect to REMIC compliance
under the Pooling Agreement and (iii) otherwise by the Trust, with a resulting
reduction in amounts otherwise distributable to the holders of the related
Offered Certificates.
The responsibility for filing annual federal information returns and
other reports will be borne by the Trustee or the Master Servicer.
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "Certain Material Federal Income
Tax Considerations" in the Prospectus.
S-58
<PAGE>
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to ERISA or Section 4975 of the Code (a "Plan"), or any insurance
company, whether through its general or separate accounts, or any other person
investing plan assets of a Plan, should carefully review with its legal advisors
whether the purchase or holding of Offered Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Code. The purchase or holding of the Offered Certificates (other than the
Mezzanine Certificates) by or on behalf of, or with Plan assets of, a Plan may
qualify for exemptive relief under the Underwriters' Exemption, as currently in
effect and as described under "ERISA Considerations" in the Prospectus. The
Underwriters' Exemption relevant to the Offered Certificates was granted by the
Department of Labor on September 6, 1990 as Prohibited Transaction Exemption, or
PTE 90-59 at 55 F.R. 36724, and amended on July 21, 1997 as PTE 97-34 at 62 F.R.
39021. However, the Underwriters' Exemption contains a number of conditions
which must be met for the exemption to apply, including the requirement that the
investing Plan must be an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D of the Securities and Exchange Commission under the Securities Act.
A fiduciary of a Plan contemplating purchasing a Class A Certificate must make
its own determination that the conditions set forth in the Underwriters'
Exemption will be satisfied with respect to the those Certificates.
Because the characteristics of the Mezzanine Certificates will not
meet the requirements of the Underwriters' Exemption as currently in effect and
the purchase, sale or holding of the Mezzanine Certificates by, on behalf of, or
with Plan assets of any Plan may result in prohibited transactions or the
imposition of excise taxes or civil penalties. Therefore, the Pooling Agreement
provides that transfers of such Certificates to a Plan, a trustee or other
person acting on behalf of any Plan or to any person using Plan assets to effect
such acquisition will not be registered by the Trustee unless the purchaser
thereof provides the Depositor, the Trustee and the Master Servicer with either
(i) an opinion of counsel satisfactory to the Depositor, the Trustee and the
Master Servicer, which opinion will not be at the expense of the Depositor, the
Master Servicer, the Trustee or the Trust, to the effect that the purchase of
such Certificates is permissible under applicable law, will not constitute or
result in any non-exempt prohibited transaction under ERISA or Section 4975 of
the Code and will not subject the Depositor, the Master Servicer, the Trustee or
the Trust to any obligation in addition to those undertaken in the Pooling
Agreement or (ii) a certification of facts (which the purchaser of a Mezzanine
Certificate in book-entry form will be deemed to have represented) substantially
to the effect that the purchase of the Mezzanine Certificates by or on behalf of
such Plan is permissible under applicable law, will not constitute or result in
a non-exempt prohibited transaction under ERISA or Section 4975 of the Code,
will not subject the Depositor, the Master Servicer or the Trustee to any
obligation in addition to those undertaken in the Pooling Agreement and the
following conditions are met: (a) the source of funds used to purchase such
Certificates is an "insurance company general account" (as such term is defined
in Sections I and II of PTCE 95-60), (b) the conditions set forth in PTCE 95-60
have been satisfied and (c) there is no Plan with respect to which the amount of
such general account's reserves and liabilities for contracts held by or on
behalf of such Plan and all other Plans maintained by the same employer (or any
"affiliate" thereof, as defined in PTCE 95-60) or by the same employee
organization exceed 10% of the total of all reserves and liabilities of such
general account (as determined under PTCE 95-60) as of the date of the
acquisition of such Mezzanine Certificates. The Mezzanine Certificates will
contain a legend describing such restrictions on transfer.
The Department of Labor has proposed certain amendments to the
Underwriters' Exemption which, if published in final form as proposed, would
permit the Mezzanine Certificates to be purchased and held by or on behalf of,
or with Plan assets of, a Plan if those certificates 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). The Underwriters' Exemption
amendments will not apply until they are finalized by the Department of Labor
and published in final form in the Federal Register, but the proposed effective
date is August 23, 2000. Accordingly, the Mezzanine Certificates may be
purchased and held by or on behalf of, or with Plan assets of, any Plan without
regard to the restrictions set forth in the preceding paragraph, if (i) the
Underwriters' Exemption amendments are published in final form with
substantially the same conditions as proposed and an effective date which is no
later that the Closing Date; (ii) such certificates are rated "BBB-" or better
at the time of purchase; and (iii) the purchase date occurs after the date on
which the Underwriters' Exemption amendments are published in final form.
There can be no assurance that the Underwriters' Exemption amendments
will be published in final form on any future date or that the final conditions
will not be more restrictive than those proposed. The Trustee, the Depositor,
the Seller, the Originator, the Underwriter and the Master Servicer will have no
obligation to notify any person if or when the Underwriters' Exemption
amendments are published in final form.
Any fiduciary or other investor of Plan assets that proposes to
acquire or hold the Offered Certificates on behalf of or with Plan assets of any
Plan should consult with its counsel with respect to: (i) whether, with respect
to the Class A
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<PAGE>
Certificates, the specific and general conditions and the other requirements in
the Underwriters' Exemption would be satisfied, and with respect to the
Mezzanine Certificates, the conditions described are met or whether any other
prohibited transaction exemption would apply, and (ii) the potential
applicability of the general fiduciary responsibility provisions of ERISA and
the prohibited transaction provisions of ERISA and Section 4975 of the Internal
Revenue Code to the proposed investment. See "ERISA Considerations" in the
Prospectus.
The sale of any of the Offered Certificates to a Plan is in no respect
a representation by the depositor or the related underwriter that an investment
in the Offered Certificates meets all relevant legal requirements relating to
investments by Plans generally or any particular Plan, or that an investment in
the Offered Certificates is appropriate for Plans generally or any particular
Plan.
LEGAL INVESTMENT CONSIDERATIONS
The Class A Certificates and the Class M-1 Certificates will
constitute "mortgage related securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA") for so long as they are rated not lower
than the second highest rating category by a rating agency, and, as such, will
be legal investments for certain entities to the extent provided in SMMEA.
SMMEA, however, provides for state limitation on the authority of such entities
to invest in "mortgage related securities" provided that such restrictive
legislation was enacted prior to October 3, 1991. Certain states have enacted
legislation which overrides the preemption provisions of SMMEA. The Class M-2
Certificates will not constitute "mortgage related securities" for purposes of
SMMEA.
The Depositor makes no representations as to the proper
characterization of any class of Offered Certificates for legal investment or
other purposes, or as to the ability of particular investors to purchase any
class of Offered Certificates under applicable legal investment restrictions.
These uncertainties may adversely affect the liquidity of any class of Offered
Certificates. Accordingly, all institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their legal
advisors in determining whether and to what extent any class of Offered
Certificates constitutes a legal investment or is subject to investment, capital
or other restrictions.
See "Legal Investment" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement, dated October 13, 2000 (the "Underwriting Agreement"), between the
Underwriter and the Depositor, the Depositor has agreed to sell to the
Underwriter, and the Underwriter has agreed to purchase from the Depositor, the
Offered Certificates.
The Depositor has been advised by the Underwriter that it proposes
initially to offer the Offered Certificates of each Class to the public in
Europe and the United States at the offering price set forth herein 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 Certificate Principal Balance of
the related class of Offered Certificates. The Underwriter may allow and such
dealers may reallow a reallowance discount, not in excess of the percentage set
forth in the table below of the Certificate Principal Balance of the related
class of Offered Certificates, to certain other dealers. After the initial
public offering, the public offering price, such concessions and such discounts
may be changed.
CLASS OF CERTIFICATES SELLING CONCESSION REALLOWANCE DISCOUNT
--------------------- ------------------ --------------------
Class A.............. 0.135% 0.090%
Class M-1............ 0.360% 0.240%
Class M-2............ 0.456% 0.304%
Until the distribution of the Offered Certificates is completed, rules
of the SEC may limit the ability of the Underwriter and certain selling group
members to bid for and purchase the Offered Certificates. As an exception to
these
S-60
<PAGE>
rules, the Underwriter is permitted to engage in certain transactions that
stabilize the price of the Offered Certificates. Such transactions consist of
bids or purchases for the purpose of pegging, fixing or maintaining the price of
the Offered 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 the Underwriter 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 Offered Certificates. In addition,
neither the Depositor nor the Underwriter makes any representation that the
Underwriter will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Depositor has been advised by the Underwriter that it intends to
make a market in the Offered Certificates but the Underwriter has no obligation
to do so. There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the Act.
LEGAL MATTERS
Certain legal matters with respect to the Offered Certificates will be
passed upon for the Depositor and the Underwriter by Thacher Proffitt & Wood,
New York, New York.
RATINGS
It is a condition to the issuance of the Offered Certificates that the
Class A Certificates be rated "AAA" by Fitch, Inc. ("Fitch") and Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S & P"; together with
Fitch, the "Rating Agencies"), that the Class M-1 Certificates be rated "AA" by
Fitch and S&P and that the Class M-2 Certificates be rated "A" by Fitch and S&P.
A securities rating addresses the likelihood of the receipt by a
certificateholder of distributions on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the certificates. The ratings on the
Offered Certificates do not, however, constitute statements regarding the
likelihood or frequency of prepayments on the Mortgage Loans, the payment of the
Net WAC Rate Carryover Amount or the possibility that a holder of an Offered
Certificate might realize a lower than anticipated yield.
The Depositor has not engaged any rating agency other than the Rating
Agencies to provide ratings on the Offered Certificates. However, there can be
no assurance as to whether any other rating agency will rate the Offered
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. Any rating on the Offered Certificates by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Offered
Certificates by the Rating Agencies.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to any of the Offered Certificates by the Rating Agencies are
subsequently lowered for any reason, no person or entity is obligated to provide
any additional support or credit enhancement with respect to such Offered
Certificates.
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<PAGE>
INDEX OF DEFINED TERMS
Page
----
Accrual Period.............................................................S-44
Adjusted Net Maximum Mortgage Rate.........................................S-47
Adjusted Net Mortgage Rate.................................................S-47
Adjustment Date............................................................S-15
Advance....................................................................S-33
Advancing Person...........................................................S-34
Advisor's Fee..............................................................S-35
Advisor's Fee Rate.........................................................S-47
AIV........................................................................S-26
Allocated Realized Loss Amount.............................................S-44
Assumed Final Distribution Date............................................S-36
Available Funds............................................................S-40
Basic Principal Distribution Amount........................................S-44
Book-Entry Certificates....................................................S-37
Cedelbank Participants.....................................................S-38
Certificate Index..........................................................S-47
Certificate Margin.........................................................S-47
Certificate Owner..........................................................S-37
Certificate Principal Balance..............................................S-44
Certificateholder..........................................................S-37
Certificates...............................................................S-36
Class A Principal Distribution Amount......................................S-44
Class M-1 Principal Distribution Amount....................................S-44
Class M-2 Principal Distribution Amount....................................S-44
Clearstream................................................................S-37
Code..................................................................S-7, S-56
Collection Account.........................................................S-31
Commission.................................................................S-50
Compensating Interest......................................................S-34
Cooperative................................................................S-39
Credit Bureau Risk Score...................................................S-26
Credit Enhancement Percentage..............................................S-45
Cut-off Date Principal Balance.............................................S-14
Debt Ratio.................................................................S-26
Definitive Certificate.....................................................S-37
Delayed First Adjustment Mortgage Loan.....................................S-15
Deleted Mortgage Loan......................................................S-30
Delinquent.................................................................S-45
Determination Date.........................................................S-34
Distribution Account.......................................................S-31
Distribution Date..........................................................S-37
Dividend Mortgage Loans....................................................S-16
Dividend Rate..............................................................S-16
DTC........................................................................S-37
DTC Participants...........................................................S-37
Due Date...................................................................S-15
Due Period.................................................................S-45
Euroclear Operator.........................................................S-39
Page
----
Euroclear Participants.....................................................S-38
European Depositaries......................................................S-37
Extra Principal Distribution Amount........................................S-45
Fair, Isaac................................................................S-26
Financial Intermediary.....................................................S-37
Fitch.......................................................................S-7
Formula Rate...............................................................S-47
Global Securities...........................................................S-1
Gross Margin...............................................................S-15
H&R Block..................................................................S-31
Index......................................................................S-25
Initial Periodic Rate Cap..................................................S-15
Initial Pool Balance.......................................................S-14
Insurance Proceeds.........................................................S-45
Interest Remittance Amount.................................................S-45
IRS........................................................................S-57
LIBOR Business Day.........................................................S-48
LIBOR Determination Date...................................................S-48
Liquidated Mortgage Loan...................................................S-46
LIV........................................................................S-26
Loan Rate..................................................................S-15
Loss Mitigation Advisor....................................................S-35
Maximum Cap................................................................S-47
Maximum Loan Rate..........................................................S-15
Mezzanine Certificates.....................................................S-36
Minimum Loan Rate..........................................................S-15
Monthly Interest Distributable Amount......................................S-45
Mortgage...................................................................S-15
Mortgage Loan Purchase Agreement...........................................S-14
Mortgage Loan Schedule.....................................................S-29
Mortgage Loans........................................................S-4, S-14
Mortgage Pool..............................................................S-14
Mortgaged Property.........................................................S-15
Net Liquidation Proceeds...................................................S-46
Net Monthly Excess Cashflow................................................S-45
Net WAC Rate...............................................................S-46
Net WAC Rate Carryover Amount..............................................S-47
NIV........................................................................S-26
Notional Principal Contract Regulations....................................S-57
Offered Certificates.......................................................S-36
OID Regulations............................................................S-57
Option One..................................................................S-8
Optional Termination Date..................................................S-35
Original Certificate Principal Balance.....................................S-44
Originator.................................................................S-25
Overcollateralization Deficiency Amount....................................S-45
Overcollateralization Release Amount.......................................S-45
Overcollateralization Target Amount........................................S-45
S-62
<PAGE>
Page
----
Overcollateralized Amount..................................................S-45
Pass-Through Rate..........................................................S-46
Periodic Rate Cap..........................................................S-15
Plan.......................................................................S-59
PMI Insurer................................................................S-43
PMI Insurer Fee............................................................S-43
PMI Insurer Fee Rate.......................................................S-47
PMI Mortgage Loan..........................................................S-43
PMI Mortgage Loans.........................................................S-43
PMI Policies...............................................................S-43
PMI Policy.................................................................S-43
Pool Balance...............................................................S-14
Pooling Agreement..........................................................S-29
Prepayment Assumption......................................................S-50
Prepayment Interest Shortfall..............................................S-34
Prepayment Period..........................................................S-46
Prepayment Scenarios.......................................................S-51
Prepayment Vector..........................................................S-50
Principal Balance..........................................................S-14
Principal Distribution Amount..............................................S-46
Principal Remittance Amount................................................S-46
Purchase Price.............................................................S-30
Qualified Substitute Mortgage Loan.........................................S-30
Rating Agencies............................................................S-61
Realized Loss..............................................................S-46
Record Date................................................................S-37
Reference Banks............................................................S-48
Related Documents..........................................................S-29
Relevant Depositary........................................................S-37
Relief Act.................................................................S-11
REMIC......................................................................S-56
Reserve Fund...............................................................S-47
Reserve Interest Rate......................................................S-48
Residual Certificates......................................................S-36
Rules......................................................................S-37
S&P...................................................................S-7, S-61
Servicing Advance..........................................................S-34
Servicing Fee..............................................................S-34
Servicing Fee Rate.........................................................S-34
Six Month LIBOR............................................................S-25
SMMEA.................................................................S-7, S-60
Stepdown Date..............................................................S-46
Structuring Assumptions....................................................S-51
Subordinate Certificates...................................................S-36
Substitution Adjustment....................................................S-30
Telerate Page 3750.........................................................S-48
Termination Price..........................................................S-35
Terms and Conditions.......................................................S-39
Trigger Event..............................................................S-46
Trust......................................................................S-14
Page
----
Trustee Fee................................................................S-35
Trustee Fee Rate...........................................................S-35
U.S. Person.................................................................S-4
Underwriter................................................................S-13
Underwriting Agreement.....................................................S-60
Unpaid Interest Shortfall Amount...........................................S-46
S-63
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Class A Certificates and
the Mezzanine Certificates will be offered globally (the "Global Securities")
and will be available only in book-entry form. Investors in the Global
Securities may hold such Global Securities through any of DTC, Clearstream or
Euroclear. The Global Securities will be tradable as home market instruments in
both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream or Euroclear and
DTC Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream and Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Clearstream and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional eurobonds, except
that there will be no temporary global security and no "lock-up" or restricted
period. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
or Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed certificates issues in same-day funds.
TRADING BETWEEN CLEARSTREAM AND/OR EUROCLEAR PARTICIPANTS. Secondary
market trading between Clearstream Participants or Euroclear Participants will
be settled using the procedures applicable to conventional eurobonds in same-day
funds.
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<PAGE>
TRADING BETWEEN DTC SELLER AND CLEARSTREAM OR EUROCLEAR PURCHASER.
When Global Securities are to be transferred from the account of a DTC
Participant to the account of a Clearstream Participant or a Euroclear
Participant, the purchaser will send instructions to Clearstream or Euroclear
through a Clearstream Participant or Euroclear Participant at least one business
day prior to settlement. Clearstream or Euroclear will instruct the respective
Depositary, as the case may be, to receive the Global Securities against
payment. Payment will include interest accrued on the Global Securities from and
including the last coupon payment date to and excluding the settlement date, on
the basis of a 30-day month or the actual number of days in such accrual period
, as applicable, and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
respective Depositary of the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the Clearstream Participant's or
Euroclear Participant's account. The securities credit will appear the next day
(European time) and the cash debt will be back-valued to, and the interest on
the Global Securities will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the Clearstream or
Euroclear cash debt will be valued instead as of the actual settlement date.
Clearstream Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Global Securities are credited to their accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, Clearstream Participants or Euroclear Participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Clearstream Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will depend
on each Clearstream Participant's or Euroclear Participant's particular cost of
funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of Clearstream
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
TRADING BETWEEN CLEARSTREAM OR EUROCLEAR SELLER AND DTC PURCHASER. Due
to time zone differences in their favor, Clearstream Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Clearstream or Euroclear through a Clearstream Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Clearstream or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of a 30-day month or the actual number of days in such accrual
period, as applicable, and a year assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. The payment will
then be reflected in the account of the Clearstream Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the
Clearstream Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be the preceding day, when settlement
occurred in New York). Should the Clearstream Participant or Euroclear
Participant have a line of credit with its respective clearing system and elect
to be in debt in anticipation of receipt of the sale proceeds in its account,
the back-valuation will extinguish any overdraft incurred over that one-day
period. If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the Clearstream Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Clearstream or Euroclear and that
purchase Global Securities from DTC Participants for delivery to Clearstream
Participants or Euroclear Participants should note that these trades would
automatically fail on
I-2
<PAGE>
the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Clearstream or Euroclear for one day (until the
purchase side of the day trade is reflected in their Clearstream or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Clearstream or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the Clearstream Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% U.S. withholding tax that generally applies
to payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8 OR FORM W-8BEN). Beneficial
owners of Global Securities that are non-U.S. Persons can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status) or Form W-8BEN (Certificate of Foreign Status of Beneficial
Owner for United States Tax Withholding). If the information shown on Form W-8
or Form W-8BEN changes, a new Form W-8 or Form W-8BEN must be filed within 30
days of such change. After December 31, 2000, only Form W-8BEN will be
acceptable.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224 OR FORM W-8ECI). A non-U.S. Person, including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States) or Form W-8ECI (Certificate of Foreign
Person's Claim for Exemption from Withholding on Income Effectively Connected
with the Conduct of a Trade or Business in the United States). After December
31, 2000, only Form W-8ECI will be acceptable.
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM 1001 OR FORM W-8BEN). Non-U.S. Persons that are Certificate
Owners residing in a country that has a tax treaty with the United States can
obtain an exemption or reduced tax rate (depending on the treaty terms) by
filing Form 1001 (Ownership, Exemption or Reduced Rate Certificate) or Form
W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding). Form 1001 or Form W-8BEN may be filed by the Certificate Owners or
his agent. After December 31, 2000, only Form W-8BEN will be acceptable.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Certificate Owner of
a Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom it
holds (the clearing agency, in the case of persons holding directly on the books
of the clearing agency). Form W-8, Form 1001 and Form 4224 are effective until
December 31, 2000. Form W-8BEN and Form W-8ECI are effective until the third
succeeding calendar year from the date such form is signed.
I-3
<PAGE>
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity treated as a corporation
or partnership for United States federal income tax purposes organized in or
under the laws of the United States or any state thereof or the District of
Columbia (unless, in the case of a partnership, Treasury regulations provide
otherwise) or (iii) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in Treasury regulations, certain trusts in
existence on August 20, 1996, and treated as United States persons prior to such
date, that elect to continue to be treated as United States persons will also be
a U.S. Person. This summary does not deal with all aspects of U.S. Federal
income tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
I-4
<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
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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
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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.
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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.
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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.
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<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
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<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
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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
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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
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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.
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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.
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REPRESENTATIONS BY SELLERS; REPURCHASES OR SUBSTITUTIONS
Each Seller will have made representations and warranties in respect of
the Loans sold by such Seller and evidenced by all, or a part, of a Series of
Securities. Except as otherwise specified in the related Prospectus Supplement,
such representations and warranties include, among other things: (i) that title
insurance (or in the case of Properties located in areas where such policies are
generally not available, an attorney's certificate of title) and any required
hazard insurance policy (or certificate of title as applicable) remained in
effect on the date of purchase of the Loan from the Seller by or on behalf of
the Depositor; (ii) that the Seller had good title to each such Loan and such
Loan was subject to no offsets, defenses, counterclaims or rights of rescission
except to the extent that any buydown agreement described herein may forgive
certain indebtedness of a borrower; (iii) that each Loan constituted a valid
lien on the Property (subject only to permissible liens disclosed, if
applicable, title insurance exceptions, if applicable, and certain other
exceptions described in the Agreement) and that the Property was free from
damage and was in acceptable condition; (iv) that there were no delinquent tax
or assessment liens against the Property; (v) that no required payment on a Loan
was more than thirty days' delinquent; and (vi) that each Loan was made in
compliance with, and is enforceable under, all applicable local, state and
federal laws and regulations in all material respects.
If so specified in the related Prospectus Supplement, the
representations and warranties of a Seller in respect of a Loan will be made not
as of the Cut-off Date but as of the date on which such Seller sold the Loan to
the Depositor or one of its affiliates. Under such circumstances, a substantial
period of time may have elapsed between such date and the date of initial
issuance of the Series of Securities evidencing an interest in such Loan. Since
the representations and warranties of a Seller do not address events that may
occur following the sale of a Loan by such Seller, its repurchase obligation
described below will not arise if the relevant event that would otherwise have
given rise to such an obligation with respect to a Loan occurs after the date of
sale of such Loan by such Seller to the Depositor or its affiliates.
However, the Depositor will not include any Loan in the Trust Fund for any
Series of Securities if anything has come to the Depositor's attention that
would cause it to believe that the representationes and warranties of a Seller
will not be accurate and complete in all material respects in respect of such
Loan as of the date of initial issuance of the related Series of Securities. If
the Master Servicer is also a Seller of Loans with respect to a particular
Series, such representations will be in addition to the representations and
warranties made by the Master Servicer in its capacity as a Master Servicer.
The Master Servicer or the Trustee, if the Master Servicer is the
Seller, will promptly notify the relevant Seller of any breach of any
representation or warranty made by it in respect of a Loan which materially and
adversely affects the interests of the Securityholders in such Loan. Unless
otherwise specified in the related Prospectus Supplement, if such Seller cannot
cure such breach within 90 days following notice from the Master Servicer or the
Trustee, as the case may be, then such Seller will be obligated either (i) to
repurchase such Loan from the Trust Fund at a price (the "PURCHASE PRICE") equal
to 100% of the unpaid principal balance thereof as of the date of the repurchase
plus accrued interest thereon to the first day of the month following the month
of repurchase at the Loan Rate (less any Advances or amount payable as related
servicing compensation if the Seller is the Master Servicer) or (ii) to
substitute for such Loan a replacement loan that satisfies certain requirements
set forth in the Agreement. If a REMIC election is to be made with respect to a
Trust Fund, unless otherwise specified in the related Prospectus Supplement, the
Master Servicer or a holder of the related residual certificate 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
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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
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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.
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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
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(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
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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
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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
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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).
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Security Owners will receive all distributions of principal of, and
interest on, the Securities from the Trustee through DTC and Participants. While
the Securities are outstanding (except under the circumstances described below),
under the rules, regulations and procedures creating and affecting DTC and its
operations (the "Rules"), DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit distributions of principal of, and interest on,
the Securities. Participants and indirect participants with whom Security Owners
have accounts with respect to Securities are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Security Owners. Accordingly, although Security Owners will not
possess certificates, the Rules provide a mechanism by which Security Owners
will receive distributions and will be able to transfer their interest.
Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive Securities
are issued, Security Owners who are not Participants may transfer ownership of
Securities only through Participants and indirect participants by instructing
such Participants and indirect participants to transfer Securities, by
book-entry transfer, through DTC for the account of the purchasers of such
Securities, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Securities will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
Participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Security
Owners.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL Participant
(as defined herein) or Euroclear Participant (as defined herein) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement in DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for 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.
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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.
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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
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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.
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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.
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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
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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
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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"
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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.
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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
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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.
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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
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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
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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
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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
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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
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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
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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.
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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.
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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.
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Except as otherwise specified in the related Prospectus Supplement, in
the event the principal of the Notes of a Series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default shall occur and be continuing with
respect to a Series of Notes, the Trustee shall be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of Notes of such Series, unless such holders
offered to the Trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying with
such request or direction. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, the holders of a majority of the
then aggregate outstanding amount of the Notes of such Series shall have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee with respect to the Notes of such Series, and the holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may, in certain cases, waive any default with respect thereto, except a default
in the payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the holders of the outstanding Notes of such Series affected thereby.
AMENDMENT
Except as otherwise specified in the related Prospectus Supplement,
each Agreement may be amended by the Depositor, the Master Servicer and the
Trustee, without the consent of any of the Securityholders, (i) to cure any
ambiguity; (ii) to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein; or (iii) to make any
other revisions with respect to matters or questions arising under the Agreement
which are not inconsistent with the provisions thereof, provided that such
action will not adversely affect in any material respect the interests of any
Securityholder. In addition, to the extent provided in the related Agreement, an
Agreement may be amended without the consent of any of the Securityholders, to
change the manner in which the Security Account is maintained, provided that any
such change does not adversely affect the then current rating on the class or
classes of Securities of such Series that have been rated. In addition, if a
REMIC election is made with respect to a Trust Fund, the related Agreement may
be amended to modify, eliminate or add to any of its provisions to such extent
as may be necessary to maintain the qualification of the related Trust Fund as a
REMIC, provided that the Trustee has received an opinion of counsel to the
effect that such action is necessary or helpful to maintain such qualification.
Except as otherwise specified in the related Prospectus Supplement, each
Agreement may also be amended by the Depositor, the Master Servicer and the
Trustee with consent of holders of Securities of such Series evidencing not less
than 66% of the aggregate Percentage Interests of each class affected thereby
for the purpose of adding any provisions to or changing in an manner or
eliminating any of the provisions of the Agreement or of modifying in any manner
the rights of the holders of the related Securities; provided, however, that no
such amendment may (i) reduce in any manner the amount of or delay the timing
of, payments received on Loans which are required to be distributed on any
Security without the consent of the holder of such Security, or (ii) reduce the
aforesaid percentage of Securities of any class of holders which are required to
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.
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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
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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.
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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
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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
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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.
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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
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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.
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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
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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.
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THE TITLE I PROGRAM
General. Certain of the Loans contained in a Trust Fund may be loans
insured under the FHA Title I Credit Insurance program created pursuant to
Sections 1 and 2(a) of the National Housing Act of 1934 (the "TITLE I PROGRAM").
Under the Title I Program, the FHA is authorized and empowered to insure
qualified lending institutions against losses on eligible loans. The Title I
Program operates as a coinsurance program in which the FHA insures up to 90% of
certain losses incurred on an individual insured loan, including the unpaid
principal balance of the loan, but only to the extent of the insurance coverage
available in the lender's FHA insurance coverage reserve account. The owner of
the loan bears the uninsured loss on each loan.
The types of loans which are eligible for insurance by the FHA under
the Title I Program include property improvement loans ("PROPERTY IMPROVEMENT
LOANS" or "TITLE I LOANS"). A Property Improvement Loan or Title I Loan means a
loan made to finance actions or items that substantially protect or improve the
basic livability or utility of a property and includes single family improvement
loans.
There are two basic methods of lending or originating such loans which
include a "direct loan" or a "dealer loan". With respect to a direct loan, the
borrower makes application directly to a lender without any assistance from a
dealer, which application may be filled out by the borrower or by a person
acting at the direction of the borrower who does not have a financial interest
in the loan transaction, and the lender may disburse the loan proceeds solely to
the borrower or jointly to the borrower and other parties to the transaction.
With respect to a dealer loan, the dealer, who has a direct or indirect
financial interest in the loan transaction, assists the borrower in preparing
the loan application or otherwise assists the borrower in obtaining the loan
from the lender. The lender may disburse proceeds solely to the dealer or the
borrower or jointly to the borrower and the dealer or other parties to the
transaction. With respect to a dealer Title I Loan, a dealer may include a
seller, a contractor or supplier of goods or services.
Loans insured under the Title I Program are required to have fixed
interest rates and generally provide for equal installment payments due weekly,
biweekly, semi-monthly or monthly, except that a loan may be payable quarterly
or semi-annually where a borrower has an irregular flow of income. The first or
last payments (or both) may vary in amount but may not exceed 150% of the
regular installment payment, and the first payment may be due no later than two
months from the date of the loan. The note must contain a provision permitting
full or partial prepayment of the loan. The interest rate must be negotiated and
agreed to by the borrower and the lender and must be fixed for the term of the
loan and recited in the note. Interest on an insured loan must accrue from the
date of the loan and be calculated according to the actuarial method. The lender
must assure that the note and all other documents evidencing the loan are in
compliance with applicable federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence and
diligence to determine whether the borrower and any co-maker is solvent and an
acceptable credit risk, with a reasonable ability to make payments on the loan
obligation. The lender's credit application and review must determine whether
the borrower's income will be adequate to meet the periodic payments required by
the loan, as well 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
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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.
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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.
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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
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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
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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
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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
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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.
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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
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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).
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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.
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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.
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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.
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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
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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
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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,
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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
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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
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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
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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
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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.
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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
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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
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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.
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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
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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.
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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"
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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
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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,
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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
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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.
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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.
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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
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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
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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
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================================================================================
$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]
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October 13, 2000
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